Palm’s rough quarter: Can it rally against the iPhone?
Palm (PALM) reported disappointing quarterly results on Monday, and it came as no surprise – the smartphone maker is getting squeezed every which way.
On the low end, smartphones from Samsung and Motorola (MOT) are nibbling away market share. On the high end, Apple’s (AAPL) iPhone has popular buzz and Research in Motion (RIMM) is winning over mobile workers. ABI Research says RIM captured 44 percent of the North American smartphone market this spring, up from 33 percent a year ago. The gains came at the expense of Palm, which slid from 33 percent to 24 percent.
That’s the context for the 1 cent per share, $841,000 loss Palm reported, its first in four years. Unfortunately for Palm investors, it probably won’t be the last. Executives told Wall Street to expect another loss this quarter between 1 and 3 cents per share, on revenues between $370 million and $380 million.
So how can the company turn things around?
The main thing Palm needs to do is finish overhauling its phone software. Though Palm sells phones that run Microsoft’s (MSFT) Windows Mobile software, Palm’s future depends on its ability to ship a new operating system that can smoothly run several programs at once, including software for playing music and video. Executives have said they’re building an OS based on the open-source Linux kernel.
The trouble is, it’s taking an awfully long time. Palm announced a year ago that it would be rolling out a new operating system, and the company has yet to release even a test version to developers. In fact, the company last month canceled its ill-conceived Foleo laptop project to focus its efforts on phone software, a sign that Palm programmers still have plenty of heavy lifting to do.
Software is so important because it’s the main thing that differentiates one phone from another. RIM’s BlackBerry is known for its easy-to-use e-mail delivery software, and Apple’s iPhone is known for its touch-controlled version of Mac OS X. As other software companies make useful new programs that work on top of the basic BlackBerry and iPhone software, they enhance the value of the devices, and increase the chance that consumers and businesses will pay a premium for them.
That’s why Palm’s introduction last week of the $99 Centro smartphone is a mixed blessing. On one hand, there’s a chance that the slightly smaller, cheaper phone will stanch the company’s market share bleeding. On the other, Palm is conditioning buyers to expect $100 phones, so this might make it more difficult for the company to sell more profitable high-end phones in the future – unless, that is, it offers a great new operating system.
In other words, it’s crunch time for Palm. And its future is really riding on software.
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A senior writer for Fortune, Jon Fortt focuses on technology and innovation in Silicon Valley - a subject he's been reporting on since his days as a rookie reporter for the Lexington (Ky.) Herald-Leader. Before joining Fortune in 2007, Jon had reporting and editing stints at Business 2.0 magazine, and the San Jose (Calif.) Mercury News, Silicon Valley's hometown newspaper.
I’m sorry to say that I think you are missing a very important issue here, and it is that PALM needs to decide if it is a software or a hardware company. Very few companies can do both (Apple the most notable exception).
PALM has demostrated that it cannot do both. It had some innovative smartphone design with the early TREOs 600s and 700s, but they have taken an awful long time for new designs. Mainly because they have focused their resources on the new software. They are taking too long and are comming out with something that is not really INNOVATIVE, that is behind the curve in support from third parties, etc.
They need to refocus, on creating some new innovative designs and let someone else come up with the software. You mention Motorola and Samsung, and they are both using the software from Microsoft, they are no longer having to CREATE their own Smart OS. Actually RIM is having similar problems as far as incorporating new tech on their software platform.
More and more companies are going to have to realize that to be profitable and innovative, they will have to choose one side or the other, build software or build hardware. For PALM, at least as it stands now, it’s better to focus on new hardware (the new phone is gorgeous) and work with software partners to MAKE THINGS WORK RIGHT in their new phones. They know how to do this. They worked out a lot of the kinks that other hardware makers like Moto, Samsung and HTC could not on the Windows Mobile OS, because they know how SmartPhones should work.
jf: Interesting take, Carlos — and many in the industry would agree with you. I’d say, though, that it’s increasingly important for companies to offer both hardware and software if they want to both win customer loyalty and maintain decent profit margins. (That’s why Microsoft has gotten into hardware with the Xbox and Zune, and why Nintendo is the most profitable game maker in the business.) Chances are that if Palm decides to be just a hardware company, it will get steamrolled by larger competitors who can produce handsets at lower cost and offer broader distribution.