Palm's Pre launch: Assessing the risks
Palm's corporate savior---the Pre---arrives June 6 and Sprint and other retailers are expecting a hit. However, there are multiple looming questions ahead.
Here are the items to watch ahead of the Pre's lift-off (Techmeme).
Will shortages be a problem? Sprint has said it expects a limited supply of the Pre. Part of this is by design: Shortages can mean more buzz. More importantly, Palm and Sprint are taking a conservative view of consumer demand.
Is the price right? Cowen analyst Matthew Hoffman said that the $299 price with a $100 rebate could hurt demand.
The Palm Pre is retail priced at $299 (est. just under <$400 at wholesale based on $399 iPhone wholesale price) and nets to $199 after a $100 rebate. Generally, we sense that rebates (unless instant) are not well-received by consumers. We doubt the mail in rebate will impact interest among the hard-core, early adopter crowd but it does raise concerns that Pre may be vulnerable to price moves from Apple and RIM (both Apple’s iPhone 3G and RIM's Blackberry Storm already retails for $199 w/o mail in rebate) by F2Q10; we believe both OEMs are likely to lower prices on existing models to stimulate summer sales and/or better position new touchscreen smartphones expected in 3Q09. Sprint's main operator competitors also appear likely to introduce cheaper mobile data pricing plans in 2H09 to maintain current momentum in subscriber smartphone adoption and mobile data usage trends. We are also surprised at the Pre’s distribution; it seems skewed toward a less upscale market than we would have anticipated given its high retail price point.
Other analysts were encouraged by the $199 subsidized price. In fact, Piper Jaffray T. Michael Walkley thinks Sprint reps will pitch the total cost of ownership of the Pre relative to rivals.
Walkley writes:
We are also encouraged with the $199 retail price after a $100 rebate. While this price for the 8GB Pre is consistent with the 8GB iPhone, we believe Sprint store representatives have been trained to sell the Pre by also focusing consumers on the total cost including the two-year contract. In fact, Sprint highlighted its Everything Data plan for the Pre offers savings of up to $1,430 over two years versus similar unlimited smartphone plans from AT&T and Verizon. While we believe this sales pitch will resonate with some consumers, we believe a price cut in the iPhone could lead to additional rebates for the Pre longer-term.
Overall, the pricing worries are justified. Apple and RIM both have the scale to squeeze Palm on Pre prices.
Also see: Palm Pre has a date: June 6; Price: $199.99; A 'crossover' device?
Will additional carriers adopt the Pre soon? Walkley reckons that Palm will add other carriers beyond Sprint. He writes:
While Palm must execute the Pre launch and scale volume for Sprint and additional carriers longer term, we are encouraged the Sprint launch date is official and have increased confidence Palm will execute with several carriers.
Can Palm hit its shipment targets? Morgan Keegan analyst Tavis McCourt figures that Palm will need to ship millions of units to justify its stock price, which took off at CES.
McCourt writes:
Our thesis on Palm remains that the company will ultimately need to ship about 8 million devices (Treos, Pres, etc.) annually in order to create shareholder value from today's share price (barring an acquisition). We believe the Pre will be very successful at Sprint, but value creation will depend on being able to replicate this success at other carriers globally. Palm has tremendous potential but, at current share price levels, we believe the upside is roughly offset by the significant competitive and execution risks.
Will there be enough apps? Hoffman notes:
Earlier this year Palm announced App Catalog (its version of an application store), a software development kit (the Mojo SDK) and an invitation-only Mojo early access program available for select developers. So far, timing of the App Catalog debut remains uncertain; but we still expect something to launch by June 6th. The open question is how many Pre applications will be available at launch. Apple's iPhone already >40,000. Nokia will have 20,000 when it launches Ovi Store in the next few weeks.
And will word of mouth be enough to keep Pre demand going? Hoffman is already harping that the Pre is too fat relative to comparable devices. Meanwhile, Goldman Sachs analyst Simona Jankowski, said Sprint may not be giving the Pre enough marketing support:
Sprint’s comments that initial advertising would be limited shift some of the burden for the product’s success to word of mouth, which could elevate the execution risk; for example, in the Storm launch, strong marketing support by Verizon was critical in overwhelming negative initial word of mouth due to software glitches. Our checks indicate that the limited initial quantities are due to supply chain hiccups.
Bottom line: The Pre will have to generate positive reviews and then rely on word of mouth.
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