Where next for Palm

It really shouldn't be like this. In a marketplace where the smartphone and the portable device are booming, the instigator of the market is simply struggling to cope. At the start of October, Palm posted a quarterly loss of $840,000 (£420,000), a hefty turnaround from the same quarter twelve months ago when a $16.5 million (£8.23 million) profit was banked. And, worryingly, many believe that the firm is ill-equipped to turn this situation around.

But then, for Palm, it's not been a very good year. Ironically, it's been exposed as lacking the sheer level of vision that it exerted back in 1996 when it launched the very first PalmPilot, and instead has had to contend with problems of its own making, along with far more innovative competitors. So while Palm has recently launched two new smartphones, they'll be going head to head with the likes of the latest BlackBerrys and the Apple iPhone. And out of those, which is the one you've seen on the front cover of lots of magazines recently?

Increase

What's particularly eye-opening is that Palm's recent quarterly loss came off the back of an increase in smartphone sales. The firm sold 21 per cent more smartphones than they did at the same point last year, although this translated into a 12 per cent increase in revenue for that particular division of the company. Given the market migration away from straight PDAs to more versatile smartphones, it's understandable that this market segment is showing growth, but what will worry analysts is the price erosion that's taking place, and the unimpressive amount of a growing pie that Palm has snared for itself.

The smartphone sector has, granted, already proven to be a more competitive market space than that for PDAs, and as a result - with the exception of some high-end, higher-profile devices - margins are beginning to be squeezed. Yet volume is clearly there, and with the market for smartphones up by 50 per cent, it's generally been considered a disappointment that Palm hasn't managed to grow that area of its business further. Palm would contest that plans are afoot to capitalise on the growing market in the coming years, but in the meantime, competitors are cashing in.

Innovation is, however, the other area where Palm has been caught short. Given the head start that the company had over the competitors it now trails - Palm had a good three year lead on the Blackberry, for instance - it's been surprisingly caught short over the past year or two.

Initiatives

Of course, Palm has tried to kick-start some initiatives and product launches of its own, but little has been forthcoming. Most notably, it had to backtrack on its Foleo smartphone companion earlier in the year. Announced in May of 2007, the firm claimed that the Foleo - a smartphone companion that boasted a 10" screen and full keyboard - would be, according to Palm's founder Jeff Hawkins, the "first product in a new line of solutions that will redefine how people work while away from their desks".

Primed with a selling price of around $500 (£250), along with talk of widespread support and a platform to which features could easily be added, initial interest in what was to be the first in a new line of mobile Palm products was high. Yet just over a week later, a Gartner analysis criticised the device, arguing that the Foleo was too big, and was going against the trend in the market where portability was proving to be key. Eventually, in September, Palm chief executive and President Ed Colligan confirmed that on the eve of its launch, the Foleo was being canned. Instead, Palm shifted personnel over to the development of its operating system platform, although Colligan did express a desire to launch a Foleo II at some point in the future.

The operating system, however, is proving to be another uphill struggle for Palm. Currently, its range of portable devices utilise Palm OS 5.0 - now known officially as Garnet OS, courtesy of its latest owners - which is half a decade old, and showing its age in a market that's shifting towards the likes of Windows (which is, inevitably, also running on some of Palm's own products). Palm has argued that it's vital it develops its own operating system, which it will seek to use to underpin many of the firm's future developments, and help exploit the growth in the portable sector. And so Palm OS II has been under development for some time, and was originally primed for a release in 2007 at the least.

Yet a further announcement by Ed Collgian, just a month about he confirmed the cancelling of the Foleo project, brought further gloomy news. Palm OS II at best is still twelve months away, and possibly eighteen. That could leave Palm competing without a new operating system until early 2009. And while the headroom in the sector means smartphone sales will continue to rise, the sales growth is unlikely to be matched by an increase in market share for Palm. This is in spite of some impressive new releases: the US launch of the Centro, for instance, has been met warmly thus far.

So is Palm for sale?

Given the tough times Palm has endured of late, it's perhaps unsurprising that takeover talk is continuing, and it's hard to conclude that Palm isn't vulnerable to some form of further buyout. When you consider rumours such as those pointing at Google entering the market (http://www.itpro.co.uk/news/123537/google-tipped-to-enter-mobile-market.html?searchString=palm), perhaps launching both a handset and an operating system, it's clear that the market is going to get more and more competitive. An even bigger example is the Apple iPhone, which has promptly arrived and outsold Palm's products by some distance already. Given the size and the strength of the opponents lining up to face Palm, there's a logic to the iconic firm moving to owners with far deeper pockets.

That's perhaps why, early in the year, Palm employed the services of Morgan Stanley to help pursue some form of buyer. Back in March, there were reports of several firms and private equity organisations circling the company, although at that stage - in spite of some quite heavy speculation - a deal was never concluded.

Among the interested parties back then were some logical names. Motorola, for instance, would be a logical fit for Palm technology, complementing its own success in portable devices (particularly the mobile phone market). Yet, in spite of CNBC reporting that a $2 billion (£1 billion) deal was all but agreed, a readjustment of Motorola's own business outlook (citing mobile phone sales that came in lower than expected) was believed to have scuppered the chances of the never-confirmed agreement going ahead. Speculation had too linked Nokia with some form of deal. Talk there though dampened off the back of Nokia's own increasingly impressive inroads into Palm's sector of the market.

Mainstream computer manufacturers such as HP and Dell were also linked with a potential deal to snap up Palm too, but formal word from either was not forthcoming, and nothing concrete has materialised.

Back then, the speculation surrounding a potential deal inevitably inflated the Palm share price, and this is believed to have put off some potential suitors. Eventually, no deal was concluded, and talk of any kind of takeover quietened down.

Since then, the world economic situation has changed. Whereas six months ago, the cost of borrowing was still relatively cheap, the changes in the world financial markets mean that things are much tougher. That, in turn, has resulted in more cautious private equity companies, who are struggling to raise funds as easily as they could have done earlier in the year.

Yet one private equity backer has, nonetheless, invested into Palm, and while it's only a partial stake, there's some who believe it's the right move for Palm at the right time. Because in September, Elevation Partners injected $325 million (£162.5 million) into Palm - with the option for Palm to borrow a further $400m (£200 million) - in return for a 25 per cent stake, and inevitably seats on the board. This gives Palm breathing room, and crucially, may help it get through the next eighteen months competitively, while Palm OS II is completed. If that operating system fails to deliver though, then starker challenges will lie beyond that, and the longer term future will be much muddier.

Long term

There's little question that Palm remains vulnerable to - and perhaps in the long term needs - some kind of deal, though. While its smartphone sales boost is encouraging, the fact that its market share is showing little improvement has to be a worry. And yet the name still carries a degree of goodwill, and Palm - in spite of its recent problems - is nonetheless an iconic brand in its market sector.

The period ahead is going to be telling, however. Elevation's investment clearly is a major help, and there's undoubted potential in the Palm business if it can reposition itself a strong competitor to the likes of iPhones and Blackberries. That in itself is an extremely tall order, and Palm quickly needs to prove that it's up for the fight if one of the more popular names in portable computing is going to continue to effectively compete.

Email to a friend

Print this page