Palm-reading to gauge what the future holds

February 25, 2010

PKTMP001Palm Inc’s stock swooned this morning after the smartphone maker said it expects third-quarter and full-year revenue to be lower than expected because not enough people are buying its phones. In Palm’s exact words:

Revenues for the quarter and full year are being impacted by slower than expected consumer adoption of the company’s products that has resulted in lower than expected order volumes from carriers and the deferral of orders to future periods.

Palm launched the Pre last year amid much fanfare, followed by the Pixi, with many celebrity tech columnists ooh-ing and aah-ing about the operating system, webOS, that could run multiple applications at once and perhaps even become the iPhone killer. But that enthusiasm has clearly not translated into sales, as Palm struggles to loosen Apple’s vice-like grip on the consumer smartphone market — even as newer competitors, such as Motorola’s Droid and Google’s new smartphones, based on its Android operating system, crowd the market.

In recent conversations, people close to Palm have said the company is single-mindedly focused on building scale and developing its “app store,” the virtual shop where users can buy small programs for everything from calorie-counting to weather. To that end, Palm is seeking to build its geographic presence and build partnerships with more wireless phone carriers (Sprint and Verizon currently sell its devices, and AT&T also plans to sell them).

“Palm’s just a little peanut with a good operating system,” said T Rowe Price portfolio manager David Eiswert recently, when he stopped by our offices for a chat. Eiswert, whose fund owns about 12 percent of the company, is bullish on Palm, and calls himself a webOS guy. But while he believes that the recent tie-up with Verizon will help it gain “shelf space” from Research in Motion, which sells the BlackBerry device, Eiswert said that Palm has a long way to go.

“Is Palm’s operating system where it needs to be? No,” Eiswert said, adding that an upcoming version of the software could be a big improvement. “The question for Palm is, can they deliver a compelling product? Can they get distribution?” The hardware, too, he said, was just “OK, not compelling.”

So then, do Palm’s big shareholders, including private equity firm Elevation Partners and funds Fidelity, T Rowe Price and Capital World Investors, have a potential sale of the company in mind? The market clearly believes that the company could be sold any day; rumors about a deal have repeatedly driven the stock up and down in recent months.

A deal for Palm could make sense — at least, that’s what nearly every tech and telecoms banker I speak to seems to think. As for who would make a good fit, there is a list of potential suitors, of which Finnish cellphone giant Nokia may be the one who needs it most.

“The three companies driving the future of mobile computing — Apple, Android and Palm — are all in Silicon Valley,” Eiswert said (BlackBerry maker RIM doesn’t fit his bill because they make 2.5G phones that have less processing power than the newer smartphones). “Nokia doesn’t have the software or expertise… they really have to reinvent themselves. If we wake up tomorrow and Nokia buys Palm, for $3 billion or $5 billion, it doesn’t matter, Nokia’s stock price (will) go up.”

Other potential buyers of Palm include PC maker Dell, which is testing the mobile phone market with its own device, but it  may need to step up its game to gain even reasonable market share.

Then, there are the Korean phone manufacturers, Samsung and LG. I was just reading an article in the March 1 issue of Bloomberg BusinessWeek that says Korea may be “losing its edge in the international market, despite its reputation as the epicenter of digital cool.” Samsung and LG just don’t have the smartphone software to compete, which is a growing concern for the country, the article states. Could they be interested in acquiring Palm too?


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