The press has speculated heavily about an impending takeover of Palm by a strategic buyer •- a larger handset manufacturer like Nokia or Motorola looking to bolster their smart phone offerings or a PC OEM like Dell or HP trying to extend their reach into the mobile market •- or a private equity fund betting that Palm is the next Apple.

As someone who spent four years on the frontlines at Handspring and Palm helping incubate and manage their carrier distribution channel, I have a keen appreciation for the challenges that the company is faced with today. And my perspective is this: Palm should sell to a corporate strategic investor who has the scale and resources needed to survive in a carrier dominated world and not a private equity buyer. Palm should do this in spite of how appealing the prospect of continuing to be an independent company is and how sexy it is to believe it could be the next Apple.

This is going to be a hard call to make for a company that is extremely entrepreneurial and innovative relative to its size, and owes much of its past success to stubborn resilience and swimming against the tides of conventional wisdom. But, it is a call Palm has to make to insure its long-term legacy and not risk being irrelevant.

For a company that Fortune magazine once (in)famously predicted would challenge Nokia for leadership in the cell phone handset business, as of late, Palm has been waging a losing battle against cruel market forces. The challenges Palm face as a standalone company are deeply structural, things that are more tied to fundamental industry dynamics than what any financial investor or good management can control or fix for the long-term. There was a point in Palm’s history two or three years ago when Palm could have doubled-down on the success of the Treo — introduced new form factors and price points and built fences around the experience with compelling services that are sticky to the device, similar to what Apple did with the iPod — but that time is long past, with umpteen new competitors diluting the Treo mystique with slicker form factors, improved usability and lower costs.

The Palm of today has very little sustainable competitive advantage. RIM has the enterprise email servers which are hard to displace thanks to the inertia of IT managers, iPod has iTunes. Palm just has its hardware. Whatever loyalty Palm OS commanded with consumers and developers has been diluted by the complete lack of innovation on that front and its imminent obsolescence. Palm is also comfortably perched on the low-quality, high-cost end of cost-quality curve and it is hard to envision how a pure hardware company can succeed in the long term with those characteristics.

One of the main reasons why financial investors are interested in Palm is because of its parallels with Apple. Both companies have enjoyed an enviable position as the darlings of the trade press who embraced them as upstart innovators standing up to the might of Microsoft. They attract similar target customers, have similar product development DNA thanks in part to employees who zigzag between the two companies, and follow similar design philosophies to create simple, delightful user experiences. So, in any discussion of the future of Palm, it is only natural to wonder if Palm is Apple, pre-Steve Jobs Act II.

But if I were Palm, the Apple-parallels would keep me up at night, not flatter me. The one important thing the iPhone has going for is something the Treo struggles with, namely ‘sizzle’ at point of purchase. Most of the differentiation that Palm has (user experience) is not obvious at the point of purchase where consumers make decisions on looks and sizzle. If you think of iPhone as the beautiful girl at the bar who most likely will prove to be a disappointment in the sobriety of the morning, then Treo is the nerdy intellectual with whom you can talk philosophy with in bed • which one would you take home if you had $300 to spend on a smart phone in the coming year?

That Apple’s core demographic is exactly Palm’s is cause for significant worry • there is a pretty good chance that most current individual Treo users, which is the majority, will buy the iPhone (or a Blackberry Pearl-like device) as their next smart phone. Alternatively, if you are betting on the overall market growing and Palm attracting a whole new breed of smart phone customers, those folks are going to be much more price-sensitive; Palm would be extremely vulnerable if it came to purely competing on price, especially without the differentiation of Palm OS.

There has been talk of a new and improved Linux-based Palm OS from Palm which is good news, but the critical issue is timing. Getting a new operating system right on the first try is a fairly tall order. So, given that the current Palm OS is nearing its end of life, the Treo differentiation isn’t what it used to be, and carrier patience must be wearing thin with the quality concerns that have plagued Treos, the real question is if Palm can deliver their new OS running on some lower cost, higher quality devices and get to the other side fast enough.

At the end of the day, I just don’t believe a niche player with a one-trick pony product line can survive as a standalone handset vendor for the long haul. RIM was lucky to be first and get entrenched in the enterprise before the carriers figured out what was going on and the power dynamic shifted far enough in favor of RIM to attain scale •- a Walmart threatening to leave Cingular for Verizon because Cingular dropped the Blackberry line is a risk a carrier won’t take for the near future. Other than RIM, the only niche player I would give any chance in the carrier world is Apple, but they have gobs of cash, cachet, alternative revenue streams, and a brand that Palm doesn’t have. Even Apple, with all that, will have trouble being a credible mobile handset vendor to carriers in the long term because of the inherent scale required to be successful, which few other than a Samsung, Motorola or Nokia have. Even if the iPhone is as huge a success as everyone is predicting it to be, which I don’t believe will be the case, as long as the carriers continue to be as powerful as they are, my prediction is Apple’s mobile fortunes will mirror that of Palm’s history with Treo • rapid rise, brief reign at the top, followed by slow decay.

So, the only way a financial buyer should buy Palm is if it believed it could drive some focus and short-term value and cash out before the strategic buyers like Nokia, Samsung and Motorola finally get their smart phone act together. To do that, Palm would have to embrace being a niche player, give up ambitions to be the next Apple, trim down the organization, focus on fewer meaningful carriers, fewer meaningful regions (an uncomfortably large percentage of Palm’s business is in the US relative to the size of their organization) and timely delivery of quality products. If indeed there is some truth to the Linux operating system rumors, Palm should ride the Linux wave to try and rejuvenate their historically strong developer organization which has languished as of late. A financial buyer with deep pockets could consider a consolidation play strengthening Palm with a few strategic acquisitions, whether that is an ODM (original design manufacturer) like an HTC who has the device manufacturing expertise and scale, or whether that is some mobile internet services companies like Handmark or Audible that can help transform the Treo into a more complete solution. It is possible these things would set the company on an upward trajectory again and that Palm could indeed be the next Apple, but my Plan A would be to turn around and try to sell the company at a premium to one of the bigger players in the next couple of years, before those larger players find success and confidence in the smart phone market.

Whatever happens, it is going to be interesting to watch. Palm has a culture of innovation, a penchant for reinventing itself successfully and a history of proving skeptics wrong. So, one thing is near certain regardless of whether Palm remains an independent company or is absorbed into a larger corporate entity: There are a few more acts left before the curtain falls on this upstart innovator who name will forever be associated with the hand held and smart phone industries.

[Update: VentureBeat has corrected the bio below. Due to an oversight at VentureBeat, the original bio did not fully explain the relationship Gibu Thomas has with Palm.]