Palm gets slapped

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Palm, marketer of the wildly popular hand-held computers of the same name, is beset by growing pains. The company, having nailed most of the early adopters for its devices, now faces price volatility in the category, somewhat slackened demand and increased competition from Research in Motion's Blackberry and a host of PocketPC devices. The tech sector's nose dive hasn't helped matters.

In July, the company took steps it believes will aid long-term growth by splitting Palm into two divisions. One focuses on platform software and licensing of the Palm Operating System; the other markets hardware and new software applications.

But Palm's stock has continued its free-fall since the restructuring announcement. Battered by the ailing tech economy, the stock late last week hit an all-time low of $3.46-98% off the peak of $165 it hit the day it went public in March 2000.

Palm may have been caught flat-footed. "They [Palm] had a big problem in that they didn't recognize how fast the pricing model was going to change once they licensed the OS," said Steve Baker, director of research, NPD Intelect, a Reston, Va., tech-research firm. "They did a poor job in differentiating their products on price, for customers to understand why something was $450 vs. $199. ... They could have done a much better job at positioning those products," he said.

Despite the growing pains, however, Palm's unit sales remain strong. "This is a category that's one of the best growth categories for CE [consumer electronics] retailing right now, there are a lot of people who want these things," Mr. Baker maintained. The lowest price on a Palm device is $129; it remains to be seen whether pricing in the fourth quarter will plunge to the $99 sweet spot.

The first Palm OS licensee in March 2000 was Handspring, a company started by the creators of the original Palm Pilot. Now, Handspring's Visor is a lower cost rival in the consumer market.

More than 1.7 million hand-held devices, or personal digital assistants, were sold from January to June this year, according to NPD Intelect. Hand-helds powered by the Palm OS racked up nearly 80% of the hand-held market and 60% of retail sales in June.

Palm's unit sales are up about 80% over last calendar year. The PocketPC devices marketed by Compaq Computer Corp., Hewlett-Packard Co., Casio and others account for about 15% of the market for hand-helds. But PocketPC devices, powered by Microsoft Corp.'s Windows CE operating system, are expected to grow share quickly because of their marketers' toehold in the enterprise sector. The real money is in customizing software applications for big companies such as United Parcel Service and Visa International.

Palm said it's sold more than 13.7 million Palm devices from its 1996 debut through June 1, 2001. Including licensed devices, Palm said 16 million have been sold during that period.

In the fourth quarter, Palm expects to fire off a round of advertising targeting consumers, but will focus more aggressively than ever on information-technology professionals. "We haven't spent much time talking to the IT audience," said Liz Brooking, senior director, marketing communications, Palm. Ms. Brooking said fall campaigns will focus on generating demand and speak to the idea that there are more than 10,000 applications for the Palm OS, differentiating Palm from competitors.

Palm has plenty of work to do. Both Palm and its agency, AKQA, San Francisco, have had layoffs in recent months. The agency remains Palm's global agency of record, and it redistributed personnel to adequately staff the Palm account. "They are probably the most responsive agency I've ever worked with," Ms. Brooking said.

The company spent $27 million on U.S. measured media in 2000, according to Taylor Nelson Sofres' CMR. It spent $7.8 million from January to May 2001.

Palm reported spending $157.3 million on worldwide advertising for the year ended June 1. For that year, the company had a net loss of $356.5 million on revenue of $1.56 billion.

Ms. Brooking declined to specify future spending or comment on cutbacks. "All tech companies are really reviewing their entire expense structure," she said.

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