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Smart phone maker Palm facing fight for survival

Its shares plummet nearly 30% after analysts offer grim assessments of the company's future.

March 20, 2010|By David Sarno
  • After a strong debut last summer, the Palm Pre's sales have been dropping.
After a strong debut last summer, the Palm Pre's sales have been dropping. (Paul Sakuma / Associated…)

After nearly two decades of putting cutting-edge personal electronic devices in the hands of consumers, Palm Inc.'s grip on survival may finally be slipping.

The smart phone maker's stock plunged nearly 30% on Friday after several Wall Street analysts offered grim assessments of the company's future.


FOR THE RECORD:
Palm smart phones: An article in Saturday's Business section about Palm Inc. said that Sprint was the sole wireless provider for the Pre and Pixi smart phones. Verizon Wireless also began carrying the phones in late January. —

"They might be going bankrupt," said Vitali Savitski of Canaccord Adams, who urged investors Friday to sell the stock after making a highly unusual prediction that he expected the value of Palm shares to dwindle to zero. "There's still some hope, but we think it's still a very risky buy."

The analysts' remarks came a day after the company said that it sold far fewer phones than it had hoped in its fiscal third quarter ended Feb. 26, and that the current quarter probably would be worse.

"Our recent underperformance has been very disappointing to me personally and to the entire Palm team," Chief Executive Jon Rubenstein said during a conference call with analysts Thursday.

Palm shares fell $1.65, or 29.2%, to $4 on Friday. The stock has slipped more than 60% this year.

Palm's fate may be tied to the success or failure of its newest line of smart phones, the Pre and Pixi. The Pre debuted last summer to strong reviews and quickly sold out in many retail stores, marking an early victory for both Sunnyvale, Calif.-based Palm and its exclusive wireless carrier, Sprint.

But then the phones stopped ringing. In each of the two quarters after the Pre's release, sales dropped nearly 30%, and by the end of February, Palm had sold only 408,000 of its Pre and Pixi smart phones over the previous three months. That was far behind competitors such as Apple Inc., which sold 8.7 million iPhones in its fiscal first quarter.

By January, Palm's share of the smart phone operating system market had dwindled to 5.7%, and it was surpassed for the first time by mobile newcomer Google Inc., which leapfrogged Palm with the help of its much-hyped new touch-screen models, including the Droid and the Nexus One.

Palm is now far behind market leaders Research in Motion Ltd., whose BlackBerry models own 43% of the market, and Apple, in second place with 25%, according to research firm ComScore Inc.

Analysts said a weakened Palm could eventually become an acquisition target of larger electronics makers looking to add a powerful suite of mobile software to their portfolio.

"If you're LG or a Dell or an HP that wants to be in this business but doesn't have an operating system," Palm might look attractive, said Tavis McCourt, an analyst at Morgan, Keegan & Co. "But whether somebody wants to pay $1 billion for that, it's hard to know."

Palm got wide attention in 1996 when it launched the PalmPilot, the first mega-popular personal digital assistant, or PDA. Although not yet connected to the Web, the pocket-size devices enabled users to scribble memos and electronically organize schedules and phone lists.

The gadgets quickly caught on in the business community. When Palm went public in 2000, its shares rose to nearly triple the initial offering price. Two years later the company released its hand-held Treo device, which became one of the first smash hits in the world of smart phones.

But as the decade wore on, more smart phone makers entered the market and Palm's go-to device, the PDA, rapidly became outdated. Palm fell from its throne as a leader in hand-held devices and has not been able to climb back up.

Its best recent hopes were the Pre and Pixi, endowed with a new operating system that focuses on social networking and high-resolution Web browsing.

Despite favorable reviews of the new phones, several advertising stumbles hindered them from achieving the kind of popularity that might have allowed Palm to compete with its rivals. A series of television ads last summer featured a pale, barely clad woman in a pastoral scene talking about how her Palm phone could read her mind.

"Does it know you're crazy?" she asked herself. "Of course it does, sir: It's mine."

The conceptual ads, which did little to showcase the features of the new phone, were widely labeled odd and even creepy. Around the time of their release, Palm terminated the employment of its senior vice president of marketing, Brodie Keast.

That situation "was a debacle and they knew it," said McCourt, who noted that the company had failed to wage further large-scale advertising campaigns for its new phones.

"Consumers need reminding," he said. "It's a crowded field, and Palm is getting lost in the confusion."

david.sarno@latimes.com

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