Behind the MS/Palm Treo Collaboration

Palm reported a 25 percent increase in net revenue in September, largely on the strength of a 160 percent rise in Treo sales. After struggling in a flat PDA market for the past few years, Palm has finally found a gold mine in the smartphone market. Yet, despite this success, the Treo's PalmOS operating system still hasn't achieved Windows' ubiquity.

Meanwhile, PalmSource, the maker of PalmOS, is about to be purchased by Access, a little-known Japanese software company, for $324 million. Why was PalmSource a takeover target? Money. PalmSource reported another loss last quarter--more than $2 million this time--and the business trends aren't positive.

Aside from the financial issues, Treo faces some technical challenges. PalmOS still has some real advantages as a PDA OS, but its multitasking capability is primitive compared with Windows Mobile, and its voice and video features expose its PDA legacy. In addition, corporate users want a device that works well with Exchange, as the BlackBerry does, and Microsoft is positioning Windows Mobile to do just that.

The next-generation PalmOS, Cobalt, has yet to be adopted in any meaningful way. So Palm had a choice: Stick with the irksome limitations of the current-generation PalmOS--and possibly lose out to another smartphone manufacturer--or jump the fence to the Windows world. The choice couldn't have been too difficult.

Palm pledges that it won't abandon PalmOS on current and future devices, including the Treo, but clearly, the company is hedging its bets. After it joins Access, PalmSource will have a limited time to get its act together or risk becoming another bit player in the PDA market.Either way, the Windows-based Treo is a big win for users. It might be wise to hold off major purchases until it's clear whether this new cross-breed has staying power. But the merger brings together two client-device leaders, and it puts the pressure on PalmSource to deliver a next-generation OS winner as well.