For Palm, Yet Another Wrenching Crisis

Palm is the Jack Bauer of the mobile industry. Its story is one of high-tension drama in which it lurches from one crisis to another, saving itself from the jaws of despair only to face some new and more daunting threat, all while the clock ominously ticks away. But Palm’s current management is cunning, and we’ve learned never to write it off as finished.

The latest grim plot twist came last week when Palm reported its fiscal second-quarter earnings. Smartphones sold to consumers fell 4 percent from a year ago, before Palm even debuted the Pre. A costly ad campaign sank gross margins to 25.6 percent from 27.9 percent a quarter earlier. And the number of apps for sale in the Palm store now totals a mere 800, the company said, compared with 16,000 in the Android Market and more than 100,000 in Apple’s App Store.

Now that Palm is once again backed into a corner, it’s tempting to sit back and wait for its dramatic recovery. But this corner is a particularly dark one because the company’s best-laid plans and its promising webOS software, backed by the biggest marketing spend in years, aren’t translating into big sales. How will Palm extract itself from this predicament?

For starters, it needs to fix two problems: Its failure to connect with consumers, and its failure to connect with developers.

First, consumers. Hitching Palm’s star to Sprint may have been an expedient first step, but the longer the Pre and the Pixi fail to find a home on a bigger carrier, the harder it will be for Palm to catch up. Palm itself admits that sales through Sprint have been “lower-than-expected.” That’s CFO-speak for “unacceptable.”

Jonathan Rubinstein, Palm’s CEO, said in the earnings call he’s “very, very excited about our future opportunities with a variety of carriers.” That could mean anything, but it led some analysts to believe a deal with Verizon is around the corner. While that would provide a huge boost for Palm’s future, Verizon has been something of a tease. Last May, Verizon’s CEO said his company would sell the Pre “in six months” – a deadline that has come and gone. Later, a January 2010 date was floated, but in the meantime Verizon has grown enamored with Android phones.

Even if Palm did partner with Verizon, it’s got to stop wasting its money on ads that aren’t working. The early iPhone ads got the hearts of consumer fetishists racing. Android ads responded with a geeky appeal. And the Palm Pre? That blonde ghoul haunts my nightmares, and I can’t wait for her to go back to the Hieronymus Bosch painting she came from. The Pixi ads are more agreeable, but fail to convey the cost and feature advantages of the phone.

The competition is just as intense when it comes to getting the attention of developers. As Om has pointed out, “[B]uilding and supporting an application for different platforms is as tough as climbing a straight wall of rock.” Palm’s 7-percent share of the smartphone market ranks it far down the list of mobile platforms with which developers want to work. And with apps increasingly a deciding factor for consumers buying smartphones, 800 is not enough.

But working with developers is an area where Palm can improve quickly. On Friday, it introduced Project Ares, a beta development tool that runs entirely in a browser. Rubinstein says Palm will announce a “full developer program” at CES next month, and enhancements to webOS will follow. The platform’s edge over rivals, such as multitasking and pinch-to-zoom, haven’t been enough to spur sales, and they will be matched soon enough. So Palm also needs to keep raising the bar with new improvements.

It’s not just a question of doing enough, however, but of doing it fast enough. Rubinstein says Palm is in the early stage of the race. OK, but let the other guys build up a big enough lead and you may never catch up, no matter how hard you run.

Image courtesy of Fox.

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