Does the Street Know Something We Don't?2 April, 2001 Note: I don't do April Fool's columns. The following info is legit, to the best of my knowledge. I've got to say up front that I normally find Wall Street to be a completely ludicrous enterprise and desperately wish that the American economy was founded on something rational and concrete. The stock market is, at best, a consensual hallucination, where companies are valued not by anything intrinsic to the company, but solely on the basis of everyone--for the moment--agreeing to an arbitrary number. Wall Street is populated mostly by easily spooked sheep that know that their entire fortunes are built on a house of cards, and show the requisite panic. Last week, however, I think the Street may have hit on something far more perceptive than usual. Palm released sales projections of $315 million, down from their previous estimate of $570 million. The reasons for this, Palm said, were delays in releasing new models and backlogged inventory of older models. The stock market panicked, predictably, and Palm's stock price fell 48%, far enough to endanger the recent buyout deal with Extended Systems, which was supposed to be paid in shares of Palm stock. Handspring, an innocent bystander but Palm's most visible licensee, also saw its stock fall by 33%. Was this typical Wall Street panic, or is something going on that really would devalue the 800-pound gorilla of the palmtop computing set in such a dramatic way? Let's take a closer look at Palm's situation. Palm's biggest problem seems to be all too familiar: Handspring. As many of you know, Handspring was founded by Jeff Hawkins and Donna Dubinsky, the same team that founded Palm itself. They left in 1998 when it seemed 3COM would never spin Palm off into a separate company, and have since gone on to create the Visor, considered by many to be a better Palm than a Palm. Handspring offers more capable devices than Palm at nearly every price point, and recently released the Visor Edge, a sleek, ultra-slim model that directly competes with the Palm Vx, Palm's best-selling model. The Visor line has been eating market share since introduction, and now one Visor is sold for every two Palms. In a way, that was part of Palm's plan, only it doesn't seem to be working as well as they'd hoped. The idea for Palm all along was to get out of the hardware business entirely and make their money from the far higher-margin software sales. Hey, it works for Microsoft, after all. The idea was to sign up a bunch of licensees like Handspring, Sony, Nokia, etc. and let them build the devices, all the while paying Palm a small amount for each device to cover the operating system. The problem with this plan is that so far there's no money in OS licenses, only 1.8% of Palm's total sales. Handspring is the only PalmOS device maker other than Palm itself that ships in appreciable numbers. Symbol and HandEra (who should release their new device today--watch for coverage and comments in the Writing On Your Palm Group on Yahoo) have sold primarily to industrial customers, and Sony's CLIE has largely flopped here in America, where Sony's Memory Stick standard isn't nearly as well-accepted as Compact Flash or MMC. To make matters worse, Handspring is now making noises about possibly licensing Windows CE from Microsoft, and releasing Handspring Pocket PCs as well as PalmOS-based Visors. (There has been some speculation recently that Handspring might switch to the Pocket PC at the expense of PalmOS, but it really isn't an either/or situation; they can make both devices if they want to.) Were they to make good on that, I could easily see Handspring and Compaq going neck and neck in the Pocket PC market, further eroding Palm's sales. Speaking of the Pocket PC, it's doing far better in the marketplace than previous Windows CE-based devices, and promises to do better still this fall, when the new Merlin-class Pocket PCs hit the streets. Currently, Compaq can't make enough iPaqs to meet demand, and they continue to sell out despite price tags of $600-650. On the lower end, Hewlett Packard just released the $350 Jornada 525, a leaner, snappier cousin to the venerable 540 series. At that price, the Jornada--and Casio's EM-500 Pocket PC-- are cheaper than the new color m505 by a hundred bucks, and have three times as many pixels on the screen. Given the above, I suspect that Palm was pressured into a premature announcement of the m500 series by Handspring, Sony, HandEra, HP, and Compaq, all of whom have announced new devices in recent weeks. Palm had to formally announce their new devices or watch their sales disappear entirely. They also cut the price of the Palm Vx--their bread-and-butter model--to $349, making it cheaper than the Visor Edge by about fifty bucks, but roughly the same price as more capable and expandable Pocket PCs. Palm has also announced their intention to lay off 10-15% of their staff--contract and permanent employees--and delay construction of their new corporate headquarters. They're clearly bracing for rough times ahead. So here's what I'm thinking. Palm was pressured into tipping their hand on the m500 series much too early. Keep in mind that traditionally, Palm doesn't announce new devices officially until they're rolling off the assembly lines. All the demo models of the m500 series that have turned up have been hand-made prototypes, not final products. I don't think Palm has production ramped up yet for the m500 series, and I don't think they expect to get it done in time. While Palm claims that the devices will be available in May, I suspect that it will be the iPaq all over again--shortages, back-ordered devices at every website, retail drones who have never even heard of the new models, etc. I wouldn't be at all surprised if the m505 is not widely available until Labor Day. Is there hope for Palm? Can they recover? Or has Palm's excessively conservative approach to operating system development left them with a product they can't sell? Let me know on the Writing On Your Palm discussion group. |