Merger May Make One Handheld the Red-Headed Stepchild

H-P's Jornada and Compaq's iPaq both aim for the same pool of customers.
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Poor little Jornada better hone her chimney-sweeping skills.

Hewlett-Packard

(HWP)

and

Compaq

(CPQ)

are bringing together two similar handheld device businesses under one roof. H-P's Jornada falls smack dab in the uglystepsister category -- the PDA is a more clunky, less successful alternativeto the shiny, chrome-faced Compaq iPaq. Both competitorscourt the same pool of customers, setting the stage for fairy tale heartbreak. Either the H-P Jornada finds a use for itself, or it may spend its days trying to turn pumpkins into stagecoaches.

As onlookers scratch their heads about the H-P and Compaq pairing, thehandheld device segments of their businesses are just another portion thatseems to be eerily similar. Both companies are in the

Microsoft

(MSFT) - Get Report

camp,basing their handhelds on the Pocket PC operating system. They offer greatcolor screens, PC-sized memory and price tags in the $400-$500 range. Youwon't see any consumer-focus from this pair. Both companies are reachingfor the deep pockets of the corporate customer, leaving

Palm

and

Handspring

to struggle with margin pressure at their new $199 price points.

It follows that neither device has much of a retail-sales presence.According to NPD Intelect, cash registers rang up near cookie-cutter retail results for both in June as the Jornada represented 4.1% of units and theiPaq mustered 3.9%, compared with Palm's 65% mark. You don't buy these instores.

But the corporate channel has been a good friend to Compaq in 2001. TheiPaq's worldwide market share climbed from 7.8% in the first quarter to 16%in the second, according to research firm Dataquest, making up ground onPalm's 32% stake, down from 50% in the first quarter. The Jornada madegreat strides as well, capturing 6.9% of the second-quarter market after aslimmer 3.7% market share showing the first quarter. Together the two areonly 10% shy of Palm's figures.

However, progress from this point depends on their merging parents'ability to hash out a coherent strategy for the both of them. The iPaqclearly has dominated in the marketing realm and is a Wall Street darling,but giving up Jornada's share of handheld sales outright would be foolish.

"Maybe you could say that there would be less market confusion withfewer competitors. That might be an advantage, but it's a pretty smalladvantage," says Bill Crawford of U.S. Bancorp Piper Jaffray. Surely one ofthe many consumer electronics players getting into the handheld businesswould pop up to fill the gap. "There's not any great addition. Clearly thisdoesn't make a whole lot of sense from the iPaq perspective."

It will take serious creativity on CEO Carly Fiorina's part to find away to differentiate the two devices enough to suit combined sales forcesaimed at the same customer. Sell the Jornada at the lower end, potentiallyeroding some of iPaq's stability? Sell it at the higher end, pushing theiPaq's price down? Both devices have been focused toward the same endmarket; it's one of many sticky situations H-P and Compaq management willhave to negotiate to make their merger additive, not redundant.