Can Palm save itself?

Just like last year, when Palm made a big splash at the Consumer Electronics Show by unveiling its webOS platform, the company once again took the stage at the trade show today to tout its new, long-rumored relationship with Verizon Wireless. This, when coupled with AT&T Mobility's announcement earlier this week that it would launch exclusive webOS devices later this year, gives Palm support from the nation's two largest wireless carriers. But will it be enough to turn around the company and get it back to profitability (let alone deliver hit devices)?

I think the odds are stacked against Palm, and it will have to execute perfectly on a number of different levels (and receive large marketing support) for it to have a chance at success.

Despite the increased operator support--the lack of which has arguably been the biggest factor holding Palm back--the smartphone maker faces some serious hurdles. First, its brand in the market is still relatively weak when compared with Research In Motion's BlackBerry, Apple's iPhone and the slew of increasingly sophisticated Android devices from the likes of Motorola and HTC. Palm CEO Jon Rubinstein seems to understand this predicament perfectly. "We need to work very hard to get the word out and get people to understand why our products are better than the competition's," he said on the company's earnings conference call last month, noting that the Palm would increase its marketing efforts. I think that's a wise idea; it needs to, otherwise it will fail to reach consumers beyond core Palm users.

The second big problem facing Palm, in my view, is related to the first: its relative lack of momentum in the market. In its fiscal second quarter, Palm's smartphone sell-through--how many devices consumers actually bought--fell 29 percent from the previous quarter and 4 percent year-over-year. And this was the second quarter that the Pre was available, the quarter in which Palm introduced the Pixi and in which the Pre gained greater international carrier support. The fact that Palm's sell-through fell is a clear indication that the company's products are not exactly catching fire.

Unfortunately for Palm, the smartphone market has not stood still in the past year. All of the major carriers are now supporting Google's Android platform, and the Android Market has grown to around 20,000 applications, compared with around 1,000 for Palm's App Catalog. It will be harder than ever to stand out in the carriers' own smartphone lineups, let alone in the smartphone market as a whole. Palm's competitors, with deeper pockets, have a distinct advantage here, no matter how bullish top Palm investor Elevation Partners is about the smartphone battle being a "marathon."

The company's third major hurdle is the tiny size of its developer ecosystem compared with its rivals. Like it or not, size matters when it comes to smartphone application storefronts. Palm has, at least up until now, been caught in a Catch-22: Palm's phones have not caught on because of the relative lack of applications, and developers have not taken to the platform because of the small audience. That dynamic could change dramatically with the Verizon and AT&T partnerships, but Palm is so far behind on this front it may not matter.

Luckily, Palm seems to understand all of this. The Pre Plus at Verizon has 16GB of internal memory--double what it is with Sprint--and the Pixi Plus will have WiFi. Both devices will be able to record and edit videos and the Pre will now support 3D games. All of these upgrades could help sway customers. More importantly, Palm has formally launched its developer program. The company has taken several innovative steps to help its developer ecosystem grow, including:

  • Launching a $1 million Hot Apps bonus program to reward the most popular webOS apps, which it is hoping will help spur growth.
  • Adding Web distribution for applications, so that customers can share and spread the word on apps.
  • Opening up its database of webOS applications data, including app descriptions, ratings, stats and screen shots, which is essentially crowd-sourcing the spread of webOS apps.

At this time last year, Palm was given the benefit of the doubt, because it was not clear how the Pre would perform in the market. Now that it has not been the success its backers likely hoped for, time is running out for Palm to prove it can deliver a hit. The webOS platform still remains innovative, stylish and compelling. Now Palm has to convince smartphone users that it is worth buying.

All of these developments are positive, and at this point, necessary for Palm. In order to succeed in the cutthroat smartphone market, Palm, which showed up late to the game with webOS, will have to execute its strategy perfectly to grow its market share, sell phones that customers want to buy and turn a profit.

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