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Content, Digital Rights Management and the Palm OS.
With the Palm OS, Sony couldn't control the way people use the Clies to play content (music, movies, etc). There are several programs on Palm OS (Kinoma, MMPlayer, Pocket Tunes, etc) that allow someone to play any content they choose (legally owned/"fair use" or illegally downloaded/pirated).
Sony, being a huge Consumer Electronics Company, as well as a Media Giant (movies, music, games) has always had internal conflict between those two divisions. Sony wants to control how you use your Sony hardware and what you can use it for. The Palm OS didn't offer them that total control, although Sony tried to control content on their Clies (ATRAC, Memory Stick with Magic Gate, crippling the CF slot so you couldn't use it to store movies and music files, etc).
IMO that's the real reason Sony killed the Clie line: content delivery and DRM. There are too many ways around it on Palm OS and Sony is looking at the PSP and other closed (proprietary) content delivery systems with very strict DRM.
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