China, Linux Could Put PalmSource in the Catbird Seat

Opinion: While the Palm Inc. spinoff has had a tough infancy, its acquisition of China MobileSoft promises to position it as a formidable contender in the emerging mobile market.

If you have a soft spot in your heart for underdogs (and who doesnt), its tough not to cheer Wednesdays news from PalmSource that it is acquiring mobile Linux vendor China MobileSoft.

That hopeful spinoff of Palm Inc.—which came to life only a year ago—has had a tough infancy. But heres a move that promises to position PalmSource as a formidable contender in the emerging mobile market.

If you think that sounds like the same line that PalmSource president and CEO David Nagel put down to the media and analysts in his announcement Wednesday, youre right. Im buying it—and not because Nagel said so.

What we have here is a numbers game that makes it tough not to be impressed by PalmSources move. Considering what PalmSource was up against, its nothing short of nimble.

Heres a company that was spun out of Palm Inc. with great excitement a year ago, only to find itself smack in the middle of a market that was eroding.

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Fighting challengers such as Microsoft and its Windows CE operating system on one side, and Nokia and its Symbian operating system on the other, PalmSource also faced an overall erosion in the handheld market (that wasnt helped by hardware cousin PalmOnes recent decision to end its exclusive devotion to the Palm OS and embrace those competitors, as well).

Click here for a column on what PalmSources acquisition means for its future.

Recent news only seemed to compound the problem. In November, Gartner reported that shipments of the Windows CE operating system had soared as PalmSources sunk. According to Gartner, Microsoft shipments increased to 1.4 million, up about 33 percent over last year, while shipments of the Palm OS dropped by 25 percent to 851,000.

Researchers at IDC in Framingham, Mass., reported in October that shipments of handheld PDAs had declined for the third consecutive quarter, down 4.6 percent from the previous quarter and down 8.7 percent from the previous year.

The data show that smart phones with personal information management and other data-handling functions were absorbing some of the market that PDAs (personal digital assistants) once held. But it was a market where PalmSource had only a slim presence.

Just last week, Gartner reported that worldwide mobile phone sales had topped 167 million units in the third quarter, up 26 percent from the same quarter a year ago. Nokia, Samsung and Motorola accounted for 60 percent of those sales.

Now, here comes PalmSource with news that it is acquiring CMS (China MobileSoft), one of Chinas leading mobile software developers. Clearly, the company was busy behind the scenes carving its niche for the future.

That niche is Linux, and the market is China.

Linux has been the platform of choice in many countries. CCID Market Research predicts that by 2008, Linux will be embedded on 55 percent of the mobile devices in China.

PalmSource will be there to greet the trend as it happens. With its acquisition of CMS, the company immediately doubles its development and its number of phone licensees and gains a stronghold in a market that all mobile operators have their eye on.

Last year, China Electronics News, a publication of the Ministry of Information Industry of China, reported that there were more than 100 million mobile subscribers in the country.

According to that report, at least half of them were holding Chinese-made devices, and although Motorola and Nokia had made inroads, the percentage of homegrown devices in the market was expected to grow.

Coincidentally, The Asia Times on Wednesday reported that rebel billionaire Sir Richard Branson has his eye on China. His Virgin Group is rumored to be pursuing a joint venture with the nations largest mobile service, China Mobile.

It seems that the mobile phone market, once dominated by Europe and the United States, has turned east.

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