AN FRANCISCO - Last year, Palm thought it had all the pieces for a
turnaround in the market it pioneered: A new CEO known for making the
iPod a household name, a sleek new smart phone called the Pre and fresh,
intuitive operating software.
Instead, the company is in danger of going the way of its 1990s Palm
Pilot, making it the latest innovator to learn that great technology and
an accomplished leader don't guarantee success.
Several analysts say Palm might not remain an independent phone maker
for more than a year or two. It just could be too late to stop the
momentum enjoyed by Apple's iPhone and Research In Motion's BlackBerrys -
not to mention a growing crop of phones running Google's Android
software.
Palm spokesman Derick Mains said the company had no comment.
Consumers
have gravitated toward smartphones for their versatile features, such
as internet access and applications that can be downloaded. One out of
six US adults had a smart phone last year, according to Forrester
Research.
But Palm - a leader in the early days of handheld computing - was slow
to adapt. It began fighting back in earnest in January 2009 at the
International Consumer Electronics Show. It unveiled the stylish
touch-screen Pre and webOS, software that allows Palm phones to do
something the iPhone can't - run multiple apps simultaneously.
Ed Colligan, who was then Palm's CEO, said at the time that the new
products somewhat marked a relaunching of Palm itself. But it hasn't
gone as smoothly as Palm hoped.
Palm released the Pre last June, for use on Sprint Nextel's wireless
network in America, and followed it in November with a cheaper model,
the Pixi. US carrier Verizon Wireless started selling upgraded models of
these phones in January, and AT&T plans to offer webOS phones later
this year.
Despite widespread availability and positive reviews, consumers haven't
really embraced the products. Palm sold 810,000 phones in the quarter
that ended Aug. 28. In the next quarter, sales fell to 573,000. And
Palm's latest report, due March 18, is not expected to be bright. Palm
recently cut its forecast for that period, citing sluggish sales.
Discouraged investors have sliced the company's stock price by more than
half since the Pre hit stores. In that same time, shares of Apple have
risen nearly 50 per cent to all-time highs, while RIM shares have fallen
11 per cent.
One big problem for Palm is standing out in a crowded market dominated
by Apple and RIM. Many analysts believe Palm's latest products are good,
but the company simply hasn't been able to make potential customers
realise this.
Not for a lack of trying: Palm spent US$74.1 million on sales and
marketing in its last reported quarter, up 64 per cent from the previous
year.
Verizon and Sprint have advertised the Pre and Pixi, too, but now
probably aren't doing it as aggressively as they would if they had the
phones exclusively.
On Palm's end, at least, the marketing push is likely to last for
several more quarters as it tries to connect with consumers, said
Deutsche Bank analyst Jonathan Goldberg.
For a larger phone maker such as Motorola, in the midst of its own
comeback attempt, an advertising blitz might not be such a big deal. But
Palm is much tinier than its key competitors.
It takes Palm an entire quarter to sell as many phones as Apple sells in
a less than a week. RIM spent six times as much on a category it calls
selling, marketing and administrative expenses in its last quarter as
Palm spent on sales and marketing.
One thing Palm has: a CEO who helped make Apple what it is.
Right before the Pre launch, Colligan was replaced by Jon Rubinstein,
53, who spent a decade at Apple during its own comeback run. He started
in 1997 and was a pivotal figure behind the brightly coloured iMac
computers and the iPod.
He came to Palm in 2007 as executive
chairman under a deal in which Palm sold nearly a third of the company
to private equity firm Elevation Partners.
Still, even the most astute leadership isn't enough in such a
competitive market, Canaccord Adams analyst Peter Misek said.
"It takes distribution, it takes cash, it takes luck. It takes a lot of
things, and if all those things don't click your probability of success
is low," he said.
It also takes time. And Palm wasted it during many years of corporate
restructuring, according to Donna Dubinsky, a former Palm CEO and board
member.
Dubinsky and Jeff Hawkins founded Palm in 1992, and in 1995 it was
bought by US Robotics, a modem maker that was acquired by 3Com in 1997.
Palm spun off as its own company in 2000, two years after Dubinsky and
Hawkins left to form a rival startup, Handspring, that made influential
early smart phones.
In 2003, Palm acquired Handspring and spun off PalmSource, which made
the PalmOS handheld computing software, as an independently traded
company. PalmSource was bought by Japan's Access Co. in 2005.
Dubinsky said all the shuffling took "critical resources and attention
from product development." And even though it happened years ago, she
called the decision to spin off PalmOS a "huge strategic error."
"As RIM, Apple and Palm all have demonstrated, these devices need to be
highly integrated hardware and software developments in order to
optimize the user experience," Dubinsky wrote in an email.
"When Palm no longer could advance the OS, and had to create a new one,
it lost several years."
So what will happen to Palm now?
Misek thinks the company could keep spending its cash - it had $590
million at the end of its most recently reported quarter - and run out
of gas in a year or two.
Or, it could try to conserve funds and angle to be bought out. But Misek
thinks a buyer could be dissuaded by the year or two it might take to
get webOS working on new phones.
Kaufman Bros. analyst Shaw Wu thinks Palm could be purchased in the next
year by a company such as Motorola or Dell. That would give those
companies their own smart-phone software rather than making them rely on
software found on many kinds of devices.
In fact, Wu said, Palm's best asset is its intellectual property. Palm
has patents on its own style of the touch-screen technology that Apple
popularised and is now suing phone maker HTC over.
Ultimately, Wu thinks the smart phone market will look like the PC
market, which was crowded with competition early on but eventually
produced a short list of winners and a smattering of losers.
"Palm's almost on that list of losers," he said.
