Palm Prē: Chronicle of a Death Foretold, Part 2

Please read Palm Prē: Chronicle of a Death Foretold, Part 1.

Winning markets is often a matter of timing. If the Palm Prē had been available two years ago, the iPhone would have had serious problems getting any traction. If the Prē had appeared 15 months ago, it would have given the iPhone serious competition.

Now, after a successful launch, the Prē is looking at challenging Windows Mobile and Android for 4th place in the smartphone platforms market over the next 12 months. There is no way that the Prē will take over from Apple (with 40 million+ iPhone/iPod touch users), from RIM (with nearly 20% of the market and a strong lock on corporate mobile email), or from Nokia (with nearly 40% of the market and strong relationships with the non-US mobile phone companies).

Launch Problems

Clearly, Palm had problems getting the Prē out the door. No-one in their right mind would launch two days before Apple's WWDC - but maybe Roger McNamee made the decision. Maybe he believed his own words in a March 5th interview: "You know the beautiful thing: June 29, 2009, is the two-year anniversary of the first shipment of the iPhone; not one of those people will still be using an iPhone a month later."

Reports from reviewers, such as Walt Mossberg (WSJ) and Jon Stokes (Ars Technica), show problems with software and early hardware failures, but perhaps that was all designed to show off Palm's impressive cloud backup so they could automatically download apps, account information, and preferences again.

Prē's connection to iTunes looks like another shortcut to save money. Apple doesn't need to sue over it. The support note shows that Apple doesn't support the Prē. The "software fix" will be enough to show users it just isn't safe to rely on Palm's hardware and software skills, and McNamee mouthing the M word at D7 won't protect them. Apple already provides access to iTunes via XML - RIM and Nokia already use it.

Palm also had problems building enough for launch. Most analysts estimate sales of around 50,000 for the launch weekend. Stores selling out when they receive 20 or 30 units and then not immediately restocked isn't impressive, especially when you compare this "iPhone killer" to the 1 million sales of the iPhone 3G in it's first weekend or the estimated 500,000 of the original iPhone.

Beleaguered Palm

This could well be a result of Palm's weak finances. While Palm may be willing to commit to taking 50,000 units a week, suppliers will want financial guarantees so they know they will be paid.

Last quarter, Palm burned through nearly $100 million and expected to go through more this quarter, according to the 8-K filed on March 3. This means little, if any, cash is likely to be left from the successful share issue. In the 10-Q filed April 3, there was roughly $230 million left in cash and cash equivalents, with $9 million of that in Auction Rate Securities that are difficult to sell since the collapse of that market. This will carry Palm through to Christmas at best.

Unless the Prē is successful right away, Jon Rubinstein and his team will need to raise more money to keep Palm going and to build the market for the Prē. The problem is how.

Palm already carries $400 million in long term debt, and any new long term debt will need to retire that. Elevation Partners is probably still close to the limit it can invest and with other investments, like that in Forbes, worth less than they paid, may not want to invest more. Palm shares are up substantially from the $6 of the last sale, but a share price around current levels, according to the analysis of Charles Wolf of Needham & Co., needs sales of 8 million Pres to justify it - and let's remember 8 million is more than iPhone sold in the first year with no real competition and better distribution.

Hanging on to the $100 rebate will help Palm. If Palm manages to sell 1 million Pres a quarter and the usual 40% of buyers fail to claim their rebates, it will cut down on the cash Palm needs to raise. Delaying the rebate checks will help too, so it could be interesting to hear the excuses for any delays.

Of course, if Palm goes into bankruptcy, Prē buyers will be lucky to see any rebate at all.

Prē Markets

Where will the Prē sell well, in the short term, so investors will want to buy more shares? What niche markets can it take over? It's already too late to hope to dominate the home or business markets.

McNamee may like to believe there is "white space" for Palm to move into, but the more apps other platforms offer, the more those platforms are likely to fill it. Until Palm can widely distribute the SDK for the Prē, only a few developers will be able to write new apps to help sales.

Palm also needs to put a microtransaction system in place to support developers, unless they all want to write for free or are willing to settle for less than the 70% share of revenue they get from the App Store by selling through storefronts like Handango. Until good new apps appear in quantity, the Prē is an expensive feature phone with good browser and good messaging.

A Sprint Exclusive - for Now

Launching on Sprint, a CDMA network, at least protects the Prē some from the iPhone competition. Apple won't move onto Verizon for at least a couple of years. Sprint, though, as been losing customers every quarter, as well as money, for some time, so it would have been better for the Prē to launch on Verizon and, judging by recent remarks about availability, maybe Verizon feels that way too.

Palm should, however, make it very public when Sprint's exclusivity ends or customers who might otherwise buy Prē now will stay with Verizon.

The Competition

The Prē has had much better reviews than the Blackberry Storm, which has now sold over 1 million but needed strong marketing support from Verizon/RIM to get there. Neither Sprint nor Palm have that kind of money, so one of the big questions is how much publicity the Prē will get in the aftermath of the iPhone 3G S launch. Palm needs to get as much word of mouth as possible through Facebook groups, geek gatherings, etc., or the Prē will be drowned by Verizon/RIM Blackberry and Apple's iPhone marketing.

The short term rules out sales to any size of business that doesn't already have a contract with Sprint. Also, businesses like to deal with solid partners they know will be around, and they take their time to evaluate new hardware and software. Significant business sales are unlikely to start before 2010.

Geeks, Sprint Users, and Palm Users

The main short term markets look to be geeks who like to multitask, satisfied Sprint users who want to upgrade to a smartphone, and satisfied Palm users. Somehow, Palm needs to grab these markets and reach at least a million Prē sales fast and then, if the SDK is in good shape, more developers will come on board. Otherwise Prē applications will fall further and further behind the iPhone (50,000), Android (5,000), RIM (1,000), and third party applications are a major attraction for smartphone users.

Palm Is No Apple

Palm is being talked about as though it will be another great comeback story - another Apple brought back from near death. Anything is possible before the last rites are read in bankruptcy court, but the odds are much longer for Palm.

Apple had Steve Jobs and billions in the bank. It's major competitor, Microsoft, was rightly concentrating it's efforts on taking over the server market and defending itself against Netscape rather than trying to add another 2 million or so desktop licenses a year.

Palm's main competitor is a lean and hungry Apple at the top of it's marketing game, eager to take over the next big computer market and occupy the position it should have won with the Mac. Other competitors such as RIM, Nokia, and Android, are well financed and in a stronger market position.

The End?

Palm had to bet the company, but it still looks like too little, too late - and running out of cash to pay the wages and bills is what will bring Palm down.

If WebOS is as good as it's supporters say, either the company will be taken over or the assets will be bought out of bankruptcy court. Palm shareholders will probably lose out unless there is a bidding war between the likes of Nokia and Microsoft - and how likely is this when the source code for WebOS is available under the GPL like any version of Linux?

If the buyer has strong relationships with the carriers, Apple and RIM will be up against a well financed competitor, but it will take more than money to compete in what is becoming a two horse race.