Where does Palm go from here?

Weak sales of its smartphones raise questions about Palm's future, possible sale

Smartphone industry pundits wonder whether Palm Inc. can survive another year, given Palm's guidance today that its new smartphone sales failed to meet expectations.

Palm revenues for the year will be "well below" a previous forecast, Palm said, because adoption of its Palm webOS smartphones, the Palm Pre and the Pixi, first announced in early 2009, is taking longer than anticipated.

The news caused Palm's stock price to plunge 17% initially, and the question is being raised whether Palm can survive in its current form beyond the 2010 year-end holiday shopping season.

Five analysts suggested that several things could happen to Palm by year's end: It could be bought; it could go private; it could raise more funds from Elevation Partners, an investment firm which has infused more than $400 million in Palm since 2007; and, finally, it could focus heavily on expanding the number of carriers selling its smartphones, especially abroad.

The possibility of Palm being sold to another company has been raised many times in recent years, but one analyst today questioned why anyone would buy it.

"The best candidates to buy Palm might be a Chinese or Japanese company wanting to get in the smartphone market, but realistically what would they buy?" asked Jack Gold, an analyst at J. Gold Associates. "The odds Palm can last another year are no better than 50-50 right now, unless they build momentum and make money."

Because potential buyers of Palm aren't evident, Gold said it's even possible that Palm "could just fold up and go away if they run out of cash."

Ken Dulaney, an analyst at Gartner Inc., said Palm "needs to be acquired" and suggested Research in Motion Ltd., the maker of the BlackBerry, would benefit from buying Palm and its talented engineers.

Dulaney refused to speculate on Palm's future in a year, but Gartner researchers have projected that Palm's smartphones will have only 1.4% of the smartphone market in 2012, which Dulaney called a "very difficult survival strategy."

In the last year, Palm has been up against tough competitors, including Apple , Google , Motorola, Samsung and Nokia that are "monsters in a tough, tough smartphone market," Dulaney said. Palm is "a Silicon Valley icon, and I don't want to see them go."

On the other hand, Will Stofega, an analyst at IDC, predicted Palm will certainly be around in a year, since the company has a great mobile operating system but has not had the help from carrier partners that it needs. He suggested Palm could go private, and could certainly start aggressively marketing its products abroad, partnering with carriers from other countries.

Kevin Burden, an analyst at ABI, said Palm has "very solid devices and a well-done OS, but their problem is lacking scale" against enormous competitors. "Could they ride this trouble out with a lot more wireless operators? Yes, but there's already so much competition from iPhone, Android and even Windows Phone 7 coming," Burden said. "They don't have the scale to compete today, and the big guys are getting bigger."

Expanding carrier relationships might be key to Palm, at least for the next few months, all the analysts said.

"In the phone space, success is about good carrier relationships," Gold said, noting that Palm's webOS was first tied to Sprint Nextel, the no. 3 carrier in the U.S. market, before expanding to others, which slowed adoption of its products.

Today, Palm talked about its carriers, saying in a statement that its "carrier partners remain committed," even as it added a somewhat contradictory comment that carriers had ordered lower-than-expected volumes of Palm products and had deferred orders to future periods.

A Dow Jones News Service report Wednesday ( subscription required ) that quoted Canaccord Adams analyst Peter Misek as saying No. 1 wireless carrier Verizon Wireless was evaluating whether to drop its Palm Pre Plus and Pixi Plus smartphones from shelves. But a Verizon Wireless spokeswoman later called the Palm devices "important" in Verizon's smartphone lineup.

Then today, Verizon issued a press release that seemed to be an endorsement of the Palm Pre Plus and Pixi Plus, using the headline, "Apps on Palm Smartphones Shine on Verizon Wireless' 3G Network." A Verizon spokeswoman said the release was in the works before reports of Palm's poor sales surfaced, and added that Verizon will continue to support Palm devices with its marketing efforts.

How did Palm get to this place?

One reason is that while Palm needed to update its Palm OS, its new webOS announced in early 2009 wasn't immediately compatible with its older one. "Palm's had no momentum with webOS," Gold said. "They had a loyal base with Palm OS and then turned them off when they went to webOS."

The webOS also wasn't launched with many applications and no real blockbuster apps, analysts added. Plus, Palm's application store hasn't done that well and is costly to support, leading Gartner's Dulaney to suggest that Palm close it down and sell applications in a leading application storefront instead.

Aside from the intense competition from other OSes, Palm has suffered by not having strong global reach to sell its products and hasn't marketed its smartphones well, the analysts said.

"Palm's marketing was always sub-par, and they can't afford to do what Apple and Google do," Gold added. "They also don't have the brand recognition. Apple sneezes and everybody gets a cold, while Google smiles and everybody thinks they told a funny joke. Meanwhile, Palm doesn't have the same cachet."

Carl Howe, an analyst at Yankee Group Inc., put it another way: "Palm isn't a market leader. Consumers like to buy what their friends and family have and like, and because few people already own webOS devices, they don't get that recommendation buzz that other handsets do."

Matt Hamblen covers mobile and wireless, smartphones and other handhelds, and wireless networking for Computerworld . Follow Matt on Twitter at @matthamblen or subscribe to Matt's RSS feed@matthamblen or subscribe to . His e-mail address is mhamblen@computerworld.com .

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Copyright © 2010 IDG Communications, Inc.

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