META Trend: By 2007/08, 65% of enterprises will have wireless applications deployed, with mobile devices outnumbering traditional PCs. Device diversity, mobile middleware platform evolution, and mobile management (e.g., deployment, provisioning, updating) will be key challenges, forcing almost continuous investment and upgrading. Converged devices will replace most standalone PDAs, except in specialized environments.
PalmSource, the software component of the Palm company split, is struggling to find a strategy to make it a long-term survivor in the increasingly competitive embedded-OS wars. Indeed, with the exception of the PalmOne Treo smart phone device, which is highly popular with e-mail-centric users (and only behind RIM’s BlackBerry device in market preference), the market for standalone handheld devices generally – and Palm OS-based devices specifically – continues to shrink (e.g., Sony recently announced it is exiting the handheld market and will no longer sell its Clie device due to lack of sales). We expect the market for standalone PDA devices to continue its downward spiral for the next three to four years, with increasing numbers of customers that use PDA devices as personal information managers moving to smart phones instead.
Smart phone devices are offered by an increasing array of vendors (e.g., PalmOne, Nokia, Motorola, Siemens, HTC, Samsung) and provide a hybrid capability bridging the cellular phone and PDA markets. We expect the smart phone market to capture upwards of 85% of traditional enterprise-level PDA/PIM users during the next three to four years, and major vendors (e.g., HP, Dell, PalmOne) will offer the market converged devices to supplement their standalone PDA offerings. The one exception to the reduction in PDA popularity is the industrial, specialized, standalone, handheld-device market, where we expect an increase in volume for the next three to five years. However, here too, Palm faces a daunting challenge, since Microsoft Windows CE/Pocket PC platforms dominate the enterprise selection process. We expect Microsoft-powered industrial handhelds, from vendors such as Symbol and Intermec to represent more than 75% of the market by 2007/08, leaving PalmSource and Linux to fight over the remainder of the market.
PalmSource understands that to survive it must move toward a feature phone/smart phone-enabling OS package. It has started down that path with its Cobalt OS version, which offers a number of enhancements over previous versions of the Palm OS. However, PalmSource has recently made a strategic move that will enable it to compete in an emerging environment that is less focused on the OS and more focused on the end-user experience. PalmSource is moving up the food chain, deploying its environment on top of an existing embedded OS (Linux) and moving to become more focused on the user interface (UI). Further, to enhance its chance of survival, it is building out a Palm-based application ecosystem, through deployment of its own applications and enhancement of third-party ability to produce compelling software for Palm-based devices. We believe this new direction is the right approach for Palm and is likely the only one that can ensure it does not simply fade away to niche-player status during the next few years.
There is an increasing propensity for vendors of smart phones to move to a standard embedded OS (e.g., Symbian, Linux, Windows Mobile). Indeed, we are seeing a growing interest in Linux, especially in low-end to midrange devices initially, but ultimately in higher-end devices as well. To play to this expanding market, PalmSource recently purchased China MobileSoft in its bid to outflank Symbian, Nokia (with its series 60/90 platforms), and Microsoft (Windows Mobile).
PalmSource’s Chinese Connection
The acquisition of China MobileSoft (CMS) benefits PalmSource in several ways. It gains a workforce that has been focused solely on building phone systems, thus enhancing the company’s own expertise in this area. In addition, PalmSource obtains a number of applications for these devices, which it can sell or incorporate into its user interface as an enabler for higher-level application vendors. It also (importantly) obtains entry into the Chinese (and greater Asian) market, through both product relationships with key OEM vendors and the ability to develop software in a lower-cost environment than the US (this is especially critical for customized solutions for specific vendors/phone models). China and other emerging economies (e.g., India) will be the fastest-growing markets for mobile devices for the next three to five years.
CMS already had been working with a Linux kernel for phones, so PalmSource has obtained a fast-track method to get the Palm UI to Linux. Since many of the newest chip sets and accessories come to market first with Linux drivers, this gives CMS the potential to incorporate the latest designs first. (Any modifications made to the Linux kernel would then be handed back to the Linux open source community.) Further, the company also obtains a multilingual capability for its OS that would have taken many years to develop on its own, giving it an advantage in the fastest-growing market for cell phones. Finally, CMS brings more than 20 applications (e.g., MMS, mini-browser) that can be ported to Palm or other platforms, placing the company in competition with OEM application vendors (e.g., Openwave, Opera), with potential for additional revenues and/or competitive advantage.
For its part, Nokia recently established a strategy similar to that of PalmSource. Nokia’s Series 60/90 platforms are one layer removed from the device kernel (in this case Symbian, though this could theoretically change), enabling application providers to deploy at a higher level of abstraction (though differences in I/O capability, screen size, etc., still need to be factored in). This is an attractive option for many application vendors, and indeed, makes it easier for Nokia itself to deploy new devices (leaving the low-level hardware driver work, specific to devices, on the Symbian OS). Microsoft remains a holdout against this new approach, keeping its OS and UI tightly coupled in the Windows Mobile platform. We do not expect to see Microsoft separate these two environments anytime soon, but this will ultimately put the company at a disadvantage in the market.
Although PalmSource’s course of action will breathe new life into its products, the company still fights an uphill battle against Nokia/Symbian in particular, and to a lesser extent, Microsoft. We believe Nokia, with its Symbian kernel, will take a large portion of the smart phone market (more than 35%) during the next two to three years (with other Symbian licensees, Siemens and Ericsson, taking 10%-15%). PalmSource will achieve a substantial market share (15%-20%), and Microsoft will remain at 10%-15% share.
End users/enterprises should focus on selecting devices for their end-user interfaces/ecosystems rather than for the specific OS running as the kernel. This will provide the ability to upgrade to new devices as they are offered, without having to abandon all previous applications.
Bottom Line: PalmSource’s new approach will provide it new life in an otherwise declining OS environment. Companies should look at the higher-level UI/ecosystem of applications, rather than focusing on specific embedded operating systems.
Business Impact: The rapid adoption and continuing change in the mobile device market will make it difficult for companies to standardize and achieve cost savings.
