Are two Palms better than one?

Palm Inc. CEO Carl Yankowski raised the possibility the maker of the popular Palm handheld computer might split into separate hardware and software companies when he spoke at a technology conference in New York on Tuesday, according to published reports. The statements marked the second time in less than six months that Yankowski has floated the idea of reorganizing his troubled company along the lines of its two primary business units.

Palm spokeswoman Marlene Somsak stressed that such a split was only under consideration, not a set strategy. "We know that it's something that we could do, but it doesn't make any sense to do it at this time."

While analysts say it's unlikely Palm would divide itself anytime soon, the fact that Palm is even mulling such an option suggests the company is having difficulty being both an operating systems developer and a hardware vendor. The company both builds its own machines and licenses the operating software to hardware competitors such as Handspring Inc.

Licence to kill "The problem still persists that Palm as a whole entity continues to compete against its partners," said International Data Corp. analyst Kevin Burden. "If Palm's idea is to proliferate its operating system so that it's the most dominating OS, and the way they do that is through licensing, then they really have to start thinking about separating its hardware business."

This isn't the first time there's been speculation about a divided Palm. At the company's developer conference in December, Yankowski also mentioned that Palm would consider spinning off certain divisions.

It's unclear exactly what form such a split would take. Somsak would not comment on how such a separation would be carried out or what a divided Palm would look like, stating that "to even to go down all the different possibilities would only lend credence that this is something we plan to do."

Two options If the company were to reorganize, however, it has two options, each with its own set of benefits and risks. The company could simply separate its hardware and software operations, which currently work together, into two divisions, each operating separately, but both still under the Palm umbrella.

Or the company could actually divest its entire hardware operations and become a software-only company. Part of the appeal of this strategy is that software generally offers higher profit margins than hardware, said Lehman Brother analyst Joseph To.

More importantly, such a move would free Palm to sign more OS licensing deals. Currently, the company is hamstrung by the fact that licensing its software to companies such as Handspring and Sony effectively means less sales of Palm's own hardware devices.

Market share And while the company currently licenses its operating system to about a dozen different companies, the Palm operating system's share of the overall handheld market is slipping. In April, devices with Microsoft's PocketPC operating system grabbed roughly 10 per cent of all handheld sales, up markedly from 6.1 per cent in March, according to NPD Intelect.

To stave off the growing Microsoft menace, many believe that Palm needs to get more aggressive with its licensing program and put the Palm OS inside a greater variety of handhelds - something that may only be possible once the hardware side is no longer a part of the company, but just another licensee.

But with 97 per cent of Palm's revenue currently coming from hardware sales, the company is not in any hurry to shed its hardware side of the business.

For now, speculation about two Palms is just talk, Burden said. "We haven't seen any concrete plans," he said. Until the words are more than just a passing comment to analysts, it won't be taken too seriously, he added.