For Palm, Yet Another Wrenching Crisis

30 Comments

Palm (s 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 (s goog) and more than 100,000 in Apple’s (s aapl) 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 (s s) 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.

30 Comments

D. P.

Ad spending does not affect gross margins.

Their gross margins fell because ASPs dropped – i.e. Sprint has been paying them less per Pre sold through.

Ad spending did increase (from ~$55m to ~74m) despite management’s insistence a year ago that they were aiming for sub $100m operating costs.

Good thing Goldman found chumps at Capital World to bail out the Chubby Wombat’s sand castle.

gbp

hmm, that’s interesting.
Part of the reason why PALM will sell Pre and pixi on Verizon in few weeks.

Jacob Varghese

I think the Palm fans are missing one very important point. It’s not about who has the most features. Apple has thought us that. Palm is losing mindshare to Apple, Blackberry, Android and soon Windows Mobile 7.

Fortunately, it’s still early in the game. I’m not ready to write them off just yet but you’d be crazy to be putting more money into them.

I think they haven’t clearly identified their voice just yet. Who is there target market?

gbp

Agree with the mindshare point but please take Windows mobile7 out from that list. PALM’s issue is marketing. They were timid in going against any phone. The platform is best for productivity and simplicity. The inferior SDK and missing gaming support are over hyped. The phone is the best phone for productivity. While I am not counting any other platform out, PALM will slowly dent RIMM and Windows sales next year.
RIM is one trick pony. Microsoft is too late too slow.

whynance

Everyone here put up some great and thought-provoking comments. For me, I found it funny how the analysts and experts were dissing RIMM for the last few weeks and 95% of them were telling investors to sell of their shares before they posted earnings (along with Palm) last Thursday after the bell.
Fortunately, I liked RIMM at $55/share only a few weeks ago where I picked it up. Now, at $70/share, it feels kind of good to see what the analysts have to say about their terrible advice.
For Palm, sure it doesn’t have the fame and fortune of the iPhone or Blackberry but it hasn’t had the history of those two either. For the gentlemen who enjoys the Palm’s thrashing because it could very well drive the price down, I agree, as this could be an ample opportunity to get Palm’s stock for free.
However, it’s still very speculative as it’s been shown that iPhone absolutely kicks the crap out of all the other smartphones. But, I have not heard ONE person who owns a new version of the Palm say anything bad about it yet so…I’m still not going to believe the experts who say the Palm is a terrible company since they’re usually wrong anyhow.
Do your own research on it but I’m still not ready to throw Palm under the bus quite yet.

Carlos

At this point the only way of saving these devices is to go GSM/unlocked at around $249.95

if not they will be forgotten by early summer ’10

Miguel

Palm was stupid to start off with Sprint in the first place. A company bleeding cash and coming out with a potential hit needs to start off with either AT&T or Verizon and they totally missed that no-brainer of a move. Instead, you partner with a sinking ship for 6 months and have dismal sales. Palm would have been better off spending $5.99/min and trying to get Ms. Cleo to predict what Palm should do next than pull off that bone-headed move to be “exclusive” with Sprint.

Charles

I loved my Palm IIIx but I think this is a case where “all good things must come to an end”.

The mobile handset market is heating up and Palm simply does not have the cash to compete.

Even if you feel that Palm currently has the best product on the market it is not getting the sales it needs. Without the sales it will not be able to pump enough cash back into the product’s R&D to keep up with the next generation of mobile handsets.

Augustus

What can I say?

I am just buying Palm shares. I expect the smartphone market to be dominated by Apple and Palm.

Does that sound crazy? I invested in Apple in 1997. That sounded crazy too. I bought into Starbucks in 2007 (that sounded crazy too but no longer).

The experts are usually wrong. I will not give out my analysis. Do your own homework.

Lets just say the economics of the smartphone market something similar to online video. Joost was there first but it didn’t matter, Hulu beat them.

Put two and two together.

Rocksteady and Jim have pretty good points.

So please keep thrashing Palm so I can buy the stock cheap.

-Augustus

Jim

I’ve tried all three iphone, Droid, and Palm Pre.. Palm Pre is a productivity machine. It’s a wonderful piece of work, and it’s a shame it gets so much bad press.

whenever I now use an iPhone or an iPod Touch.. its UI drives me crazy. Palm Pre is beautifully done, making a seamless transition from app to app.

Go Palm!

or my prediction would be that NTT Docomo buys it, improves it, and uses it to dominate the world of smart phones

Rocksteady

I think there is a lot of negative hype here, when the answer is obvious. The better device will win its share of the market. I know iphone, Droid, and WebOS-used all 3. WebOS is by far the better OS for a phone, and Pre/Pixi are much better phones. Droid is great for watching online videos, GPS etc., but the form factor is horrible. Too heavy, too large, and having to slide the keyboard out and turn it sideways is a lot of effort. The keyboard dimension is a tittle too large, so its hard to hold and thumb type-you need to use a table. Android scatters icons on your screen with no purpose or organization-interapp synergy is monimal.
iphone-not a good form factor, the OS is good but its made to be more than a phone. Its a great device to be sure, but the UI makes phone/text usage awkward for many.
Palm-anyone who is interested in what I am saying, try the messaging application on the WebOS. Synergy, the concept Palm never defined well, is awesome. The only device that tempts me over the Pre is Pixi, because it has an awesome keyboard. Again, we are talking about small, graceful, integrated functionality.
In the end, I am of the opinion that the best device will win, at least a huge chunk, of the market. I seen Palm Pre users convert iphone users in the fall. Not so anymore, everyone knows VZ is around the bend, and there are some real issues with Sprint stores

Nicholas

Palm has some interesting technology and tools, but lacks the shear size to become successful. Now that everybody is jumping on Android, the also rans (in the US smartphone market) are the only available options for partnership. I believe that they made the wrong choice focusing on CDMA based devices, and should have gone with a GSM world phone.

A Palm tablet would be pretty fascinating particularly with the recent tools. But some interaction with the underlying technologies is necessary. I wish them luck, but mind share is a finicky beast to attract. Developers need a viable market, and mediocre but useful tools will suffice to get a platform moving. Palm will survive somewhere, it likely will not be an easy ride though.

Paul

Yes. And with Droid, Verizon is no longer the savior it would have been to Palm, since nobody will care about Pre when it arrives there. Pixi may get some attention, since it is small and cute. As for a sale of the company, why would someone else try to build on WebOS? Why not just build on Android, or even Windows Mobile (MS must be willing to put close to a Palm purchase price into partner marketing)?

VS

Another real problem with the Pre is that it is very, very slow and unresponsive. As a developer, the Pre has two major problems – marketshare and the lack of a full SDK.

Also, It doesn’t matter how hard Palm wants to spin the virtues of programming in Javascript, it’s just not the best way to make use of the limited resources on a mobile device.

At a minimum, Palm needs to speed up the Pre, and provide access to a full SDK. If these two things don’t happen in the next six months, Palm is dead.

In addition to Apple, RIM and Android, there’s the looming (and forever delayed) Windows Mobile 7. If Microsoft pulls out a good showing of WM 7 (there is supposed to be more information at Mix 10), Palm will have yet another competitor to worry about.

Robert N. Lee

“That blonde ghoul haunts my nightmares, and I can’t wait for her to go back to the Hieronymus Bosch painting she came from. “

HAHAHAHAHAHAA…oh, that is exactly the expression of my reaction to those ads, but I couldn’t come up with it. It’s been, as you point out, an insane year and few years for smart phone commercials (you forgot the excellent HTC branding campaign), and the first time I saw a Pre ad, my girlfriend and I (she’s a designer and works in marketing, also) paused the TV and went “Are they kidding?”

Palm shoulda made the transition into phones and won big, riding on their PDA success, but…RIM. Palm just did not roll with that punch, ever.

Ruben Schade

You know who should acquire Palm? 3Com! :)

In all seriousness though, I only left high school a few years ago and while I didn’t have any pressing need for a PDA I grew up tinkering around with a Palm IIIx while my friends used Game Boys and have fond memories of it. I still reckon Graffiti is the closest anyone has come to an accurate, reliable and speedy on screen character recognition system.

I have no doubt Palm engineers (even if they’ve all changed since then) have the gutso, imagination and talent to produce amazing hardware and software, but much like Microsoft they suffer at the hands of less than competent marketing folk. Hope the company can get its act together.

As a matter of disclosure, I’ve long since switched to an iPhone but my dad’s still holding out for a Pre in Singapore, when they decide to ship them here (second strike against their marketers).

Kevin Kelleher

I agree with your points on Graffiti and Palm engineers. I still have a functioning Palm III tucked into some desk drawer. It’s like a relic from another age, and Graffiti is like a dead alphabet I once bothered to learn.

Paul

Palm’s current team of engineers is new, but their old engineers were either slackers, terribly managed or both. No sense blaming it on marketing – they just built stuff SLOWLY.

Alex

Good post.

Palms future is bleak without a huge balance sheet. As a result, I still believe Cisco would acquire Palm, but, only spend around $750M.

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