Palm In Distress (again)

Competition is hell. It is especially so when you're trying to revitalize your business by following the market into the already-crowded smart phone space. By all accounts, WebOS and the handsets based on this new mobile phone platform are really very good. Unfortunately for them, they aren't especially better in the eyes of consumers and their competitors -- Apple, RIM, Google and even Microsoft -- are formidable. There will be a shake-out in the platform wars and, as many predicted (including me), Palm would be the first to exit. This is becoming increasingly likely.

Their most recent quarterly report tells the bad news. They have excess inventory of handsets in the distribution channel, which clearly indicates that even their modest projections (given the size of the growing smart phone market) were too high, and has left them holding the large cost of building that inventory but without the revenue. They can always cut costs -- as they have been doing -- to stay profitable, but that won't save them. It's easy enough to fire a large part of your work force, if they are involved in production; except that in Palm's case, as in many technology firms, the company's future depends on the intellectual capital produced by those people. In short, while they remain optimistic, there is little enough to justify that optimism.

In theory, share price should be a multiple of earnings, and Palm's aren't bad, although that's usually only true if the business outlook is stable. Palm's outlook is very, very bad. It looks like next quarter's revenue will dive to something like one-half that of the previous quarter: from $350M down to $150M. Not only are they failing to grow or even stabilize their business, this is happening in a market that is growing by leaps and bounds. They are now entering what could very well up as a death spiral where they lose market share, cut costs, have less capacity to produce interesting products, and the competition widens the gap. Customers know this and become less willing to be a channel for products from a faltering supplier.

There was quite a reaction in the trade media to Canaccord Adams' reduction of Palm's share price outlook to $0. This is really kicking them when they're down. It's also a good call. Despite their current distress, the intellectual assets of WebOS and their handsets are worth something, but that may be only realizable, if at all, if they are acquired by a company with the financial capacity to put those assets to work. That may happen. If it does, I predict that the technology will still fail. The smart phone market is already crowded and even some good platforms -- including WebOS -- will fail.

The shake-out will not end with Palm. The next candidates for the chopping block are Symbian and Windows Mobile. Microsoft will pour money into their platform for some time into the future, so they will be around for some time, and could survive as a niche player. Symbian will probably hit crunch time in 2011; Nokia won't willingly let go of it, and although it will irk them no end I expect that they will choose to protect their handset business over the platform, and begin by offering a few devices with Android or, less likely, one of the less-popular Linux variants.

That leaves Android, iPhone and Blackberry as the most likely survivors of this competitive battle. Palm gave it a really good try, but WebOS is likely to only survive, if at all, as components adapted to other purposes by whichever company eventually acquires them. It's a heart breaker.