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Palm's Problems Pick up Steam

Weak demand for Palm phones at Verizon point to troubles ahead.

NEW YORK (

TheStreet

) --

Palm's

(PALM)

paltry sales earn it a downgrade as the company's triumphant rebirth effort runs into more challenges.

"Our checks indicate weak sell-through at

Verizon

(VZ) - Get Report

after softer than expected marketing support and a weak ad campaign," Macquarie Securites analyst Phil Cusick wrote in a research note Tuesday, downgrading Palm to neutral.

The bleak assessment on Palm Pre and Pixi sales at Verizon effectively confirms a long running suspicion: The problem with Palm wasn't

Sprint

(S) - Get Report

, where Palm phones languished in an exclusive sales agreement last year.

Palm Pixi

Palm's up-from-the-ashes turnaround tale also illustrates the difficulties

smaller smartphone players

face in a field of giants like

Nokia

(NOK) - Get Report

,

Apple

(AAPL) - Get Report

,

Research In Motion

(RIMM)

and

Google

(GOOG) - Get Report

.

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Palm's travails also show that it takes more than a good phone to succeed in the mobile industry. Attributes like lots of cash, broad distribution channels and cooperation on custom phone features and design are a big plus for telco partnerships.

Telcos tend to pick favorites among their product partners, getting behind certain models with lavish, splashy promotions and strong in-store sales support.

Last year, as

TheStreet

reported,

Verizon snubbed Palm

, or was less than enthusiastic about the upcoming arrival of Palm phones. At the time, Google

Motorola

(MOT)

and Verizon had been intensely focused on the launch of the

Droid

phone. Verizon had reportedly created an unprecedentedly large, $100 million ad campaign for the Droid.

The Palm phones arrived quietly at Verizon last month and the marketing push has been nearly absent. Cusick expects

AT&T

(T) - Get Report

, which gets the Palm phones in May, to be as equally ambivalent on Palm marketing.

"We expect AT&T to launch Pre and Pixi in April or May but with even less marketing support than Verizon," Cusick writes.

With Palm's turnaround gambit becoming more of a long shot, investors take flight. In early afternoon trading, Palm shares fell 7.46% to $8.42.

-- Written by Scott Moritz in New York.

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