What Went Wrong With Palm?

Palm (NASDAQ: PALM) seems to be floundering. It recently reported mixed results – earnings were better than expected but smartphone sell-through was highly disappointing. Let’s take a closer look at what went wrong.

In the most recent third quarter, Palm reported that it shipped 960,000 smartphones but sold only 408,000 units compared to 783,000 shipped and 573,000 sold last quarter. Despite declining sales attributed to a post-holiday slowdown, the company posted a narrower loss of $22 million and revenue of $350 million versus $90.6 million last year and $288.35 million last quarter. But the higher revenue is also due to a change in the way Palm recognizes revenue from Web OS products. Under the new system, it recognizes most of the revenue from the sale of Web OS products on delivery, and the rest of the service revenue is deferred over the two-year contract period. Q2 coverage is available here.

For the fourth quarter, Palm expects revenue to fall to less than $150 million, almost half the $305.8 million estimated by analysts.

It wasn’t just a matter of initial interest waning in the Pre. Palm followed up the Pre with a new model Pixi, and in January at the Consumer Electronics Show, it launched two new phones, the Palm Pre Plus and the Pixi Plus, available on Verizon. Earlier, Palm had an exclusive carrier partnership with Sprint, which proved to be a disaster. CEO Jon Rubenstein lamented that Palm would have been doing better if it had beat the Droid to Verizon. Droid has sold more than a million units since its launch. After the weak sales of the Web OS models, both Verizon and Sprint are offering huge discounts. Verizon is offering a buy-one-get-one-free deal with a two-year contract while Sprint is offering a 50% discount. PC Mag also tries to understand what went wrong at Palm.

Palm has tried all the tricks in the trade: new OS, new models, and new carriers. However, what is lacking in Palm’s strategy is focus on applications: it has just 2,000 applications in its store, compared to more 100,000 for the iPhone. According to a study from Skyhook Wireless, few developers want to create applications for Palm Pre and Symbian.

Palm, I have always thought, will eventually be acquired to plug the hole in the smartphone strategies of one of the giants. Nokia is a prospective suitor for Palm. Even HP and Dell could benefit from acquiring Palm: it would provide them with the technological base for getting into convergence devices. HP says that it is creating innovative products to connect with consumers in its PC business and its new tablet is trying to compete with the iPad. Palm could provide it with the necessary technology and innovative energy to surge forward in convergence devices. 

Palm is currently trading around $5.65 after hitting a 52-week low of $5.29 on March 17 and a 52-week high of $17.50 on September 22. With a market cap of $947 million, it would come pretty cheap for Nokia, HP, or Dell. Palm’s CEO squashed all acquisition speculation but said that if there is a reasonable proposal, the board would have to consider it.

My analysis is that Palm has done a poor job of two critically important things in getting the product positioned for differentiation: market segmentation and partnerships. Instead of going for a differentiated enterprise application-based strategy that I suggested two years back that would have given Palm a differentiated prosumer story, the company has become a me-too company chasing Apple’s and RIM’s tails. The result is that Palm means nothing to no one in trying to become everything to everyone. This a very poor strategy, despite good execution on the product development side. Nor is it surprising given that Jon Rubinstein, during his Apple days, relied on the marketing genius of Steve Jobs to worry about these aspects of the business.

In terms of acquirers, the more I think about it the more it seems that Palm in the hands of a company that really lives and breathes enterprise will give it the best leverage.

Last week, in my post on Nokia, I looked at the possibility of Nokia acquiring Palm. Yes, that would give Nokia a foothold in Silicon Valley, and combined with its international distribution channels, Palm’s products would acquire better reach. Both companies would benefit.

But the more I think about it, HP would be a much better acquirer for Palm. What Palm needs is an enterprise application strategy, not this wishy-washy me-too stuff that they’re marketing right now.