Commentary: The Lengthening Shadow of Microsoft Darkens Its Door

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I remember only one product demo from my time at the Comdex computer show five years ago this month: a Palm Pilot.

I didn't notice the product on the show floor. Rather,

an acquaintance -- and proud Palm owner -- gave me an impromptu demo one evening. It was a cool product. But I was more impressed by the evangelistic passion of the owner, something I hadn't seen in technology since the advent of Apple's Macintosh.

Since its 1996 debut, Palm has sold more than 14 million gizmos. This column is about how Palm could turn success into failure.

Microsoft gaining ground
Palm is in trouble: Revenue in its most recent quarter tumbled 47%. The stock is down 98% from the peak it hit the day it went public last year. Palm's CEO exited this month. Microsoft Corp. is gaining ground.

Palm grew out of the disaster of Apple's Newton. Apple overpromised and underdelivered; Palm built a simply elegant device that worked.

Sales took off. Microsoft then entered the category with a special

Bradley Johnson is deputy editor of 'Advertising Age' magazine.
version of Windows. Microsoft, typically, didn't get far with its initial entry. Palm continued its ascent.

Aggressive licensing
But Palm failed to appreciate two points: 1) Microsoft eventually gets things right; and 2) Palm's best opportunity to maintain category dominance was to aggressively license its software to consumer electronics and computer makers far and wide.

Apple, enamored of profits on its hardware, for years refused to license its software to other computer makers. Eventually Apple relented, creating a competitive market for Macs -- but only after Microsoft had made its improved Windows the industry standard. Then Apple, not happy that Mac clones undercut it on price, stopped licensing its software. Apple today is a minor niche brand; Mac could have been Windows.

Tiptoeing instead of charging
Palm is in danger of being the Macintosh of its space. Palm tiptoed around licensing, not wanting to risk hurting its lucrative hardware business. Palm eventually licensed its software to companies including Sony and startup Handspring (home of Palm's creators). But Palm still directly competes with its licensees.

I suggested at a dinner with Palm executives a few years ago that

they split hardware and software into separate companies -- and then license the heck out of the software to create a competitive Palm hardware market. Instead, Palm's then-owner, 3Com Corp., spun off the Palm business in an IPO that last year made Palm a one-day wonder. Belatedly, Palm plans by the end of this year to make hardware and software separate entities within Palm.

Momentum swing
The market-share score now is 54% for Palm and 24% for Microsoft's Pocket PC, according to market researcher Gartner. Momentum is swinging toward Microsoft; Gartner analysts say Microsoft and hardware licensees (Compaq, Hewlett-Packard, Casio and others) could snare a 30% share over the next year.

Palm still has one potent weapon: its brand (albeit a somewhat fuzzy brand). Consider that Palm stopped selling "PalmPilots" more than two years ago after losing "Pilot" rights in a dispute with Pilot Pen Corp. Palm unveiled PalmPilot's successor, Palm III, in March 1998, and over the next year phased out PalmPilot. Figure that some 12 million of the 14 million customers have bought Palms, not PalmPilots. But the old name lives on: A database check shows "PalmPilot" and "Palm Pilot" have generated 10 times the number of press mentions since Palm III's launch as they received up to that point. Palm couldn't kill a great name; the question is whether Palm has control of its brand.

Bought again?
There's talk Palm could get bought again after going through four sets of owners -- startup; U.S. Robotics; 3Com; independent. Palm has endured continual management change. The jobs board on Palm's Web site last week listed 11 openings. Palm forgot to list one: CEO.

Palm, for now, leads its market. It still has a chance to keep its lead by pursuing aggressive licensing. But time is running out. It would be a sad thing to see a great brand and great product lose.

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