OS subsidiary at hand for Palm

Palm says it will create a separate subsidiary for its operating system business. The change may ease confusion for its software customers and hardware competitors--who are often one and the same.

Handheld giant Palm announced on Friday its plans to create a separate subsidiary for the part of its business that develops and licenses the Palm operating system.

The move is less dramatic than actually spinning off the unit, as 3Com did with Palm last year. But it could still be a precursor to a spinoff.

The company currently runs as a single operation that includes the units that develop the handheld devices and the operating system.

The subsidiary should be running by year's end, according to Palm.

"We're eager to foster the independence of both of our businesses, and creating a separate subsidiary for our platform activities will allow us to bring greater clarity of mission, better serve licensees and, we believe, increase shareholder value longer term," Palm chief executive Carl Yankowski said in the statement.

Palm spokeswoman Marlene Somsak said the move demonstrates the company's intent to operate the businesses separately but added there is no current plan or timetable to actually spin off the OS business.

"This is just a step to create more focus and demonstrate our strategic intent to build the (OS) business," Somsak said.

Somsak added that the OS business will now have more clearly defined financial goals.

Yankowski has said in recent months that the company would split the two businesses when such a move was feasible.

Palm shares, which have lost more than 80 percent of their value this year, closed up 3 cents, or less than 1 percent, at US$5.21 on Friday. In after-hours trading on Island ECN, Palm shares edged up another 6 cents to US$5.27.

Thomas Sepenzis, a CIBC World Markets analyst, countered Somsak's assertion that there are no plans for a spinoff.

"Why would you create a subsidiary if you aren't planning to spin the business off?" he said.

Some analysts have said that a spinoff may be premature, given the fact that Palm's operating system accounts for just a fraction of the company's sales, with roughly 95 percent of revenue in recent quarters coming from sales of its devices.

But Sepenzis said he expects revenue for the OS to grow significantly, adding that the licensing program has been in place for only a year and a half.

William Crawford, an analyst at US Bancorp Piper Jaffray, considers the move positive for the stock. "Some people will jump on the idea and get all excited about it," he said.

Crawford said he believes it is a good decision for the company, but more for the benefits it gives Palm in managing relationships with its licensees than for the prospects of a spinoff.

"I'm not really sure that would unlock any value" for shareholders, Crawford said.

Under its present structure, the OS business works closely with companies that license the operating system--handheld makers such as Sony, Handspring and HandEra.

At the same time, Palm's handheld device group competes with those companies. The impending move could ease some of that tension.

Under the new structure, the Platform Solutions Group--Palm's name for the OS business--will operate independently but continue as a part of Palm, sharing some resources such as administration.

Handspring, the largest licensee of the Palm OS, declined to comment on Palm's move.

"We're still eager to work with Palm," Sony spokesman David Yang said, "and this doesn’t in any way affect our current relationship with them. If anything, this creates more of a formal division with the OS group and the hardware group."

IDC analyst Kevin Burden expects more companies to license the OS as a result of Friday's news.

"The software guys have been stingy in terms of licensing out the OS because companies signing up would be potential competitors to the hardware business, which brings in the most revenue for the company," Burden said.

Palm's OS controlled nearly 80 percent of US market share last year, and its devices had 53 percent market share, according to IDC.

Even though it maintains a high percentage of market share, analysts have said that Palm has not created enough innovations to allow it to stay ahead of rivals such as Microsoft's Pocket PC OS on the software side and Sony on the hardware side.

"They've been concentrating on too many things, and that's why they've fallen behind competitors," Sepenzis said of Palm. "This move makes them more competitive because the hardware guys have to buckle down...They won't have the advantage of close ties with the OS guys. And the OS guys can concentrate on beating Microsoft."

Sepenzis added that with the transition of the Palm OS to ARM-based chips, the company has the opportunity to substantially beef up the operating system.

Palm director David Nagel will head a committee of the board to oversee the establishment of the subsidiary. Also on the board committee are Yankowski and Eric Benhamou, chairman of both Palm and 3Com.

The company is also setting up an advisory group of its licensees to give feedback to the new unit.

"The formation of this subsidiary is a further step to ensure continued leadership in this rapidly growing new industry," Nagel said in the statement. Palm added that Nagel has been spearheading plans for the subsidiary for several months.

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