As the nation’s two dominant personal digital assistant makers watch their stocks crumble, their revenue expectations halved and the fires of a price war blazing, some in the industry wonder whether the PDA market isn’t quite the gold mine many had hoped.
Others, however, see Palm Inc. and Handspring Inc.’s recent frenetic profit warnings as a shift toward realism, where the value and expectations of PDA companies will come under the reins of pragmatism. And these optimistic watchers see wireless services as a kind of saving grace for PDA firms struggling to jumpstart a limping market.
Wireless services are “going to be very important-not so much now, though,” said Jennifer DiMarzio, an industry analyst with Summit Strategies Inc. “Once people get used to that convenience, just like a cell phone, they’ll never go back.”
Wireless functionality “is a critical strategy for us going forward,” said Carl Yankowski, Palm’s chief executive officer. “Wireless will enable people to put the information they need and want in the palm of their hand.”
But while wireless might be the light at the end of the tunnel, Palm, Handspring and others must first get through the tunnel-and so far that has proved difficult.
Handspring late last week cut its quarterly revenue outlook in half, citing the slow economy and overstocked inventories.
“While we have been scaling back our expectation for growth over the past six months, the recent rapid and dramatic decline in the rate of sales growth was unexpected,” said Donna Dubinsky, Handspring’s chief executive officer.
Handspring said its revenues for the quarter ending June 30 would be between $60 million and $65 million, way down from the company’s expected $130 million. In addition, the company said it plans to take a charge in the fourth quarter of up to $20 million for excess inventory materials.
Handspring’s announcement smacked of Palm’s failures last month, in which Palm dropped its quarterly expectations from about $300 million down to about $140 million-almost the exact percentage drop Handspring expects. Palm also bowed out of its proposed acquisition of Extended Systems Inc.
In its warning, Palm too cited the dawdling economy and the slower-than-expected availability of its new high-end handhelds, part of the company’s “m” series-which stands for “mobile.”
Another factor behind Palm and Handspring’s failings is the growing war between the two companies, both of which use Palm’s operating system. In the past few months, each has been trying to outdo the other in cutting PDA prices.
Palm dropped the price of its high-end Palm VII from more than $500 to just $200-and with a Palm rebate the price lessens to an astonishing $99. Not to be outdone, just a few days later Handspring dropped the price of its Visor Deluxe down $50 to $200 and is offering a $50 rebate on its Visor Platinum. Handspring also announced last week a trade-in program-which covers PDAs made by any company-in order to promote its Visor Edge handheld.
“We caution that the discounting is a trend that may continue to impact pricing on the current generation of products and make it difficult for (Handspring) to re-attain 30 percent-plus gross margins,” wrote Credit Suisse in a research report.
However, Palm and Handspring’s pricing moves could become a boon in the long run, according to research firm Strategy Analytics. In a report the firm states that the now cheaper low-end models have been selling well, which has buoyed the two companies. In addition, getting rid of old devices will create a fresh environment for new ones, and both Handspring and Palm recently introduced new high-end handhelds.
As the pricing war continues, both companies say their sales slowdowns are just temporary. And while that may be true, some new problems are cropping up, and most are tied to a fearful business word-Microsoft Corp.
While Microsoft doesn’t manufacture PDAs itself, it does license an operating system-Pocket PC-which quickly has been growing in popularity. According to market trends watcher NPD Intellect, Palm OS users Handspring and Palm still control more than 90 percent of the PDA market. However, companies using Microsoft’s operating system-including Hewlett-Packard Co., Compaq Computer Corp. and Casio Inc.-are quickly gaining a foothold. According to NPD Intellect, Pocket PC sales account for more than 26 percent of devices costing $350 and up.
“We see two major platforms evolving,” said Mark Margebicius, a senior research analyst with Gartner.
Palm OS and Pocket PC will come to dominate the market, he said, with Palm falling to 55 percent in a few years and Pocket PC rising to almost 25 percent.
But neither company will be ousted, Margebicius said.
“We don’t see a real shakedown” between Microsoft and Palm, he said.
The reason, many agree, is that there is enough space for both players. The PDA market is in its infancy, and there is still plenty of room to grow.
“I think you’re going to see a lot more growth in the next six months to a year,” DiMarzio said.
“It’s still pretty early in the game, no doubt about it,” Margebicius said.
And that growth will be in a large part due to wireless services, many agree.
“We are still at an early stage in the industry and still see promise for the sector to integrate mobility and communications,” Credit Suisse said.
Most of the major PDA players already are moving toward this point. Palm released its mobile Internet kit early this year, and the company plans to introduce enhanced wireless services. Handspring too just last month announced its Wireless Internet Access Suite, which includes programs for Web browsing, messaging and e-mail applications. And Microsoft has been touting its .NET mobility project, which the company hopes will integrate a variety of wireless services.
“We certainly believe that the world is going wireless,” said Marlene Somsak, a Palm spokeswoman.
“The next big push will be wireless technologies,” Margebicius said.
While there has been all kinds of bumps in the road, the outlook for the PDA market is bright, industry watchers agree. Handspring’s Dubinsky summed up the hopes of the PDA players while discussing Handspring’s profit warning last week:
“While some industry observers have interpreted these current issues as indications of a fundamentally weak category, we do not share that opinion. We believe that our industry, like many others today, is suffering from an economic slowdown and an inventory correction. Although it is painful to adjust to, we believe it is temporary. Over the long term, we must-and we will-create major new products that differentiate us from our competitors and allow us to bring new capabilities that will extend handheld computing and communications to a broader and broader customer base,” she said.
