When is a Palm PDA not a true Palm? When it's a cell phone that only looks like a Palm - something you'll likely be seeing in the not-too-distant-future.

That's because PalmSource, the company that develops and licenses the Palm operating system, is diversifying. Instead of just focusing on its traditional PDA and PDA-phone hybrid business (such as the Treo 650, reviewed here), it's starting to branch out with offerings for more conventional mobile phones.

You can hardly blame the company. The PDA business isn't doing so great lately. Sales of classic PDAs (ones that aren't also phones) are plummeting: The research firm IDC says 2004 worldwide sales totaled 9.2 million, a 13 percent decline from the 10.6 million sold the previous year. Last year, two major companies, Sony and Toshiba, exited the PDA business outside of Japan - and Sony has since quit in its homeland as well.

[Anyone who doubts that PalmSource is heading for the phone market should read our interview with PalmSource CEO, David Nagel - Editor]

Buying into the phone business
To jump-start its entry into the mass-market mobile phone business, PalmSource decided to buy a company that was already producing software for phones. And it found one in China: Last month, PalmSource completed its acquisition of China MobileSoft (announced in December). The company is not well known, but its MobileSoft Technology subsidiary (based in Nanjing, China) develops software that up to now has only been licensed by Chinese phone vendors.

That's a plus from PalmSource's point of view, since it gets instant entrée to the burgeoning Chinese cell phone market. It also reaps a benefit in the North American phone market by providing PalmSource with an operating system for low-end handsets.

What a Palm phone may look like.
Basically, PalmSource just needs to tweak a few elements and slap on a new user interface - one that echoes the look and feel of existing Palm OSes - onto MobileSoft's phone software, and voilá, PalmSource has software to license for the millions of inexpensive cell phones out there. The new phones will have an address book that's data-compatible with the ones in today's Palms, but they won't run traditional Palm applications (of which the company still has more than Windows). Phones based on this operating system will be called PalmSource Feature Phones, and I wouldn't be surprised to see the devices start appearing in the next few months.

Going forward, PalmSource will introduce a second phone OS called MFone for smartphones. Like the Feature Phone OS, it will be based largely on software that China MobileSoft has already developed, but this more upscale phone OS will be Linux-based. PalmSource needs to do this: The existing Palm OS has come a long way, but it has limitations for serious communications devices. Devices based on PalmSource MFone will probably compete head-to-head with Microsoft Windows Mobile-based Smartphones.

A bit farther out, however, more far-reaching changes are in store as Palm transitions to a Linux-based operating system for PDAs.

Palm-Linux marriage
PalmSource officials say that future releases of the company's top-of-the-line Cobalt variant of the Palm OS will be based on Linux. That doesn't mean the next generation of Palm PDAs will be moving to a command-line interface: PalmSource isn't going to fix something that isn't broken, and people know and like the Palm interface.

Also, PalmSource doesn't intend to completely abandon the huge library of applications that have contributed to the OS's success. Unlike the Feature Phone and MFone OSes, which won't run traditional Palm apps, the Linux-based Cobalt OS will be able to run most legacy apps in an emulation mode. The ones that might run into problems are apps that aren't properly written - likely the same ones that had trouble migrating from Palm OS 4 to Palm OS 5.

PalmSource's new directions may alarm longtime fans who don't want the OS to change. But they sounds to me like a smart response to the new realities of the handheld business: On one hand, PalmSource expands into new and huge markets (the inexpensive cell phones that run PalmSource Feature Phone); on the other, for the more expensive phones and PDAs that require versatile connectivity, sophisticated graphics, and general computing firepower, Linux is simply a sturdier foundation. Palm's most important, and possibly most difficult, task will be to educate its customers on the difference between a device that just looks like a Palm and one that actually runs Palm apps.