Handhelds try to shake hangover

After a brutal six months, the handheld industry is looking to new midrange devices and wireless access to get past its first major slump.
Written by Ian Fried, Contributor and  Richard Shim, Contributor
After a brutal six months marked by excess inventory and a steep drop in demand, the handheld industry is looking to new midrange devices and wireless access to get past its first major slump.

At this time last year, the prospects for the young handheld industry seemed boundless, with shipments doubling nearly every quarter and analysts projecting a continued steep rate of growth. But then the economy hit rough waters. And poor decisions on the part of market leader Palm led to an inventory glut and eventually to a price war among manufacturers.

For the last few months, the industry leaders have been trying to pick up the pieces. Palm and Handspring, which licenses the Palm operating system, are looking to upcoming products and eventually to devices with integrated wireless access to spur their recovery. Meanwhile, manufacturers that use Microsoft's Pocket PC OS hope that a new version of that operating system will help their devices become the de facto handheld for the corporate world.

Analysts say the current situation is better for handheld makers than it was a few months ago but is still not great.

"At least (they've) worked off a lot of the inventory," said Charles Wolf, an analyst at Needham.

Price cuts have been a key part of that equation. Palm and Handspring began chopping prices significantly in April, after realizing that demand was well short of what they expected.

The cuts have continued. On Monday, Handspring cut prices up to US$100 on nearly all its devices.

In addition, manufacturers have been introducing new models to address the midrange of the market. Sony unveiled its first midrange handheld, the US$200 Clie PEG-S320, in late June. Palm is also expected to announce a new midrange device later this month that adds a Secure Digital expansion slot to the case design of its m105. Handspring is also working on replacements for both its Deluxe and Platinum devices.

Meanwhile, the first Pocket PC-based devices have reached the midrange of the market. Compaq Computer's monochrome iPaq is now selling for US$150--less than half its original price.

Too many choices?
However, analysts are concerned that if Palm and Handspring don't retire their older models, the market could again become overwhelmed with too many choices, as was the case earlier in the year when Palm announced its new m500 and m505 amid a glut of its existing products.

Michael Mace, Palm's chief competitive officer, said last week that Palm plans to continue offering its older Palm Vx, which sells at roughly the same price to the upcoming m125. That means customers looking for a midrange product will have to choose between sleek design and expandability.

But IDC analyst Kevin Burden said he isn't sure Palm should make consumers choose between design and expandability, particularly as it looks to make the Secure Digital flash-memory slot a standard.

"A lot of users don't understand what expandability is all about, particularly the users they are going after--consumers," Burden said.

Wolf said handheld makers, particularly Palm and Handspring, would be wise to have three distinct product lines aimed at the low, middle and upper tiers of the market.

"When you start throwing out models that go beyond this simple classification, that's when you start to create problems for consumers," Wolf said.

Limits to recovery
Regardless of how many new models are introduced, Wolf said there are limits as to how fast handheld sales can grow, at least sales of devices whose primary function is as a handheld organizer.

"The type of growth rates we saw last year and in the first quarter of 2001 are probably history until we transition to a different type of device," Wolf said.

Handhelds with built-in wireless access represent the next frontier for both companies. Palm has promised by year's end a new wireless model that offers always-on access to corporate email, and Handspring chief executive Donna Dubinsky has said the company is focusing development on new wireless products.

However, analysts caution that it will be next year before such products benefit the bottom lines of either company.

For its part, Microsoft has been splitting its wireless effort. While Pocket PC already supports wireless access, the software giant is also focused on "Stinger", its design for a cell phone that incorporates many of the same features as a handheld computer but is geared to a phone's smaller screen.

Microsoft is also prepping a new version of Pocket PC, code-named Merlin, that makes the operating system more like Windows XP, its upcoming desktop OS. The arrival of Merlin, later this year, will also spur manufacturers of Pocket PC-based devices to upgrade their product lines.

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