Why Palm needs Android

The new Treo Pro runs Microsoft's Windows Mobile – but Palm may get even more mileage out of embracing Google's Android for future phones. Image: Palm

Unless you're Google, these look like rough times to launch a mobile operating system.

That puts Palm (PALM) in an awkward position. Things have not been going well for the beleaguered smartphone maker, whose founders arguably kickstarted the smartphone revolution 12 years ago. Eighty percent of its sales come from the troubled U.S. market, its Treo phone has given up market share to the BlackBerry and it has lost buzz to the iPhone.

Profits have evaporated and revenues have dipped to $1.3 billion last fiscal year, from $1.5 billion the previous year. To get back on track, Palm has been promising since April 2007 that it will launch its own much-delayed, Linux-based operating system; it's now due within the next nine months. (Palm already licenses Microsoft's (MSFT) Windows Mobile for its corporate smartphones, and would continue to do so.)

But unlike the days when Palm first began merging handheld computers with cell phones, the smartphone field is now crowded with powerful competitors. For its new operating system to succeed, Palm will have to take on Research in Motion (RIMM), Apple (AAPL), Nokia (NOK) and now Google (GOOG) – industry titans who each have their own phone operating systems, not to mention cash war chests far bigger than Palm's.

In fact, the smartphone landscape has changed so much since Palm forged its software plans, it may be time for a drastic change of strategy. If Android is all it's cracked up to be, Palm may be better off scrapping its OS plans, and throwing in with Google instead.

This probably won't happen, because giving up its OS dreams would be a tough pill for Palm to swallow. From the days of its founding more than a decade ago, Palm prided itself on merging hardware and software in fast, simple devices.

It was the software that really helped it stand out – especially the address book and calendar programs that came bundled with each device, and made Palm the king of digital organizers. (I've used one for years myself.) Also, Palm management sounds confident that enough of their old base of developers will stick with them through a transition to a new OS.

"Palm has a rich legacy in creating devices that people want and applications that people use, and we're continuing to do that," said Pam Deziel, Palm's vice president of software product marketing, in a statement the company e-mailed to me. "The Palm OS footprint has reached millions of users and devices fueled by a committed Palm community, and this shows in our ability to quickly sell over two million Palm Centros. Developers understand and appreciate Palm’s loyal customer base and are eager to work with Palm as we roll out our new OS in 2009."

She may be right. But it's also true that there's no longer much reason for Palm to roll its own OS. The old reasons – cool factor, pricing power and influence – don't carry the weight they used to. In fact, they've all become reasons for Palm to consider Android.

Take cool factor. While having your own OS can be a great way to stand out (just ask Apple and RIM), it's not necessarily the only way. Google allows developers to modify Android in any way they choose – so companies like Palm could theoretically customize it with their own look and programs. Palm engineers already have experience doing that sort of thing – they've been adding features to Windows Mobile-based Treos for years, trying to make them more user-friendly. With Android, they would have even more freedom to do that.

Then there's price. Traditionally, owning your OS has been a great way to save money, akin to cooking at home instead of going out to eat. Microsoft is rumored to charge $8-$15 to handset makers who license Windows Mobile, which can raise the retail price of phones by more than $50.

But Android is free, so Palm could sell lower-cost phones loaded with the software without paying Google. While this is a good reason for companies like Palm to license Android (indeed, TechCrunch reported Monday that Motorola is expanding its Android team from 50 people to 350), it could be an even better reason for Palm not to waste time bringing out a competing OS. Why? Palm would need to convince third-party software developers to build software for it, and perhaps convince other handset makers to license it. Why would they rush to do that, when the BlackBerry and iPhone are hot, and Android is free?

Final point, influence. Can Palm make itself indispensable if it adopts someone else's operating system? Sure it can. These days, an operating system is often less important than the programs that run on it. Rather than spend its limited software resources holding developer conferences and working on software patches, Palm might be better off focusing its engineers on building the next must-have smartphone apps – what contacts and calendar were to the original Palm, what Office is to productivity, and what iTunes is to mobile music. If Palm does it right, it could offer those programs on iPhones, BlackBerrys, Windows Mobile, Android – and make a pretty penny in the process.

Certainly, Palm would be taking a risk by betting on Android. Any embrace of Google would bring the wrath of Microsoft, which could make it more difficult for Palm to produce its most profitable handsets, its Windows Mobile-based Treos. One analyst I spoke with suggested that Palm might get more mileage by threatening to go with Android and wringing concessions out of Microsoft, than by actually doing it. Android itself is also unproven in the marketplace – and that could lead to some unexpected bumps in the road when consumers begin to use it.

But Palm needs bold moves, and it doesn't have much room for error. Executives have a few months to weigh the costs and benefits of their current plan, and make any necessary changes.  In the end, Google's Android may be the best bet.