Palm faces competitive threats

It dominates the world handheld market now - but can it fend off challenges from Microsoft and its own licensees?

Despite its current dominance of the world handheld computer market, Palm Computing will face a growing threat from Microsoft-based competitors and its own licensees, according to research firm Gartner Group.

Palm is the world leader in handheld computers, dominating about 80 percent of the world market, including licensees, and 55 percent of the European market, not including licensees. It claims to be selling 750,000 units a month.

On Monday Palm unveiled its latest handhelds, the m500 and m505, which capitalise on the popular slim design of the Palm V series as well as adding expandability through postage-stamp-sized Secure Digital cards.

But Palm faces continued pressure on two fronts: the personal, consumer market, in which licensees such as Sony and Handspring have made inroads, and the more lucrative enterprise market, which has been targeted by Microsoft and its Pocket PC licensees such as Hewlett-Packard and Compaq.

Palm is intent on capturing the loyalties of the corporate tech users, but is still vulnerable to Microsoft's forces, according to Gartner. Pocket PC is specifically targeted at corporate users, including close integration with Microsoft Office software. In Palm devices, such functionality takes second place to organiser functions. "In a way Pocket PC fits better the requirements of professional users," says Gartner PDA analyst Roberta Cozza. "Palm is in the private market. You can see that Compaq and HP are clearly targeting the professional user."

Compaq and HP have another advantage in that they are already involved with corporations in a variety of ways. "They've got desktops, services, a range of infrastructure products," notes Gartner principal analyst Brian Gammage. "It's unlikely [IT managers] will want to buy their handheld from a separate vendors. In the long run that will be important."

Despite Palm's overwhelming lead, analysts say the market is far from being locked up. "The handheld market growth last year was more than 153 percent up from 1999. It's a fast-expanding market, and things can change quickly. They've got to keep on the ball," says Gammage.

Palm's answer to the strength of competitors in the enterprise was to buy back-end software maker Extended Systems earlier this month. Palm has also created a new division especially to handle enterprise strategy.

There is also some danger that Palm is falling behind its own licensees in its hardware innovations. Handspring, which introduced the first Palm OS-based handheld with an expansion slot, at the end of February held 28 percent of the US handheld market to Palm's 61 percent. Handspring gained two percent over March figures, at the expense of Palm.

The figures are important because, while Palm ultimately hopes to prosper from its operating system license fees, today most of its revenues come from hardware sales.

Gartner's Gammage agrees that Palm has lagged a bit in its hardware innovation, but believes it is not missing anything so far. "Certainly Palm is not the first to bring out an innovative new product. Everybody's innovating, but it's all in a bit of a vacuum. Nobody has a clear idea as to what the market wants yet."

Handspring's VisorPhone, which turns the PDA into a mobile phone and wireless Web browser, is an example of a flashy new product that appeals to early adopters, but may never have mass-market potential, according to Gammage.

At a recent press briefing Palm denied it is pursuing its operating system and enterprise strategies at the expense of hardware competitiveness. "There is Palm the platform and Palm the device manufacturer. The two are separate. Palm the device manufacturer is treated like any licensee," said Chris Dunphy, Palm's director of competitive analysis.

He said Handspring appeals to a more techie market while Palm devices are aimed at the mainstream user. However, Handspring's recently-unveiled of PDAs, the Visor Edge, is directly aimed at the same consumers targeted by the Palm V and Palm 500 lines.

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