SAN FRANCISCO -- Surprise, surprise. After months of speculation,

Palm

(PALM)

announced Monday plans to release a Treo smartphone running on

Microsoft's

(MSFT) - Get Report

Windows Mobile operating system.

Now the question is how well it will do in the marketplace.

Although Palm cited strong customer interest as an impetus for coming out with the device, the company faces a number of challenges with the new Treo that could inhibit sales and/or Palm's overall performance. Among them: the timing of the release, the reception from consumers, and competition from Palm's own devices and those of rivals.

In a joint press conference here also attended by Microsoft Chairman Bill Gates and Denny Strigl, CEO of

Verizon's

(VZ) - Get Report

operations, Palm CEO Ed Colligan unveiled the new product, confirming

reports published last week. The phone will be the first version of Palm's flagship product that doesn't run on the Palm operating system.

The companies declined to say when the new product will be available, saying only that Verizon would start offering it early next year. Palm plans to release the device for other carriers in the second half of next year.

The late release means that the company will miss out on holiday sales this year. That could be important, because much of the company's Treo sales to date have gone to individual consumers or professionals who tend to step up their spending around the holidays.

However, by including the Windows Mobile operating system, the company is hoping to appeal to enterprise customers, for whom the holiday season is not as important. And to date, Palm has said that it has not seen seasonal fluctuations in its Treo sales.

Meanwhile, Palm disclosed few details about the device, making it hard to know how it will stack up against the competition. The company said only that the device will include an

Intel

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processor and will be able to tap into Verizon's EVDO high-speed data network.

As of now, the device has neither a name nor even a price, not to mention other specifications. Palm's Colligan would only say that because of the EVDO radio in the device, it's likely to be priced higher than other Treos.

Verizon Wireless is offering the Palm OS-based Treo 650 for about $400 with a two-year service contract.

Just as important as price could be the effect the new device has on Palm's other Treos, which have quickly become Palm's most important product line as sales of its handhelds have declined precipitously.

But the company has had trouble in the past competing against itself. When the company introduced the Treo 650 last year, it originally planned to sell the device side by side with the Treo 600, the previous iteration of the device. But that plan didn't work out as well as Palm hoped; carriers generally phased out the Treo 600 from their lineups as they introduced the 650.

Verizon Wireless plans to offer the Palm-based and Windows Mobile-based Treos at the same time, Strigl said. But he didn't say how long the carrier would do so.

In the meantime, Colligan acknowledged that the Windows Mobile-based Treo could eat into sales of the Palm-based Treo 650. But he said Palm expects the new device will expand the market for the company's smartphones, and that the company will be able to post sales growth for both the Windows Mobile and Palm versions.

Another key challenge is the threat of commoditization. Because the company is the primary licensee of the Palm operating system, Palm's previous Treos stood out in the marketplace. But by signing up with Microsoft, the company becomes one of several major Windows Mobile device makers and now must square off against the likes of

Motorola

(MOT)

,

Hewlett-Packard

(HPQ) - Get Report

and

Samsung

for the attention of business customers.

At Monday's conference, Palm touted some of its own innovations that company officials argued will help it remain distinct from other Windows Mobile device makers. Among those were a multimedia messaging program and a name dialing feature.

Continuing to develop and offer such innovations is important, Colligan said. If the company can't distinguish its products from the Windows Mobile competition, it "deserves to be in a commodity business," he said.