Update: Time is right for Palm sale, analysts say

Company is profitable, but is being outgunned by larger competitors

Rumors circulated late last week on Wall Street that Palm Inc. was putting itself up for sale, which one industry analyst said would be a good idea.

"I think it would be a good thing if they were purchased," said Gartner Inc. analyst Ken Dulaney. "They're doing well now, but they need more capital to do the things they need to do."

The rumors late last week drove up the price of Palm stock. Palm spokeswoman Marlene Somsak said late Monday that the company does not comment on rumors and speculation. "There's new ones every day," she said.

Dulaney said he had no direct knowledge that, as several news stories indicated, Palm was preparing itself for sale. He did say, however, that Palm investors told another Gartner analyst of the preparations.

"The rumor that [Palm] is in play came from investors," Dulaney said. Whether the stories are true, Dulaney said that Palm, which is currently profitable, can't keep up its profitability over the long haul, particularly with its popular Treo line of smart phones starting to show its age.

"Today, the big guys can do new [phone] models every six months," Dulaney said. "Palm just can't do that. The Treo has been out there far too long. Its electronics have been upgraded, but it's just too thick."

Dulaney was referring to the trend toward ever-thinner and smaller smart phones, such as the Motorola Q, Samsung's BlackJack and Research In Motion's Pearl. Even RIM's long-popular BlackBerry line aimed at business users received an overhaul recently with release of the thinner, smaller BlackBerry 8800.

Another analyst, Miro Kazakoff, said the market for smart phones is changing rapidly and the Treo has not been keeping up with its competitors. Kazakoff is director of the wireless practice for Compete Inc., a consulting company that monitors Web activity at specific sites to determine user behavior.

In particular, Kazakoff said that phone vendors have started offering lower-cost smart phones aimed at consumers. And while Palm responded to this trend with its low-cost Treo 680, that device isn't doing as well as higher-visibility devices like the Samsung BlackJack and the Motorola Q.

"What we've seen -- and it's not a great sign for Palm -- is that 50 percent of those looking at the BlackBerry Pearl are also looking at the BlackJack, but less than 15 percent of that same group are considering the Treo 680," Kazakoff said. "A lot of these shoppers haven't considered smart phones before and the Treo isn't as much on their radar as the others."

One issue might be that the Treo is bigger and thicker than its newer competitors, Kazakoff said. But another problem relates to the size of Palm as a company.

"Companies like Motorola and Samsung spend a lot of money marketing their devices to expose them to consumers," he said. "You'd hope that a rising tide would lift all boats equally, but from what we've observed, the devices that do the best are the ones being marketed most heavily."

And, he said, relatively small companies like Palm don't have the resources to market as heavily as larger companies.

Dulaney said that, while the sale of Palm makes sense, finding a buyer might be difficult.

"It wouldn't be Nokia or Motorola," he said. "Nokia wouldn't make sense because there's no common OS platform, and I don't think Motorola is interested since they already have Windows platform devices. RIM doesn't make sense because they're very confident in what they already have, although it would give RIM entry into Windows Mobile, which would increase their sales."

Besides some Asian phone vendors, that leaves large computer vendors as potential purchasers, Dulaney said. One candidate would be Hewlett-Packard Co., which recently introduced a smart phone, the iPaq 510 Voice Messenger, which will be based on the Windows Mobile 6 platform.

"Their shares are down, and the Messenger product is a weak effort," Dulaney said. "It would be natural for them to pick up Palm."

Other potential candidates include Dell Inc. and Apple Inc., but Dulaney dismissed the first possibility, saying, "Dell has too many problems now."

Apple might benefit from acquiring Palm, he said. "What they'd get from Palm is carrier knowledge. But they'd have to pick up a whole OS." By that, he said he meant that Apple is getting into the phone business with its much-ballyhooed iPhone, based on Apple's OS X, but some believe that the mobile phone business presents complications that Apple may not have considered. Also, Palm's Windows Mobile Treos would not necessarily be a good addition, given Apple's culture and traditional antipathy to Microsoft's platform.

In any case, Dulaney said that now was a good time for Palm to be looking for a buyer.

"It would be a good thing," he said. "They're profitable and there are some positive things there that won't be positive for all that long."

Kazakoff agreed, but said that doesn't necessarily mean Palm will be forced to sell.

"I'm not one who believes there's no room for small players in the market," he said. "There's always the possibility of a key innovation that meets a consumer need that can have a major effect. But the market is changing and Palm will either have to innovate in a substantial way or get themselves more in front of general consumers."

David Haskin is a contributing editor specializing in mobile and wireless issues.

Copyright © 2007 IDG Communications, Inc.

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