Palm spin-off gives 3Com more focus

By spinning off its Palm Computing subsidiary into a separate publicly traded company, 3Com Corp. will be able to refocus on its core data networking portfolio and lessen customer confusion about its strategy, according to industry analysts.

“It’s a good move,” said Michael Howard, principal analyst at Infonetics Research in San Jose, Calif. “It not only helps their customers understand what 3Com does, it also helps 3Com simplify their messages to their customer set and focuses their customer set so that they’re no longer dealing with the general public that wants to buy a PDA (personal digital assistant).”

3Com originally acquired the Palm device manufacturer through its 1997 merger with U.S. Robotics, the previous parent company of Palm Computing. 3Com claims there are more than five million customers using Palm devices for both business and consumer applications.

“3Com initially acquired Palm Computing by default, and then the PalmPilot product took off. It has the majority of the market share of these kinds of PDA devices,” Howard said. “It’s a growing business and it’s a market of its own, independent of the classic data networking market, and so it makes sense to spin it off.”

Jill House, analyst at International Data Corp. in Framingham, Mass., agreed.

“It never made sense for Palm to be aligned with the networking functions of 3Com,” she said.

Dan Servos, president of 3Com Canada Inc. in Toronto, said he couldn’t comment on whether or not 3Com is divesting itself of Palm Computing in order to address customer confusion about its networking strategy. However, he said the spin-off is intended to allow both 3Com and Palm Computing to better focus on their respective markets.

“Clearly, when you now separate a personal digital device from the network, it’s definitely going to provide a lot more focus and clarity on missions,” Servos said.

“[3Com’s] core focus is going to shift now more than ever to the emerging technologies of IP telephony, wireless and the extended enterprise.”

Central to that strategy will be a renewed focus on user-centric networking, Servos said. “The future of networking is all about focusing on the user and user-centricity. And user-centricity is all about providing very smart, intuitive and highly connected networks that personalize the way people connect to information,” he said.

Servos said that 3Com believes the intrinsic value of the Palm device is its Palm OS operating system and, as a separate company, Palm Computing will more aggressively pursue cross-licensing deals with other handheld device manufacturers. 3Com itself will license Palm OS and will continue to collaborate with Palm Computing to enhance the operating system’s functionality, Servos said.

According to 3Com, the Palm Computing division doubled its revenue last year, reaching US$570 million, roughly 10 per cent of 3Com’s revenue. Servos said that he sees a much larger handheld device market emerging on the horizon.

“On one hand, Palm got us to where we are in terms of being able to see and capitalize on our vision of providing a true end-to-end enterprise suite of solutions,” Servos said. “But now we need to go beyond this one (handheld) device, we need to be able to position ourselves and be successful at capturing all Internet appliance networking technologies. Regardless of what the device is, 3Com is going to be well-positioned to capitalize on the era of Internet appliances.”

Jeff Watts, vice-president of business partnerships at 3Com Canada, pointed out that two-thirds of Palm OS development is focused on corporate applications, and a lot of those applications are enabled through wireless phone technology, for example.

Servos indicated that 3Com will collaborate with a number of manufacturers, in conjunction with Microsoft Corp., to deliver Internet appliances — some of which will be OEMed by 3Com to those manufacturers and some of which will be branded as 3Com devices.

One analyst suggested that 3Com’s ownership of Palm Computing — a competitor to Microsoft’s Windows CE operating system — may have created friction between itself and the software giant.

“A networking company like 3Com absolutely must have a strong relationship with Microsoft. And Palm, of course, has been competing with Microsoft’s Windows CE,” said Gerry Purdy, president of Mobile Insights, a market research company that specializes in mobile computing.

Giga Information Group analyst Rob Enderle added: “You certainly saw a much higher degree of business activity between Cisco and Microsoft than between 3Com and Microsoft.”

3Com expects to make an initial public offering (IPO) for the Palm Computing subsidiary early next year, according to a company press release. Servos explained that 3Com will initially have an 80-per-cent stake in Palm Computing after the IPO, and then it will eventually spin off the division entirely.

Current 3Com directors James Barksdale, former CEO of Netscape, and Gordon Campbell, president and chairman of Techfarm Inc., will move to Palm’s board of directors.