Was Licensing the Palm OS a Good Business Move?

[NoisyCricket]

Posted from some of the e-mails from mapalad@egroups.com

At 02:10 PM 10/14/2000 +0800, Noisy Cricket wrote:

Not-sure-if-this-is-a-stupid-question:

Q: Since Palm has been licensing the Palm OS to other PDA's (all of which seem to be FAR MORE UPGRADEABLE than the original palms) is Palm shooting itself in the foot?

A: Licensing the Palm OS to other PDA manufacturers makes money for Palm. So the more Palm clones being sold, the more money for 3Com. But of course it may backfire.

that's EXACTLY what I thought. 3com loses the market share, and perhaps even the PDA-hardware business front. They may be relegated to an "OS provider".. WORSE, what happens when the PDA's they endorse the Palm OS to suddenly in the FUTURE decide that THEY CAN DO WITHOUT THE PALM OS -- Say MICROSOFT BUYS THEM OUT, and having wrested much of the market share from 3com ALREADY (presumably sometime in the future), and they relegate the palm to being a has-been PDA-manufacturer AND Platform-provider.

What do you think? Instead of licensing the OS, would it have been better if they just diverted the funds they had into developing the technologies that their "rival" PDA-makers now possess? They would have maintained their market lead that way. In a sense, now they have broken their positioning as "THE established PDA (hardware speaking anyway)". It used to be a war just between the PALM and the PocketPC's... Now there are TRG's, Visors, Sony's.. and all those will eventually compete with (or kill) the Palm.

As for the other companies such as IBM, THEY DON'T HAVE the TECHNOLOGY that PALM already has.. if they fear that these companies will create rival technologies, that would be like if NOKIA suddenly feared for its life that some other as of yet non-existent company would suddenly come up with a cellphone so superior to a Nokia, it would knock Nokia off the market. I don't think it's going to happen. Doesn't that border on Paranoia?

Whatever happens, let's just hope the PALM OS improves. Otherwise, yes, it WILL bite the dust..

Oh well. Such is life.

Noisy Cricket
(All this coming from a guy two months ago who DIDN'T have a Palm, and didn't think he would ever need one. hehehehe.)

[TNT2bluz]

Establish Palm OS as the de facto standard, license the APIs and development aps of the future you keep Windows CE away. Quick profits aren't necessarily the best thing in this industry. Remember O/S2?

[NoisyCricket]

Sorry man. I don't fully understand your statements. Could you elaborate a bit? Thanks.

oops. Pahabol Someone sent me an interesting article through e-mail. Wanted to share it with you guys.

Palm and Handspring Go Hand to Hand

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Palm is licensing its software to its strongest competitor in the surging market for handheld devices. Is that a mistake?

Not so long ago, it looked as if the Battle of the Pocket was over before it had even begun. While the press nattered on about how Microsoft was destined to become a force in handheld computers, Palm was building an astonishing 90-plus-percent share of the market. No one else was above single digits.

Well, that was March. Now, for the first time, Palm faces some really formidable competition. From the latest batch of Windows CE-powered handhelds? Yeah, right. Try Handspring--the maker of handheld computers powered by, yes, Palm's own operating system.

If you're a fan of these devices, you probably know the history. In late 1998, Jeff Hawkins, the Palm's inventor and designer, and Palm President Donna Dubinsky were frustrated with the unwillingness of 3Com, Palm's corporate parent, to spin off Palm into an independent company. They decided to leave to start Handspring, their own maker of handheld devices. Palm's parent had already been pushing Dubinsky to license the Palm operating system more broadly and so was happy to oblige her and Hawkins with a license to make Palm-compatible devices until at least September 2005.

Handspring started selling the first of its Visor line of Palm-compatible devices online in limited numbers last year, and they've been in stores only since April. While other makers of handheld computers haven't made a dent in Palm's dominance, Handspring has taken off. In June, according to data compiled by market research firm NPD Intelect, 21.6% of the personal digital assistants sold in the U.S. (excluding online sales, which the service doesn't track) were built by Handspring.

This newfound competition raises a fundamental question. In deciding to license its operating system, Palm could look to the example of Microsoft, which has made its fortune by licensing its software to all comers. But unlike Microsoft, which has never built any computers, Palm is also arming its competitors. Will it rue its decision to license its software to Handspring?

To be sure, Palm is still easily No. 1, with 65.4% of the U.S. market. But it's down from 91.7% in March, and Handspring is up from zero. Indeed, Palm sales tracked by NPD actually dropped from 221,000 in March to 182,000 in June, which suggests that some potential Palm buyers opted to buy Handsprings instead. That's a key issue for Palm, because the company makes a lot less in royalties from a device that Handspring sells than it does in profit from one that it builds and sells itself.

The exact terms of the agreement are secret, but three analysts estimate that Handspring pays between $8 and $20 a unit in licensing fees. Meanwhile, Palm sells its own devices at an average of $260, with gross profit margins of 40%. So that's $104 for Palm from every handheld that it sells itself, vs. $20 or less from each Palm-compatible unit that Handspring sells.

There are signs that Palm is counterattacking. Last month it introduced the m100, its first handheld designed without Hawkins. It's a $149, basic black device--an interesting choice, since Handspring also makes a $149 low-end device in a black (or "graphite") case. Palm, of course, denies that the m100 is a "Handspring killer." Still, both sides seem understandably touchy on the subject. Says Merrill Lynch analyst William Crawford: "They'll say, 'Everything's fine between us'--through clenched teeth."

Both Palm and Handspring resort to the time-honored Parable of the Growing Pie to explain their relationship. Says Handspring CEO Dubinsky: "There are two dimensions involved: the size of the pie and the share of the pie. We're not focused on our share of the pie; we're focused on growing the pie." Michael Mace, Palm's chief competitive officer, says something eerily similar: "Palm had to give away a slice of the pie to make the pie grow bigger."

Having spent several years at Apple in its worst period--when the company's belated attempts to license its operating system ended up undercutting sales--Mace is particularly sensitive to the danger of licensing to manufacturers who will cannibalize Palm's business. He argues that there's plenty of room for licensees (including Sony, which will debut a new PDA this fall) to address new needs and audiences, with features like built-in cell phones or doodads like MP3 players. Handspring's devices, for instance, are distinguished by their ability to easily add attachments like a modem or simple digital camera.

Still, Palm reserves the right to compete with its licensees. "There has been no agreement to split the markets [with licensees such as Handspring]," Mace notes. That's understandable in light of the economics of licensing, but open competition would undoubtedly put strains on Palm's relationship with Handspring. Palm's worldwide sales are still growing quickly: In the last quarter the company sold a record 1.1 million devices. When that growth slows, the strain will worsen. Already analysts are entertaining the idea that licensing might not be a permanent feature of the Palm universe. "Once the market gets large enough," says Goldman Sachs analyst Vik Mehta, "it's possible that Palm will decide that licensing is not something it wants to be involved in."

The hardest element to predict may be how good Palm will be at developing innovative new devices. The Palm VII, its well-received high-end device with built-in wireless capability, was largely the work of Hawkins and his team (several members of which also jumped to Handspring). Hawkins says that since he's left, Palm has done "fairly well" on product design.

As time goes on, Hawkins predicts, Palm and Handspring will branch off in dramatically different directions. For his part, Hawkins says he's planning a radical new spin on wireless communications but declines to elaborate. If Palm does manage to come out with some blockbuster designs, the two companies may offer very different products. If not, there's one more intriguing scenario worth considering. Remember, Dubinsky and Hawkins left Palm largely because 3Com didn't want to spin it out as an independent company. This year 3Com made an about-face and did precisely that, taking Palm public in an enormously successful IPO. Hawkins says that Handspring is not for sale, but it's still possible to imagine a scenario--maybe several years out--in which Palm buys Handspring and reunites the Palm family.

[TNT2bluz]

OS2 Warp was IBM's OS. Back in the 80's it was the NT when MS Dos was still struggling. It stuck to proprietary standards and had huge and restrictive licensing fees that it discouraged developers from making apps for it.

MS did everything in reverse and managed to gain enough ground.

If the Palm OS sticks with hardware from 3COM and only from 3COM, while Windows CE is licenced to run with a lot of PDA developers, then they lose fertile ground.

They can make more money once they've got everyone hooked.

Well that's just my opinion. Sort of delaying gratification for a greater reward.

[NoisyCricket]

ahhh.. I see. Now the question is... will the strategy work..

[cartman7110]

bluetooth was developed by ericsson and yet it is giving away the technology.

once you start a standard and every product evolved around yours, imagine the control you have!

[NoisyCricket]

Hmmn.. i suppose the likelihood of a third PDA platform/OS is dim.. makes sense..

Rich ********!

[KuyaDanny]

1) I've always believed that your customers are valuable to you long after they've paid money and walked away with your product. That's why it makes sense to me to keep them loyal. By licensing technology to its competitors, Palm is in touch with its competitors' customers, not just its own. If they're in touch with them, they're on their way to keeping them loyal.

2) The PDA industry was victim to a parts shortage several months ago. The shortage affected sales of Palms, mostly, and to a lesser degree, Handspring. But because of the licensing agreement, the effect of the lost sales opportunities was softened because Palm still took in a little cash from every unit their competitor Handspring sold.

3) By licensing their technology, they open up possibilities of their competitors developing applications which Palm could adopt in the future. There is no need to reinvent the wheel.

[aticus]

There may come a time when 3Com won't even need to sell Palms anymore... if enough people have or want a Palm, they might be able to exclusively design applications for Palms and make more money. Less costly to focus on this than on Manufacturing, packaging, distribution, etc...

Kinda like IBM and Microsoft. NOBODY thought a software company would overtake "Big Blue."

But who's bigger now?

[NoisyCricket]

wasn't this in the Technology Today forum? hehehe! oh well.. Beam Me Up, Scotty!