Palm's New Dough—and New Blood

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The Apple in Palm's Eye

Anderson, who co-founded Elevation Partners with McNamee, stepped in as Apple's finance chief during the computer maker's darkest days in mid-1996. Apple was losing money, strapped for cash, burdened by debt, and its sales were in the doldrums. By 2004, when Anderson stepped down as CFO, Apple had almost $5 billion in cash and sales, and profits were on the rise.

Anderson's history at Apple isn't without an asterisk. The Securities & Exchange Commission filed a civil suit against Anderson related to Apple's improper dating of stock options in 2001; he settled the matter with the SEC by paying a $3.5 million fine. Anderson, who resigned from Apple's board last year as the options matter emerged, blasted Apple in a sharply worded statement laying some of the blame for the matter at the feet of CEO Steve Jobs and the company's board of directors (see BusinessWeek.com, 4/25/07, "Parting Shots at Apple's Jobs").

Anderson says Palm is in a very different position from the Apple of a decade ago. "When I joined Apple it was in a weak financial position," Anderson says. "Palm isn't like that. At that time, the PC market was maturing and growth was slowing for everyone, and Apple had to undergo a turnaround in that environment. Here, there's a rapid growth opportunity."

Palm CEO Colligan concurs. Growth of the overall total market for smartphones will leave plenty of room for all concerned to succeed. "When you look at the growth of the total addressable market over five to 10 years, you realize that we don't have to knock the other guys out of the market to be successful," he says.

iPhone Raising the Bar

And that's precisely what attracted McNamee and Elevation Partners. McNamee says that most of the wireless handsets in use today constitute "feature phones" with many sophisticated extras that aren't easy for the average user to maximize. "That suggests that as people's expectations rise, they're going to want something that's a lot more compelling than a device that just makes phone calls." Such a device will call for the tight hardware-software integration that has been a big part of what makes Palm devices so popular among its user base.

Apple's iPhone, if successful, will only underscore the demand for devices whose features are woven together elegantly by software, McNamee says. "It demonstrates the importance of the software platform on the device," he says. "To anyone who says there's no growth left in smartphones, the Treo is exhibit A and the iPhone will be exhibit B that that's not correct."

Other makers of handsets could follow in the footsteps of Apple, which will sell the iPhone exclusively in partnership with AT&T (T). If and when lines start to form outside Apple and AT&T stores after the iPhone launch, other U.S. carriers like Verizon Wireless, owned by Verizon (VZ), and Vodafone (VOD), will be eager for a competing device.

It's not clear whether Palm would fit that bill, but Colligan says Palm is hard at work building a new version of its operating system that will be based around the open-source Linux operating system, and that its business of selling handhelds running Microsoft's Windows Mobile software is taking on an increasingly important role. "It's not a huge part of our business now, because we've only had it for a little more than a year, but with this next generation of devices, I'd say the split between Palm OS and Windows Mobile will be more like 50-50," he says.