June 17, 2002 4:00 AM PDT

Palm works to keep handhelds in business

As chief information officer for The Atlanta Journal-Constitution, Edward Baer is always looking for ways to sell more papers.

A couple years back, he decided handhelds might be useful for his door-to-door sales staff, who unknowingly wasted time by calling on people who'd already subscribed. A test run showed that salespeople armed with subscriber data on their Palm handhelds could knock on 30 percent more doors, which prompted Baer to expand handheld use to other areas of the circulation department.

A nice success story for Palm. The problem, though, is that most companies aren't dealing with the economic downturn the way the Journal-Constitution is.

As corporate spending on technology has slowed, many of the more ambitious IT projects--such as shifting work onto handhelds--have stalled at the concept stage. At the same time, the troubled economy has prompted more and more gadget nuts, who used to shell out a couple hundred bucks for the latest handheld, to stick with last year's model.

These two situations have left Palm in a bind. To make sure it remains a player in the long term, the company is forced to invest money in building products and software that will appeal to businesses. But the sluggish consumer market is making it tougher to find the cash to pay for that long-term plan. Plus, Palm's slump may give some potential corporate customers easy justification for delaying handheld plans.

"Companies are looking for an excuse for why not to do mobile now," said Kevin Burden, who tracks handheld adoption for market researcher IDC. Palm's woes provide a convenient reason.

The battle for Palm won't get much easier when IT spending kicks back in. Palm will still have to contend with Microsoft, king of the desktop, with billions of dollars in cash and a track record of gobbling up those on whom it sets its sights. Plus, Microsoft is focused on the business market, while Palm divides its resources between the business and consumer markets.

Of course, Palm has its advantages, too. The company's products are already commonplace; they're perceived as easier to use; and they offer far longer battery life than those devices running Microsoft's operating system.

And although Palm has seen spring sales fall short for the second year in a row, analysts say the company's financial footing is not as tenuous as it has been in the past.

"Unlike last year, when I think they were out of control, I think they are in control," said JP Morgan Chase analyst Paul Coster.

Palm's latest financial problems, the analysts say, shouldn't affect its long-term chances of winning the corporate market--seen by many as the real prize in the handheld business because of higher profit margins and the tendency of companies to stick with technologies once they've adopted them.


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Last year's spring profit warning was followed by a further drop in demand. A glut of inventory and a price war ensued. Coster said that Palm can avoid the same fate this year and that it has already factored in the cost of new marketing programs, such as a deal announced earlier this month that gives customers a free entry-level m105 handheld with the purchase of a midrange m500 model.

Burn rates and falling sales
Whereas the company burned upward of $150 million in one quarter last year, Coster says the current burn rate, in the low double-digit millions, is manageable. Even with Palm's stock price trading at about $1.50, the company may be able to raise additional cash by attracting new investors in conjunction with the spin-off of its operating system business.

At the same time, no one is sure just how far handheld sales may fall. Bear Stearns warned Friday that retail handheld sales dropped for the third week in a row as of the week ended June 1, the most recent one for which it had data.

More troubling, analyst Andrew Neff wrote in a note to clients, was "the pace of the drop-off, which is accelerating despite the favorable seasonality--i.e., Father's Day--and the recent pricing and promotional activities."

In the longer term, there's the question of whether Palm will have the needed muscle to convince big businesses to buy its handhelds. Although the Journal-Constitution's Baer approached Palm on his own after becoming interested in handhelds, that's not a sustainable approach for winning customers.

Palm has beefed up its sales force some, adding about 40 people in recent months. But increasingly, the company has focused its efforts on signing deals with large software vendors and others that already have relationships with big companies.

Palm signed a deal with Siebel in October and last week announced a pact with health care specialist McKesson. Palm has promised two more such deals this summer.

The company's current approach to selling large corporations on handhelds is not its first effort. Palm announced a plan in March of last year to buy Extended Systems and sell directly to businesses. However, that deal fell apart as Palm's stock price plummeted.

Some analysts say the fallback strategy of relying on partners may be a better tactic than trying to sell directly to big corporations.

"I think that's probably the right decision regardless of their cash balance or profitability," said William Crawford, an analyst at brokerage US Bancorp Piper Jaffray.

IDC's Burden agrees that the partnership approach is where Palm needs to start, but says the company will need to do more to compete with Microsoft.

"It's a strategy by necessity, but it needs to evolve somewhere beyond that," Burden said.

A symbol of things to come?
One early indicator of how the enterprise market might shake out is the experience of Symbol. The Holtsville, N.Y.-based company is not as well known as Handspring or Hewlett-Packard, but its experience selling both Pocket PC and Palm operating system-based devices could well portend the results of the coming enterprise battle.

Unlike most handhelds, which have found their way into businesses as replacements for executive date books, the devices Symbol sells are all business. The company's handhelds are used by shop-floor technicians, warehouse workers and delivery crews. They're clunky, rugged machines, often equipped with bar-code scanners.

"We don't have a Claudia Schiffer edition of our device," said Bob Schreib, director of product marketing for Symbol's mobile-computing unit.

Schreib said there remains a strong market for both Palm-based and Pocket PC-based devices. "You have people who are Microsoft shops and everything they do is Microsoft," Schreib said. "A Pocket PC solution is a natural choice for them."

With other companies it depends on other factors, such as what software they typically use to write customer applications. For example, PepsiAmericas recently inked a deal to use Symbol's Pocket PC devices, while Sears went with Symbol's Palm device.

Pocket PCs have more power, Schreib said, but Palm-based handhelds are cheaper to implement.

Schreib says it's a matter of finding the right tool for the job.

Symbol still sells more bar-code scanners running Microsoft's 20-year-old DOS operating system than either PocketPC- or Palm-based devices--an indication of how far Microsoft and Palm still have to go. However, that's also an indication of the longevity an OS can enjoy once it becomes a part of the corporate mainstream.

The task of convincing businesses to use Palms will be split between the hardware and software teams. For his part, operating system boss David Nagel sees his job as making sure that, for IT managers, using the Palm OS is a safer choice than going with Pocket PC.

Nagel, who was AT&T's de facto technology chief for part of his time at the telephone giant, said that for IT managers, there's no reward when things are going smooth, and tons of headaches when things are not working.

"When anything quits working, you are the goat of the century," says Nagel.

While waiting for the market to mature, Palm and its Pocket PC counterparts have tried to build a base of early customers that could act as its biggest proponents once other businesses decide to spend money.

Palm has won the hearts of executives and mid-level workers alike by managing their meetings and address books. In many large companies, Palm OS devices number in the thousands. The company has long made the case that some IT managers will choose to issue Palms rather than continue to have to support devices that come in the back door.

At the same time, Microsoft has managed to get Pocket PC devices in the hands of many IT managers. Often the devices have come bundled with server or PC purchases from Compaq Computer and others. Microsoft has also worked hard to woo developers, both those who have created Palm programs as well as people already developing desktop programs with the software giant's Visual Studio tools.

Chart Palm executives remain upbeat, citing several studies that show Palm continues to be the most prevalent handheld inside corporations and remains at the top of the list when IT managers are polled on their future plans.

The company points to a Gantry Group study that shows Palm OS handhelds are not only a third cheaper to buy but also 40 percent cheaper to operate. A survey of technology purchasers conducted by Maritz Research showed that 70 percent of chief technology officers and chief information officers had bought at least one Palm for a worker, compared with about half that number who had purchased either BlackBerries or Compaq iPaqs.

But Nagel and others are mindful of the companies that have found an early grave taking on Microsoft.

And if Palm fails to win a spot in the enterprise market, it faces a tough road as a consumer-heavy business. Nagel knows that firsthand from his days at Apple. Although Apple has managed to carve a profitable niche in the PC world, its market share has remained limited.

US Bancorp Piper Jaffray analyst Crawford says the benefits of grabbing at least a chunk of the corporate market are immense. The pricing pressure is less, there's the chance to sell higher profit-margin software and there are higher barriers for new competitors.

And once you're in tight with a business, you tend to stay in.

"It's like Velcro," Crawford said. Once a technology catches on with an IT department, "it can be hard to rip out."

 

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