PDA pricing: How low can they go?

The current price war in the handheld computer market between heavyweights Palm and Handspring may have consumers on the fence, but analysts don't expect prices to go much lower.

The current price war in the handheld computer market between heavyweights Palm and Handspring may have consumers on the fence, but analysts don't expect prices to go much lower.

Palm and Handspring have been matching each other price cut for price cut, but the companies aren't likely to keep trimming prices at the expense of their bottom line.

"What we're seeing now is cuts on lower-end devices that Palm has built up inventory on, and Handspring is reacting to keep up," CIBC World Markets analyst Tom Sepenzis said. "They can't get much lower."

IDC analyst Kevin Burden said any further cuts would lower profit margins, which neither company, especially Palm, can afford.

"If they dropped prices further, they run the risk of resetting prices in the market," Burden said, "which may help them short term but would be very harmful in the long run."

Resetting the bar would lower consumers' expectations on what personal digital assistants should cost and, in the worst case, shatter consumers' perceptions that personal digital assistants (PDAs) are more than just organizers, Burden said.

Burden said Palm makes 95 percent of its revenue from device sales. The other 5 percent likely comes from licensing fees of its operating system and revenue from the Palm.net service. Handspring and Sony are the biggest licensees of Palm's OS.

Palm has an inventory glut brought on by an overstock of components for devices that consumers are not demanding as a result of the economic downturn. The company has been cutting prices to bring up demand, and Handspring has been forced to keep pace to remain competitive.

Palm cut its wirelessly enabled Palm VIIx from $449 at the beginning of the year to $199, which can be rebated even further to $99 with a one-year subscription to its Palm.net wireless Internet service. In some cases, the company has been giving them away--at the Boston College commencement last weekend, Palm chief executive Carl Yankowski gave a speech and bestowed Palm VIIx units upon the graduating class.

It's not a bad deal for either party. Palm gets recurring revenue from any of the 300 graduates who subscribe to Palm.net, and the graduates get a PDA.

The company has also cut prices on its Palm Vx from $349 to $299 and trimmed its low-end m100 from $149 to $129.

Handspring cut the price of its Visor Deluxe from $249 to $199 despite earlier comments that it would not have to lower costs. Handspring is also offering a $50 rebate on its $299 Visor Platinum.

Neither company would comment on whether further price cuts are in the works.

While PDA makers are expected to hold the line for now, other innovations may help to drive down costs and prices, such as a recently announced chip from Agilent Technologies. The Palo Alto, Calif.-based company introduced its 200MHz ARM920T chip earlier this week. The chip is designed specifically for PDAs and Web tablets and combines functions such as processing, graphics and memory management. The chip is expected to begin shipping in large quantities in August and will costs manufacturers $15, making it a contender for PDAs priced under $200.

Margins aren't the only aspect to consider for this young market, according to ARS analyst Matt Sargent.

"Build costs are in the sub-$100 range, but marketing expenses are still very high, so these companies can't afford really slim margins," Sargent said.

Burden agreed. "Palm can't go much lower. Palm would look desperate if it were to cut prices even further," he said. "They made these cuts to move inventory and for that reason only. If the economy were still healthy, I doubt they would have made these moves."

CIBC's Sepenzis agreed, adding that once Palm's inventory problems are under control, the company is likely to push prices back up by integrating new features, such as improved wireless functions.

"The market will be hurt by this price war, so all the companies will have to evolve the devices to push prices back up to make some money," he said. "They'll add wireless over the next 12 months, and prices will likely be in the $200 to $300 range."

Palm is expected to release a new wireless handheld later in the year.

Palm may be tempted to take the money and run, especially if the company is indeed feeling a cash crunch--a notion that was not immediately struck down by chief financial officer Judy Bruner when the PDA maker announced the dissolution of its planned acquisition of business software maker Extended Systems.

However, the $300 million write-off to be charged for excess components and finished goods seems to indicate that the company is looking long-term and not focusing on the quick buck.

News.com's Ian Fried contributed to this report.