Palm's Destined to End Up on the Trash Heap of History

Palm(PALM) may end up in history books as a quirky US corporate craze -- a Filofax of late Nineties.

The company started losing money heavily during the first half of the year-- $390 million in the most recent quarter, including write-offs and restructuring charges. The spring period revealed Palm's vulnerability to competition as its market share crumbled under assault from Compaq's(CPQ) new WinCE PDA. It also exposed Palm's dangerous dependence on U.S. corporate spending, with the company having gained no real grip on consumer and export markets during its halcyon days.

And it's getting too late to address that, since mobile-phone vendors who have so far ignored the minuscule PDA market are about to start serious Palm-bashing next winter. Unfortunately for Palm, it's far easier to add PDA-like features to phones than it is to graft mobile voice and data to PDA's. The display and weight specs of new PDA/phone hybrids will crack the magical 30,000 pixel/140 gram limit during the next 12 months. Considering that Palm's entire output of PDAs during its corporate history barely tops the weekly sales of mobile phones globally, it is hard to see how the R&D effort of the company can match the mobile industry muscle in the future. As phones and PDAs converge, the loser is going to be the PDA market.

In addition:

The Q2 European sales numbers reveal Palm's fundamental international weakness -- i.e., consumer loyalty outside of hard-core U.S. Palm fans is close to zero. As soon as Compaq started shipping its appealing iPaq, Palm sales tanked.

In the last quarter, sales of the iPaq in Europe ran at 164,000 units vs. 162,000 for the Palm, with Compaq ramping up from just 22,000 units to parity in just 12 months. Even the old, 250-gram Nokia 9110 managed to shift 67,000 units, though consumers knew that the color update was being launched right after Q2.

Next winter's debut of mobile phones with sophisticated data features is going to be the coup de grace for Palm. And a retreat to the American market won't shelter the company for long, because the international volume leaders will attack there sooner or later. The volume leadership for wireless devices will be decided in the Europe/China/South East Asia axis, which dwarfs the U.S. device market in sales.

In the U.S., consumers are willing to carry phone/PDA or phone/Blackberry combos with them, but in other markets, consumers have not accepted the two-device solution. The global success of short-message service (SMS) already has turned phones into mobile-data devices outside of North America, although Palm is trying to export an American PDA model to markets that are hostile to it.

Palm left the revamp of its OS till much too late. The current OS is archaic, stiff and limited. By comparison, WinCE offers compatibility with Microsoft products to the corporate world, Linux is arriving to PDAs on the back of its flexibility and huge developer community, and Symbian has the backing of major phone vendors. In fact, during the next 12 months, Symbian smartphone shipments will outnumber the entire Palm OS PDA production of the past six years.

Symbian, which is specifically designed for multitasking and can handle voice and data simultaneously, is a focus of corporate mobile data programs in Europe and Asia. Palm can't match the combined R&D efforts of Symbian backers, because the company is nearly broke.

Finally, Palm has been losing steam among device vendors. Motorola(MOT) has backed out of its Palm/phone combo. Symbian has picked up the support of Siemens(SI) and Matsushita(MC) in addition to Nokia(NOK), Ericsson(ERICY) and Motorola.

The success of iPaq has invigorated the WinCE PDA manufacturers. Linux has started lining up vendor support and will announce new major backers this fall. While some phone/PDA hybrids from European vendors will employ the Palm user interface on top of Symbian's OS to appeal to North American consumers, this is a pyrrhic victory for Palm, because it reinforces the notion that Palm OS can't hack it, even if the user interface is nifty. And licensing income is a mere trickle compared with losses racked up by the manufacturing division, which has been stuck with sub-par production volumes.

Who Won Today's Face-Off? Tish Williams Tero Kuittinen

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