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"Are you nuts?" That's what AT&T Labs and Apple veteran David Nagel says his friends asked last year when he took charge of the Palm operating system. Though Palm jump-started the market for personal digital assistants with its wildly popular devices, the company had recently seen its share of woes--not the least of which was relentless competition from units based on Microsoft's Pocket PC OS.

Fifteen months into his tenure as president and CEO of PalmSource, the Palm group responsible for the Palm OS, Nagel talked with PC World at Comdex in Las Vegas about the OS and the devices built around it. "The biggest challenge is fighting the assumption that Microsoft is somehow inevitable," Nagel says. "But in some sense it's kind of fun."

Carving an Identity

PalmSource came into being when Palm split itself into two operating divisions: the Palm Solutions Group to build hardware, and PalmSource to develop the OS and license it to the hardware group and to other PDA vendors, such as Sony and Handspring. Slowly, PalmSource is emerging as a stand-alone company, a process that will conclude in the first half of 2003 when it becomes a separate legal entity, Nagel says.

Although PalmSource hasn't yet completely disentangled itself from Palm's hardware group, Nagel says it has earned the trust of other licensees that compete with such Palm devices as the Zire and Tungsten T. "We've gotten beyond the concerns and paranoia," he says.

As a result, PalmSource collaborates closely with licensees on development efforts. For instance, the high-resolution-display support that originated in Sony's Clie handhelds is now a standard feature of PalmSource's new Palm OS 5.

Furthermore, PalmSource's licensees don't compete head-to-head in most cases; each targets a different niche of the market, Nagel says. For example, Palm caters to first-time customers with its Zire and to corporate users with its Tungstens, and Sony aims at multimedia enthusiasts. That's distinctly different from Microsoft's PDA world, where devices are closer in look, feel, and functionality: "Pocket PCs are all kind of alike," Nagel contends.

Sharing the Bounty

Palm's newest licensee, announced during Comdex, is probably its most unusual: Wristwatch manufacturer Fossil unveiled its Wrist PDA, which squeezes the Palm OS into a digital watch. Scheduled to ship in the spring, the Wrist PDA will be marketed both in electronics stores and at department store watch counters.

"We don't know anything about watches--Fossil does," says Nagel. "I thought it was a preposterous idea to put Palm on a wristwatch. I was totally wrong."

The exception to PalmSource's strategy of divvying up the market: Multiple licensees--including Handspring, Kyocera, and Samsung--sell Palm OS-based phone/PDA hybrids. Nagel believes that with 400 million handsets sold yearly, the market can support that many licensees. And he says combination devices are still an immature category: "Nobody knows what product will be successful."

The Pocket PC Threat

As for battling Microsoft, Nagel admits that it's a challenge. The Redmond behemoth "has enormous visibility and an enormous amount of money. They've lost an immense amount [on handheld products], and if they're willing to do that forever it makes competition tougher." According to Nagel, however, Palm devices retain 80 percent of the PDA market and their share is growing; Pocket PC devices command just 15 percent of the market.

In some ways, the new OS 5 brings Palm handhelds more directly into competition with Pocket PCs, since it supports the high-resolution displays, multimedia, and fast processors that are standard on Pocket PCs. Still, Nagel says PalmSource will continue to focus on the strengths that made Palm products successful in the first place: efficiency and simplicity. With OS 5's new features, he reports, "People are surprised that the footprint and battery life haven't gotten worse."

The newly potent Palm devices do carry higher price tags--a trend that's occurring simultaneously with a price plunge for Pocket PCs. Dell's new Axim, for instance, starts at $199, while Palm's Tungsten T costs $499. But because Palm OS licensees focus on different slices of the market, "Dell coming in is more threatening to HP and Toshiba," Nagel says. "Palm will do fine [with the Tungsten]." Cheap Palms exist, he notes--Palm's Palm OS 4.1-based Zire costs $99--and he predicts that we'll see low-cost OS 5 devices within a year.

As for simplicity, PalmSource allows licensees to tweak the OS to meet their goals; for instance, the new Sony Clies have a Sony-designed application launcher. However, "these devise need to be simple and intuitive," Nagel says. Automobiles aren't identical, but "you can rent a car and within 30 seconds you can do everything." The goal is the same for Palm devices: "They may all look different but within a minute you know how to do it."

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