PalmSource can find solace in its licensing agreement with PalmOne. That deal lasts until 2006, so PalmOne isn't likely to drop the Palm OS anytime soon. But if PalmOne were to ship products under another OS, it could mean a limit to potential growth.
Analysts said a Microsoft-PalmOne deal makes sense for a number of reasons: The move would fit PalmOne's well-known effort to sign up third-party software vendors; Palm devices are now powerful enough to run Microsoft's relatively bulky Pocket PC Phone Edition software; and corporate buyers would be receptive to Palm devices running Microsoft's OS.
"Corporations are likely to be more receptive to smart phones running Microsoft's Pocket PC Phone Edition operating system than the Palm OS, if only because Pocket PC phones should integrate more seamlessly with Microsoft Exchanges server software, used in the majority of corporations," said Needham's Wolf.
Needless to say, that spells bad news for PalmSource, which would necessarily suffer if it lost significant business from PalmOne, the leading handheld maker and PalmSource's biggest partner in terms of revenue.
The Palm OS became the market share leader for handhelds early on -- as soon as the company's devices first hit the stores, in fact. Its lead since has been ground down as Microsoft's products have improved and the Palm OS has adopted some of the advanced features of OSs from Microsoft.
Devices have also become more powerful and have reached a point where they can adequately use Windows-based products. For example, PalmOne's Treo devices, which are likely to be the devices that will first use a Microsoft OS, at the high-end come with a 312MHz Intel XScale processor. Many Microsoft OS-based handhelds, such as those from Dell and Hewlett-Packard, use the same processors.
The Palm OS was used in 51.7 percent of handhelds shipped worldwide in 2003, while Microsoft's OS was in 38.3 percent of devices. IDC says Microsoft should take over the top spot at the end of this year, with 45.9 percent of the market, compared with 45.1 percent for the Palm OS, and grab a 51 percent share by 2006.
Using the royalty-free Linux OS would enable PalmOne to reduce the costs of building its handhelds. By how much is not certain, but analysts estimate that the company currently spends anywhere from $5 to $15 per device for the Palm OS, depending on the price of the gadget.
The market for Linux-based handhelds is growing as companies such as Monta Vista develop niche OS versions for embedded devices. Handheld devices running Linux include Sharp's Zaurus, which uses Lineo Linux, software developed by Motorola subsidiary Metroworks, as its OS.
PalmSource has also been working on its OS products. It recently announced Cobalt 6.1, its first OS aimed at the smart-phone market -- a category it's looking to grow into to go beyond its core handheld business.
Cobalt, previously code-named Sahara, has been in development for about a year. Among its features are telephony capabilities, a native email application, a Web browser and integrated Wi-Fi and Bluetooth wireless features. It also adds improved security features and enhanced capacity to open several programs simultaneously.
ZDNet UK sister site CNET News.com's Stephen Shankland contributed to this report
