Kenneth Li

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Palm Goes Low-Tech With Latest Gadget

Kenneth Li

Peering into Palm's(PALM) future may seem a lot like a trip down memory lane, as the struggling company prepares to launch its first new device since it revamped its strategy in December.

Palm is going decidedly low-tech with the introduction of its $99 Palm Zire, rather than attempting to jam as many gee-whiz functions into the smallest amount of space as possible. The old-fashioned Zire is Palm's lowest-priced product to date.

Handheld-device manufacturers increasingly are paying attention to the lower-cost end of the market. Hewlett Packard(HPQ) recently announced it plans to begin selling a $299 version of its Ipaq device, while ViewSonic also announced a similarly priced device. In fact, analysts have suggested that lower-priced handhelds make up between 30% to 45% of the market.

Palm is aiming to undercut the competition on price, by introducing a newly designed device that harkens back to the mid-'90s, when the company created an entire industry by marketing a simple-to-use and pocketable organizer that appealed to technophiles and executives alike.

This generation of handhelds -- the first leg of Palm's new two-pronged strategy -- is targeted directly at the market for soccer moms and Luddites. Handheld-technology companies have left "this first-time user completely out," said Palm's senior director of product management, David Christopher.

However, there's no telling if the company will manage to attract an audience that has turned a blind eye to technology products. Moreover, Palm is unveiling a new product line at a time when the company may be "launching into a headwind because of the economic issues," said U.S. Bancorp Piper Jaffray's William Crawford.

Palm's fortunes have been hit hard of late, dragged down by a string of delays and problems with excess inventory.

But many analysts say the company may be executing a prudent strategy by introducing a cheap handheld organizer as a means to attract a new market as well as maintain its 30%-plus gross margins -- at a time when the economic climate has dampened corporate spending.

"We understand that [Palm has] gone back to the drawing board and designed [the Zire] from ground up to deliver strong gross margins at the outset," said J.P. Morgan analyst Paul Coster.

Palm's Christopher says the new device will be profitable on a per-unit basis from the start. "We're making a profit on each individual unit at $99," Christopher said. He added that Zire sales will not be "dilutive at all to the overall company margins," declining to give out specific figures.

J.P. Morgan's Coster believes the company is likely to see more than 25% gross margins on the Zire. That's quite a few points below the company's targets of around 35% by the end of the year. The company expects two other higher-priced and technology-centric devices to pick up the slack.

As for the Zire, simplicity is the key: The 3.8-ounce, white plastic-molded device does away with two of the four buttons that are typically built into other Palm devices. Behind the plastic is the current generation's operating system and about two megabytes of storage capacity.

It will be sold at chain stores including Target, RadioShack and Kmart -- and for the first time, a Palm handheld will be sold on the main showroom floor at the stores, sharing shelf space with calculators, scissors and other office supplies, rather than behind locked, glass-enclosed cases, where handheld computers are traditionally situated.