Sony Takes Stake in PalmSource

Hoping to defend its market share in the personal digital assistants (PDA) operating systems arena from encroachment by Microsoft, Palm Computing won a ringing endorsement from Sony , which agreed to make a $20 million investment in PalmSource, the soon-to-be-separated Palm operating system (OS) unit, in return for a 6 percent stake, the two companies announced on Tuesday.


Embattled handheld maker Palm heralded the investment as a key win in its
attempt to create a separate company for licensing the company’s dominant
operating system for handhelds. Palm would like to separate the two
companies by the end of the year. PalmSouce is currently a wholly owned
subsidiary of Palm.


“Sony’s expanded commitment to the Palm economy illustrates the stimulating
value that an independent PalmSource will have on the handheld industry,”
Palm chief executive Eric Benhamou said in a statement. “We remain driven to
complete the external separation of our PalmSource subsidiary on an
aggressive timetable.”


Sony’s Clie handheld line uses the Palm OS, along with PDAs from
manufacturers such as Handspring and Samsung. The deal also calls for Sony
and PalmSource to expand their business and technical collaboration.


Palm announced its decision to separate the
OS business from its handheld-manufacturing unit
in July 2001, hoping to
capitalize on the ubiquity of the Palm OS in the handheld market. PalmSource
trumpets its OS as running 24 million devices, but it has been losing ground to Microsoft Pocket PC and devices running Windows CE.


Palm saw its market share slip in the second quarter, as customers awaited the release of its latest devices powered by Palm OS 5, which is due for release on devices later this month. According to Gartner Dataquest, the Palm OS captured 50 percent of the worldwide PDA market, while Microsoft Windows CE PDAs had 28 percent.

“The Palm franchise has been seriously eroded by Microsoft licensees,” said Gartner Group analyst Todd Kort. “I do have some worries about Palm being a long-term viable player.”

After defining the market with its PalmPilot line, Palm has seen its stock price
dwindle to below $1. Kort pegged many of the company’s hardships on Palm mistakenly resting on its early success.

“There was an opportunity two three years ago to create a new high-end line and get started on a new OS,” said Kort. “They dragged their feet and believed their mantra of keeping everything simple and opened to door to Microsoft to get Windows CE right. They basically ceded the high end of the market to Microsoft.”

On top of that, the PDA market has dipped. The overall handheld market declined 9.3 percent last
quarter compared to a year earlier, according to researcher IDC. The
researcher pegs the decline on general economic weakness and a reluctance of
enterprises to make product upgrades, predicting the market will remain flat
through the rest of 2002.


Palm has hoped to buck the downward trend of enterprise spending by
expanding the consumer handheld market, which still dominates handheld
sales, with new entry-level offerings like the $99 Zire introduced
yesterday
. Last quarter, the company reported selling more 9 percent more
units than the same quarter a year earlier.


The company is banking on its re-branded
Tungsten line
to goose enterprise sales. Last month, Palm released its
Tungsten Mobile Information Management Solution, software for professionals
to wirelessly access e-mail and other data.


However, the company might soon have more company in the already crowded PDA
market, as Dell Computer has made little secret of its interest in selling
its own PDAs soon. Dell recently expanded
into the printer market
with a deal to sell Lexmark-manufactured Dell
printers.

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