As tipped last week Palm Inc, has announced its first cell phone based on Microsoft Windows Mobile software, rather than its own operating system, which powered previous Treos.

Called “Treo on Windows,” the new phone will be available in early 2006. It will be powered by an Intel processor. In Australia Palm are talking to Telstra and Optus about the phone.

Palm is going down a dangerous path that could well upset a loyal customer base. Unlike Palm-based Treos, the new smart phone will not be compatible with Apple Macintosh computers or the Linux operating system.

This move was seen by some analysts as a marketing-driven one, an attempt by Palm to leverage Microsoft’s substantial advertising muscle. Other analysts said that by fielding a Windows Mobile-based Treo, Palm could make inroads in corporate IT purchases.

Windows Mobile 5.0, previously called Windows CE and other names, currently trails far behind Symbian in market share of operating systems for so-called smart phones, which combine cell phone, Web browsing, e-mail and PDA functionality. “We’ve been working on it for a number of years,” said Palm President and CEO Ed Colligan, who sat onstage with Verizon President and CEO Denny Strigl and Microsoft Chairman Bill Gates.

“Things have changed,” Colligan said. “Palm is no longer in the underlying operating system business,” he said, noting that Palm and Microsoft had long been competitors in the smart phone and PDA market. “Sure, we expect some people will switch [from Palm-based Treos],” Colligan said. However, Colligan stressed that he saw the new Treo as expanding Palm’s market.

“We have two reasons for working with a new platform. First, to bring new fundamental technologies and, second, to reach a new set of customers,” he said, referring mostly to enterprises. Colligan stressed the new Treo’s ability to work with Exchange’s ActiveSync feature, saying that this will help the product penetrate companies that have standardized on Windows.

What the Analysts Say

“Treo is the best-selling smart phone, with 110,000 to 120,000 units sold each month,” said Tim Bajarin, president of Campbell,  Creative Strategies. But, he said, Palm-based Treos have been entering enterprise environments “through the back door,” with IT workers purchasing individual units.

In comparison, Bajarin said, “Windows Mobile-based smart phones have been the handheld most able to get through the front door,” with hundreds or thousands of them purchased at once by corporations. The reason, he said, is that these devices can access Microsoft Exchange servers, which Palm-based devices can do only through sometimes-unreliable conduits.

“This gives IT managers a wider choice for Treo devices,” Bajarin said.

In addition, Bajarin said, “if you’re Siebel or SAP, you’ve likely created a mobile application for Windows Mobile” rather than for the Palm OS. “Now, the most popular smart phone supports Windows Mobile.”

Bajarin added that Windows-based Treos still could offer advantages over other Windows Mobile-powered devices. “Treos offer one-handed use, and the Treo is the most elegant smart phone, in terms of hardware design,” he said.

As for what will happen with Palm OS-based devices, Bajarin said that these “now have to be focused on new users and small businesses.” Neil Strother, a research director at the NPD Group, said the deal should help Palm and Microsoft market their respective products.

“Palm was always up against market giants like Nokia and Motorola,” he said, noting that Monday’s announcement gives Palm access to Microsoft’s marketing and name-brand recognition. “Like it or hate it, you know Windows,” Strother said. As for Microsoft, Strother said the deal allies the company with the popular Treo line, which is important given that Windows Mobile-based products “are not blowing people away

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