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Can new business systems help Palm keep an upper hand?

This has been a rough year for handheld computers. Worldwide shipments are down about 21% from the same time last year, according to market researchers.

This has been a rough year for handheld computers. Worldwide shipments are down about 21% from the same time last year, according to market researchers. Consumers have less discretionary income for electronics purchases, and many businesses have decided to pull back on any major purchases or deployments until the economy improves a bit -- although IT departments are moving forward with very modest mobile and wireless projects.

One of the bellwethers in this tumultuous environment is Palm, Inc., the company which pretty much established the handheld computing market as we know it today and continues to be the leader in terms of installed base and shipments. Like other companies in this space, Palm has been hard hit by the recession, depression, or whatever else is the economic term du jour, and has suffered some equally dramatic declines in overall sales and market penetration.

Palm is clearly still the market leader, no matter how you measure such success, but it has been a tough sell in terms of high-end systems and increased sales within the enterprise market. Now that things seem to have stabilized a bit in terms of the economy (fingers crossed!), we are happy to report that Palm is again well-positioned to have the upper hand when it comes to consumer and business handheld sales.

Before we tell you why, a bit of history: No one can argue that Palm, Inc. has had a tremendous impact on the handheld computing market. While the company was not actually the first to popularize the concept of personal pocket computers -- Hewlett-Packard offered its own clamshell-type mini-computer years before the debut of the Palm device, and who can forget the clearly forgettable entry of the first wave of devices based on Microsoft's fledgling Windows CE operating system -- Palm did manage to successfully commoditize the handheld computer, and in doing so launch an entire industry.

Following the success of the Palm Pilot and succeeding Palm III, the company hit another apparent home run with the highly successful Palm V series devices, which were warmly welcomed by corporate executives and paved the way for these systems to flood through the back doors of organizations even as IT managers dismissed them as unnecessary gadgets. As a result, Palm easily captured 70% or more of the overall handheld computing market -- primarily because there really wasn't that much competition back then, and the Microsoft WinCE alternatives were really just an elaborate, battery-sucking joke.

Palm Tungsten C Palm's solo ride on the handheld success train started to slow down a bit when competition entered the picture -- in particular the competition presented by Handspring, Inc., a company founded by Palm creators Jeff Hawkins, Donna Dubinsky, and Ed Colligan. All three left Palm after it was spun out of 3Com Corp., and developed their own small system that was based on the Palm OS -- called the Visor -- but included a number of hardware improvements that were not yet available on the Palm. Chief among these improvements was an expansion slot, which allowed users to plug in software modules, additional memory, and games.

Handspring was initially reluctant to commit to a business strategy, preferring to market its device primarily to consumers instead, while Palm devices continued to flow through the back doors of organizations and quickly become the de facto standard in personal information management (PIM) systems. The problem was that Palm really did not have a serious enterprise strategy up until about 18 months ago. The company may strongly argue that it did, and had the applications to prove it, but the truth is that Palm was the proper business handheld system by default and because of a strong vote of confidence by the general public.

Blame it on the economy, a lack of spending by IT, or a general disinterest in handheld computers, but Palm's popularity began to slide a bit as more innovative competing systems were introduced and computers based on Microsoft's PocketPC arrived on the scene. Palm tried to pump up the volume by unveiling less expensive devices aimed at students, and even a wireless system (Palm i705) that made a valiant but fruitless attempt to attract users with aggregated email and wireless Web browsing.

Product pitch and yawn Unfortunately, the industry yawned and the spotlight continued to dim on Palm and other handheld makers who thought they might capture consumer markets with devices that did little more than collect your addresses, and business systems that were too expensive and ultimately too limited by user interface and battery technologies. Palm and other handheld makes have since revamped their product strategy by incorporating more connectivity and wireless communications capabilities into their small systems. We're not talking voice wireless voice communications here, but useful and functional wireless data communications.

The turning point for Palm came about late last year when the company introduced two new handheld systems: The inexpensive Zire -- priced at about $99 but available free from companies like IBM Corp., with some restrictions of course -- and the sleek and sexy Tungsten T Series, with built-in Bluetooth connectivity and full support of Microsoft business applications. Although we had our doubts about the Zire (having adopted the much smaller Palm V as our classic PDA), the system has apparently been a success in terms of sales within the consumer market -- even in these tough times when every nickel counts.

Palm sold roughly 850,000 of the Zire personal information management (PIM) systems in the first five months it was available, making it the fastest-selling handled ever (says Palm, at least). The company also quickly found out through various surveys and focus groups that 25% of the users of these devices actually preferred a basic and inexpensive PIM machine.

Palm claims the slick and sexy Tungsten T was also on the business hit parade, although a spokesman for the company did not have any updated sales figures to back up this claim. We seem to feel the reception for the initial Tungsten was probably lukewarm, considering the reluctance to buy any new-technology devices by the profit-starved enterprise segment. With its built-in Bluetooth, fast ARM processor, improved color renditions, and dual expansion slots, we felt the Tungsten was more of a sign post that earmarked that turning point in Palm's journey.

The company followed the introduction of the Tungsten T with the debut of the Tungsten W, which pretty much duplicates the form and function established by the Handspring Treo -- that is, integrating a wireless phone and tiny keyboard with a PDA. While we like the form factor and the general idea of converged devices, the W is still a bit more expensive than the Handspring Treo, although time and wireless carrier pricing plans will eventually solve this problem.

Getting your multimedia fix So, why is our opinion of Palm a little sunnier today? Aside from being in a strangely benevolent mood, and that huge sack of money left on our door step (kidding...), Palm has just unveiled two systems that we feel will make a significant impact on both the consumer and business markets over the next several months. These are the Zire 71, which targets the consumer market, and the Tungsten C, which is aimed directly at the business and mobile worker market.

The Zire 71 is important because it incorporates two technology elements that are extremely hot in the consumer market right now: A built-in low-resolution digital camera (which slides neatly out of the unit when needed), as well as the ability to listen to MP3 music files and full-motion video files thanks to a variety of new software, a fast 144MHz ARM processor and a very high-resolution LCD color screen. The system also has a rechargeable lithium polymer battery, enough on-board memory to store roughly 200 digital pictures, and an expansion slot that supports MultiMediaCard, SD and SDIO add-on devices.

Like wireless phones with built-in photo capabilities, the Zire 71 is not marketed as a replacement for high-resolution digital cameras. Rather, it is sold as a solution for people who carry a PDA and would like to have a simple digital camera to capture 'life moments' wherever and whenever they feel the urge. These digital 'life-shots' can later be synchronized with a host system and sent to friends via the Internet. (The Zire 71 does not have a built-in wireless capability -- only because Palm insists there are millions of people out there who prefer to carry their music and capture quick photos and not have the battery-draining capability of wireless access.)

We expect a wide acceptance for the Zire 71, especially since it is priced at $299 and includes such things as the RealOne Mobile Player, for MP3 music files, and Kinoma Player and Producer software, which not only lets you view captured movie trailers and clips but also provides the ability to convert digital movie files to the Kinoma format for viewing on the Zire 71. You can also store these clips on expansion cards to build a portable video library.

The Tungsten C is important because it is the first Palm device to offer built-in 802.11b Wi-Fi connectivity (the Tungsten W supports wide area wireless cellular communications). This means the system can easily be used by business users to tap into company networks and access email through the growing number of wireless hot spots throughout the U.S. Right now, about 20% of the companies in the U.S. have Wi-Fi networks installed, says Palm. In addition, 55% of wireless LANs are today purchased by consumers, which include work-at-home and telecommuting executives.

As part of the Tungsten C introduction, Palm has announced a strategic agreement with Wayport, Inc. to offer wireless access at the more than 525 hotels and 10 airports offering already offering the company's Wi-Fi connection service. Under terms of the deal, people who purchase the $499 Tungsten C can use the Wayport service for 30 days free of charge. After that, subscription prices apply, which vary from $29.95 per month for a one-year contract, to $49.95 per month for a no-contract agreement. The company also offers pre-paid access and corporate connection plans (www.wayport.com).

The Tungsten C is also based on Intel Corp.'s 400MHz XScale Technology processor, and has a built-in keyboard for quick and dirty data entry and replies to e-mail. It also comes with 64M bytes of RAM, making it one of the most powerful and capable handheld systems on the market (at least until the next king-of-the-hill comes along!). The cost for all of this: $499.

The right market mix We think the mix of technology and the pricing of both the Zire 71 and the Tungsten C are perfect for their respective markets. Consumers will be willing to shell out $299 for an all-in-one personal multimedia device. Businesses are less concerned with price, but very concerned about security, device flexibility and convenient and reliable wireless access. In terms of security, the Tungsten C supports 40 and 128-bit encryption when WEP is activated, and also supports virtual private network (VPN) connections (encrypting all data between the handheld and the server).

Users can also program the device to kick in with various levels of security at different times of the day, although we fail to see the strong benefit of this to the corporate user who considers most everything secure. The Tungsten C also incorporates a proxy-less browser, which is a more direct connection that eliminates anything sitting between the mobile system and the corporate server (the Tungsten T has a proxy-based browser system).

Palm is also working right now with a number of partners to pump up the level of security, looking at such things as improved IPSEC and VPN connections. What is lacking in the picture is any kind of out-of-the-box mobile administration software, which allows LAN and network administrators to keep tabs on handheld usage and access. Solutions are available from such companies as XcelleNet, Inc., although we feel some kind of a packaged product would be very attractive to a corporation's IT department.

Also, this month, Palm in partnership with IBM Corp. plans to release a set of APIs that will connect Palm's VersaMail program directly with the Domino Lotus Notes Server. This means the system will be smoothly compatible with both Microsoft Outlook and Lotus Notes environment, which pretty much covers the enterprise email gamut.

Overall, we think the Tungsten C and the Zire 71 are the hot mobile systems this summer, and will generate a lot of excitement and appeal within their respective market segments. Microsoft is rumored to be readying the introduction of a new PocketPC OS this year -- for whatever reason, code-named Ozone -- but sources say this is merely a maintenance upgrade and not a major product announcement. So, it would seem that Palm not only maintains that upper hand, but also has its fingers on the pulse of both consumer and business users.

Tim Scannell is the president and chief analyst with Shoreline Research, a Quincy, MA based consulting company specializing in mobile and wireless technology and initiatives. Shoreline works with end users, looking to implement mobile solutions, and vendors, developing new products and seeking business and customer opportunities. The company also specializes in training and strategic planning projects. For more information on Shoreline Research and the company's strategic services please go to www.shorelineresearch.com.


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