Is Palm approaching its last stand?

Is Palm approaching its last stand?

Summary: Palm is reportedly looking for buyers, but folks aren't buying it. Just the fact that Palm is looking for a buyer may indicate the company is in trouble.

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TOPICS: Mobility
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Palm is reportedly looking for buyers, but folks aren't buying it. Just the fact that Palm is looking for a buyer may indicate the company is in trouble.

The Wall Street Journal is reporting (subscription required) that Palm has hired Morgan Stanley to evaluate options including a sale or move to go private. Typically that's good news. Today, however, Wall Street types are viewing Palm's options as limited.

J.P. Morgan analyst Paul Coster downgraded Palm and didn't exactly mince words:

"We believe Palm's product line-up is stale, price-based competition will likely weigh on ASPs and gross margins, and R&D could climb in fiscal year 2008 as Palm races to develop a new Treo platform."

Coster's argument--that Palm is getting whacked by price competition--isn't new. The projection that Palm will have to invest heavily to create a "multi-threaded Palm OS, a proprietary communications protocol stack, and a flexible platform for next generation products" indicates that the company will have to find a partner or be under even more pressure.

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The overarching question for Palm is over whether it can compete in the market for next generation mobile devices. So far, Palm's future rests on the Treo, which accounts for 60 percent of the company's revenue. Palm goes as the Treo goes and if the product loses share the company is in big trouble.

Coster said:

"Palm appears to be aiming for a new product cycle in 2008, but we are skeptical that the company can capture 07 holiday sales owing to a lengthening engineering cycle. Moreover, Palm's core-competences seem too narrow for the next generation of differentiated mobile solutions, where emphasis will be on server-side applications and services that complement the device."

That last point about the mobile war being fought on the server-side is notable.

Nollenberger analyst Casey Ryan also downgraded Palm shares, but held out some hope that the company could boost international sales and rebound. Overall, though Ryan is optimistic about Palm, but notes that the "Palm buyout theory remains unproven."   

For folks that love their Treos--and there are a lot of you--this Palm skepticism may be a bit disheartening. While Palm may not be in the dead pool there are significant questions about its future. Perhaps a move to go private would enable the company to push the innovation envelope. Today, it can't invest too heavily without hearing heckling over profit margins.

In other words, Palm has to get bigger. But it's unclear whether a big player like Nokia would be interested. Motorola wouldn't be a bad fit, but there are no slam dunks. Coster lays out the landscape:

"We believe there is value in the Palm brand and channel, but neither fits well - strategically - with a tier 1 handset OEM's.  Palm lacks significant IP, outside of the client-side Palm Operating System, but we believe this is an increasingly unimportant basis for handset differentiation."

More mileposts in the Palm saga will come later this month. Palm reports earnings March 22 with an analyst day on April 10.

Topic: Mobility

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4 comments
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  • Jeff Hawkins?s advisor

    http://thedialogs.org/2007/03/02/jeff-hawkinss-advisor/
    jhitrov
  • Palm's problems are much older ...

    ... than their current difficulties. They were ahead when they first went mobile but they let PocketPC cath-up with them and then entered the smartphone market way too late.

    Their customer service has always been marginal and they only acquired the Treo line when they bought Handspring (which had years earlier been a spin-off of Palm.) The palm henadheld does some things very well but it just isn't enough. I love my Palm TX but I would not give up my BlackBerry to get a Treo -- and THAT is a problem for Palm!
    M Wagner
  • They were doomed as soon as Microsoft entered the market

    I remember people laughing at Microsoft when it first entered the market against what was then PalmPilot (or was it just Pilot back then?). Didn't they know Microsoft's history of entering a market and winning it over? Happened in word processors, spreadsheets, instant messengers...

    BTW, "Palm will have to invest heavily to create a "multi-threaded Palm OS" ?! Palm OS isn't multithreaded today?! No wonder Windows CE won out.
    PB_z
  • They were doomed as soon as Microsoft entered the market

    I remember people laughing at Microsoft when it first entered the market against what was then PalmPilot (or was it just Pilot back then?). Didn't they know Microsoft's history of entering a market and winning it over? Happened in word processors, spreadsheets, instant messengers... Wonder if it'll happen in portable media players as well...

    BTW, "Palm will have to invest heavily to create a "multi-threaded Palm OS" ?! Palm OS isn't multithreaded today?! No wonder Windows CE won out.
    PB_z