Dawn Of The Palm Economy

3Com, finally, spun off its Palm Computing division last week into an independent, publicly traded company. Now out of the 3Com nest, Palm will be much better equipped to strive toward what its owners always wanted it to be when it grew up: the Microsoft of the digital device era.

So far, the success of Palm has rested on the estimated 5 million handhelds it has sold, but Palm's handlers envision the Palm Operating System as the standard platform for many millions of other devices, ranging from smart phones to Internet appliances.

"It's our goal to make the licensing of Palm OS as ubiquitous as possible," said Janice Roberts, senior vice president of marketing and business development at 3Com, who had previously headed up the Palm division.

In the view of 3Com's executives, Palm OS enables an ecosystem that incorporates Palm OS' 20,000 software developers, service providers and device manufacturers - including Handspring, a much-hyped start-up founded by Palm Computing's founders, which released its Visor devices based on the Palm OS last week. In fact, while Handspring is portrayed as a serious competitor to Palm, 3Com executives point to Handspring as evidence of their strategy's success.

"You should expect that we will enable many more Handspringlike companies," said Eric Benhamou, 3Com's chairman and chief executive.

Palm Computing, in its bid to become the Microsoft of the post-PC era, faces competition from Microsoft itself - but it hasn't been very formidable. Microsoft's Windows CE has not been as successful as the Palm, and critics lambaste Windows CE as bloated. An independent Palm also will step up its attack against Psion, a British company that hasn't made much headway in the U.S.

But could the premise behind Palm OS - as evolving into a platform that rivals Windows' dominance in an emerging market segment - be flawed? Forrester Research analyst Charles Rutstein thinks the comparison is a stretch.

"It's not clear that [Palm OS] can become a general-purpose OS like Windows," Rutstein said.

Nevertheless, the move is healthy for both 3Com's traditional networking business and Palm Computing, analysts said. Divorcing the networking business of 3Com from Palm, which never really had any clear synergies, will better enable each to set its own agendas.

3Com executives no longer will need to position Palm as being integral to its networking mission. Benhamou acknowledged for perhaps the first time that Palm and 3Com haven't been exactly a perfect union.

"In many cases, the natural partners for the networking business might not be the natural partners for the handheld computing business, and vice versa," Benhamou said last week.

The 600-person Palm Computing will see an influx of cash from its initial public offering, expected to take place sometime in January 2000, which it could use for acquisitions or internal expansion. Some analysts speculated that Palm Computing could be worth upward of between $4 billion and $5 billion. 3Com said the Palm division had sales of $570 million for the fiscal year ended May 28, about 10 percent of its overall revenue.

Not surprisingly, the move to separate 3Com and Palm was cheered with gusto by industry analysts as well as Wall Street.

So why did 3Com wait so long?

3Com CEO Benhamou said Palm finally had reached "critical mass," and framed the decision as a parent parting with its mature child. But there was a financial reason why 3Com didn't act sooner. According to Christopher Paisley, 3Com's chief financial officer, a company must wait at least two years after completing a pooling-of-interests acquisition before selling any of its major assets. 3Com bought modem maker U.S. Robotics and its Palm division in the fall of 1997.