Posted on: Sunday, December 7, 2003

Struggling PDA maker hopes for wireless salvation

By Mike Musgrove
Washington Post

These are stormy days for the handheld industry, and particularly for its dominant player, the company formerly known as Palm Inc.

In a holiday season in which the demand for other categories of consumer gadgets is projected to pick up, sales of the personal digital assistant, those pocket-sized gadgets for keeping addresses and appointments, are down for a second year in a row — off 15 percent from the peak handheld-sales year of 2001.

Many analysts say the future of the handheld market may depend on how well the industry crafts products for the wireless market, be they souped-up versions of the cell phone or streamlined computers.

Replacements selling

While a new and growing audience lines up for digital cameras, game devices and digital music players, most handhelds sold are replacements for people who bought handhelds a few years ago, said Stephen Baker, an analyst at research firm NPD Group.

"The sad thing is, Palm has better products now than they've had in about five years," he said.

The changing marketplace is one reason the company embarked on radical restructuring. Palm recently split into two corporate entities — PalmSource Inc., which develops the software used in Palm-compatible handhelds, and PalmOne Inc., one of many handheld-making licensees of that software.

At the same time it split, Palm acquired Handspring Inc., a competitor started by some of Palm's founders in 1998. Handspring never made a profit, but some analysts say that's largely because it jumped into an expensive-to-develop product class that the world wasn't ready for. Handspring's Treo line of "smartphones" — cell phones that incorporate the functionality of a PDA — are regarded by some as the best in their class, though they haven't been brisk sellers.

"The big issue in the handheld space is whether (PalmOne) can hold onto their identity while getting ready for the next big thing," said Paul Saffo, a research director for the Institute for the Future, a Silicon Valley think tank. "Their salvation is one word: wireless."

Future in wireless

This year, only about 15 percent of PDAs sold include wireless capabilities; Todd Kort, analyst at research firm Gartner Inc., predicts the number will double next year because of cheaper, more battery-efficient chips.

Kort predicts corporate customers wanting to keep their workers wirelessly plugged into the office will help prop up handheld sales, though he doesn't forecast growth for handhelds as a market in general.

Sales of smartphones, on the other hand, are on the rise and may surpass handheld sales for the first time this year. About 13 million smartphones are expected to be sold this year, compared with 11 million handhelds, and the research firm IDC thinks that number will double next year. There is still plenty of room for growth for handheld companies targeting cell-phone buyers: About 500 million cell phones are bought every year.

Palm moves to phones

If PalmOne persuades mainstream consumers to buy a Palm-running smart phone for their next cell phone, it could mean good business for the struggling company. But PalmOne isn't alone; Microsoft's Pocket PC software has a growing number of smart phones, and cell phone manufacturing giants such as Nokia are trying to develop software for such phones.

While PalmOne's purchase of Handspring gives it a toehold in the nascent smart-phone market, some argue it's not a major head start. "Palm created a device that was category-defining," said Seamus McAteer, senior analyst for market research and advisory firm Zelos Group Inc. But the Treo smart phone is "not a category-defining device," he said, because its look does not stand out and some prefer other designs.

PalmOne is mum about what's next.

"Even if, as a consumer, you don't care about Palm, you should," said Saffo. "Without (PalmOne), we're all marching in lockstep with AT&T and Microsoft. As consumers, I think we should all buy a Palm even if we don't use it — just to keep the diversity out there."