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Gates wanted to buy Palm's software business, says report

If he did, it looks like an aggressive, dangerous and ill thought-out move

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Microsoft made an offer for 3Com's Palm Pilot software business in August, but was rebuffed, according to this morning's New York Times. The story seems genuine, and (along with the company's plan to buy De La Rue) suggests that Microsoft has decided to resume an aggressive acquisition strategy, no doubt taking the view that this would make no significant difference to the level of the DoJ's attacks on it. Since the regulators warned Microsoft off of its proposed takeover of Intuit in 1995, Microsoft has been relatively cautious in acquisitions. WebTV has been one of the more significant ones, and it's made a string of fairly low-profile investments in small technology companies. Even these have attracted the attention of rivals, the criticism being that Microsoft buys stakes in companies to bind them closer to it, and deny them to the competition. But the Palm business would have been a different matter altogether. 3Com got Palm when it bought USR, which itself had bought the start-up earlier. At the outset it didn't seem that 3Com saw the Palm Pilot as being an important product line, and although it's been making more enthusiast noises since then, it's not what you'd call core business for a networking company that has other problems to deal with. Palm technology could have applications that are more closely related to core business in the future, but today it's largely a useful high volume moneyspinner. It's been outselling Microsoft CE devices by a factor of 2:1, and the CE sales are split between numerous manufacturers, whereas the Palm Pilot only has one significant one. Microsoft's plan seems to have been to take over the software for the Palm Pilot, and then run it according to the Dos script. Microsoft owns the OS, licenses it and develops it, and defines standards. According to the NYT Bill Gates told 3Com chairman Eric Benhamou that he would make 3Com's Palm hardware business "the Compaq Computer of the hand-held market." If this is the case, Benhamou was probably right to turn Gates down. The Palm platform is available for licensing, but has only had a couple of takers so far. Gates' argument would have been that Microsoft backing would have accelerated this, but it could equally well have scared potential licensees off and/or confused them. It would also have left 3Com with a fuzzy role in the whole deal - if we're talking the Dos model here, how does 3Com get to be Compaq? And wouldn't it rather be Intel? 3Com could maybe have made money from licensing technology to other Palm Pilot manufacturers, but by releasing control of the software to Microsoft it would have been releasing control of its means to develop the platform into something more obviously a part of its core business. Basically, Bill was pitching the wrong plan to Eric. But it's interesting that he's now prepared to try to buy a whole software strategy lock, stock and barrel. And it's also worth noting that he couldn't have been thinking much about the regulators - if the deal had gone ahead the terms and conditions would have been gone over with a fine tooth comb by the DoJ, which would have been looking for anticompetitive market carve-ups by the two companies. It also makes it clear that although he's still pitching CE as the industry standard low-resource platform, he's prepared to buy another one if it looks like being more appropriate for pocket devices like phones and personal organisers. Just telling Bill 3Com isn't interested in a deal doesn't help the company figure out what it's going to do with Palm Pilot though. 3Com needs to come up with a credible strategy for taking it further, and may well not be able to do that on its own. The two founders of Palm Computing jumped ship from 3Com earlier this year, and a couple of weeks back opened up shop as J D Technology, a venture-backed outfit that proposes to have hand-held devices on the market late next year. So 3Com needs to show their departure hasn't left it with a vision deficit, or people will start to think Palm is a high volume platform that isn't going anywhere. ® Click for more stories

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