3Com spins off Palm Computing division

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3Com's decision to spin off its Palm Computing division into a separate company could speed the spread of handheld devices in enterprise nets, analysts and users say.

It's also a smart move for both companies, freeing them from the burden of juggling the demands of two very different product lines -- 3Com's network business and Palm's handheld devices and systems software.

The network company will be able to focus exclusively on its core business, says 3Com CEO Eric Benhamou. He declined to comment on the continuing speculation, rife for months, that 3Com is seeking a marriage partner -- a larger company that will acquire it. Spinning off Palm will make 3Com stronger on its own, Benhamou says.

The impact on 3Com's bottom line, for good or ill, will be minimal, says Phillip Redman, program manager with The Yankee Group, a Boston, Mass., market research firm.

"The $500 or so million in gross revenue [from Palm] doesn't tell you what 3Com's profits were," he says. "Typically, profits from hardware products, especially in the price-conscious consumer market, are small." If the Palm initial public offering (IPO) is successful, 3Com shareholders will benefit because they'll be favored with Palm stock, Redman says.

"This spinoff has been a long time coming," says Gerry Purdy, president of Mobile Insights, a market research company specializing in mobile computing. "A networking company like 3Com absolutely must have a strong relationship with Microsoft. And Palm, of course, has been competing with Microsoft's Windows CE."

Palm Computing will now be able to compete even more effectively, Purdy says.

As a public company, Palm will be able to aggressively license Palm OS software to any and all hardware vendors that want to build handheld devices and need systems software to run them.

Indeed, the widely anticipated new handheld device from Handspring, Inc., a start-up created by Palm's original founders, Jeff Hawkins, Donna Dubinsky and Edward Colligan, is an almost perfect example of Purdy's point.

Handspring's Visor, unveiled last week, comes in three models and runs the Palm OS software. But prices range from $149 to $249, which are considerably less than Palm's current product line, which starts at a newly reduced price of $229 for the Palm IIIe and ranges to $449 for the Palm V.

Handspring also created a special expansion slot, called Springboard, which lets users plug in attachments such as phones, bar code scanners and other peripherals. The attachments are ready to use and typically have their own batteries. A software development kit will let third-party firms create their own Springboard modules.

The spinoff from 3Com, coupled with the kind of third-party innovation that's possible through more companies such as Handspring, will strengthen Palm against its chief rival, Microsoft, and its Windows CE software.

"With the Handspring product, Microsoft can no longer think it will be able to steamroller over Palm and just walk away with the handheld market," Purdy says. "It's a wake-up call to Microsoft to step up to the plate and make its Windows CE environment better and easier to use."

Palm President Alan Kessler, who remains in place as 3Com hunts for a CEO who will report to the Palm board, has made it clear that this kind of software licensing will be a major part of Palm's mission and revenue going forward.

"Palm has the lead [in the palm-size market] right now," says Jatinder Singh, manager of mobile computing for Impact Innovation Group, a custom softwaare development shop in Columbia, Md. "This spinoff [from 3Com] will help them do what's necessary to maintain that lead."

One of the necessary steps Palm needs to take is to devote more resources to integrating Palm devices and applications with the enterprise network.

"They're starting to put more emphasis on the enterprise, and with this spinoff [from 3Com], they'll be able to concentrate even more on it," Singh says.

3Com will likely make the IPO of Palm stock early next year. Four to six months later, it will offer the balance of the shares in the new company to existing 3Com shareholders.

Jim Barksdale, formerly of Netscape and now a managing partner in the Barksdale Group, and Gordon Campbell, president of Techfarm, have been named to the Palm board of directors. With Benhamou, they'll look for a CEO and additional directors.

Palm had revenue in fiscal 1999 of about $570 million, comprising about 10% of 3Com's total revenue. There are now about 600 Palm employees.

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