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What Went Wrong With Palm?

Posted on Monday, Mar 22nd 2010

Palm (NASDAQ: PALM) seems to be floundering. It recently reported mixed results – earnings were better than expected but smartphone sell-through was highly disappointing. Let’s take a closer look at what went wrong.

In the most recent third quarter, Palm reported that it shipped 960,000 smartphones but sold only 408,000 units compared to 783,000 shipped and 573,000 sold last quarter. Despite declining sales attributed to a post-holiday slowdown, the company posted a narrower loss of $22 million and revenue of $350 million versus $90.6 million last year and $288.35 million last quarter. But the higher revenue is also due to a change in the way Palm recognizes revenue from Web OS products. Under the new system, it recognizes most of the revenue from the sale of Web OS products on delivery, and the rest of the service revenue is deferred over the two-year contract period. Q2 coverage is available here.

For the fourth quarter, Palm expects revenue to fall to less than $150 million, almost half the $305.8 million estimated by analysts.

It wasn’t just a matter of initial interest waning in the Pre. Palm followed up the Pre with a new model Pixi, and in January at the Consumer Electronics Show, it launched two new phones, the Palm Pre Plus and the Pixi Plus, available on Verizon. Earlier, Palm had an exclusive carrier partnership with Sprint, which proved to be a disaster. CEO Jon Rubenstein lamented that Palm would have been doing better if it had beat the Droid to Verizon. Droid has sold more than a million units since its launch. After the weak sales of the Web OS models, both Verizon and Sprint are offering huge discounts. Verizon is offering a buy-one-get-one-free deal with a two-year contract while Sprint is offering a 50% discount. PC Mag also tries to understand what went wrong at Palm.

Palm has tried all the tricks in the trade: new OS, new models, and new carriers. However, what is lacking in Palm’s strategy is focus on applications: it has just 2,000 applications in its store, compared to more 100,000 for the iPhone. According to a study from Skyhook Wireless, few developers want to create applications for Palm Pre and Symbian.

Palm, I have always thought, will eventually be acquired to plug the hole in the smartphone strategies of one of the giants. Nokia is a prospective suitor for Palm. Even HP and Dell could benefit from acquiring Palm: it would provide them with the technological base for getting into convergence devices. HP says that it is creating innovative products to connect with consumers in its PC business and its new tablet is trying to compete with the iPad. Palm could provide it with the necessary technology and innovative energy to surge forward in convergence devices. 

Palm is currently trading around $5.65 after hitting a 52-week low of $5.29 on March 17 and a 52-week high of $17.50 on September 22. With a market cap of $947 million, it would come pretty cheap for Nokia, HP, or Dell. Palm’s CEO squashed all acquisition speculation but said that if there is a reasonable proposal, the board would have to consider it.

My analysis is that Palm has done a poor job of two critically important things in getting the product positioned for differentiation: market segmentation and partnerships. Instead of going for a differentiated enterprise application-based strategy that I suggested two years back that would have given Palm a differentiated prosumer story, the company has become a me-too company chasing Apple’s and RIM’s tails. The result is that Palm means nothing to no one in trying to become everything to everyone. This a very poor strategy, despite good execution on the product development side. Nor is it surprising given that Jon Rubinstein, during his Apple days, relied on the marketing genius of Steve Jobs to worry about these aspects of the business.

In terms of acquirers, the more I think about it the more it seems that Palm in the hands of a company that really lives and breathes enterprise will give it the best leverage.

Last week, in my post on Nokia, I looked at the possibility of Nokia acquiring Palm. Yes, that would give Nokia a foothold in Silicon Valley, and combined with its international distribution channels, Palm’s products would acquire better reach. Both companies would benefit.

But the more I think about it, HP would be a much better acquirer for Palm. What Palm needs is an enterprise application strategy, not this wishy-washy me-too stuff that they’re marketing right now.

Chart for Palm, Inc. (PALM)

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Palm, one of the leader in hand held devices is now pushed to the sideline and its almost out of the game. The main reason is their failure to embrace emerging technology and they are slow to repond to the market changes.

someOnWhoShotTheStocks Monday, March 22, 2010 at 4:07 AM PT

I think that Cisco could also be a candidate since their approach to the consumer market with the Flip camera.

They are the ones stating that mobile traffic would increase 5 fold in the next years and they might help do this by promoting a mobile device such as the Palm Pre.

They already have a good partnership with major mobile operators worldwide and they could use this to push the Pre.

Adrian M Monday, March 22, 2010 at 5:32 AM PT

Yes, failure on differentiation front seems to be the main factor. From a technical viewpoint, some have suggested that the small screen size did them in. If that is the case, Mini-5 from Dell should be a big hit!

up?take Monday, March 22, 2010 at 7:26 AM PT

It’s simply a question of being run over by a truck with an iPhone engine, RIM tires, and an Android chassis. Yes, it’s about applications. Yes, it’s about differentiation. But, most importantly, it’s about consolidation in the mobile device operating system market. After Palm’s imminent demise (or, if they’re lucky, acquisition) there will be others. Palm put up a good fight but they really had no chance against the truck they couldn’t see coming. Even a corporate icon as big and cash rich as Motorola was run over by the same truck and, despite recent signs of recovery, is still on life support.

Leif Eriksen Wednesday, March 24, 2010 at 3:35 PM PT

Palm’s struggles may reflect a failure to connect closely enough to consumers to identify their needs and deliver novel solutions. So much of the power of the smart phone is in its ability to receive and deliver or process information from the user. In the case of the Palm Pre, the fun and promise of a smart phone quickly evaporates–it certainly did for me–when users find that the narrow keyboard is far too small for practical typing, that there is no on-screen virtual keyboard for text entry, that there is no autocomplete or spellchecking, and that there are no voice commands to simplify tasks. Entry of info or commands becomes a chore.

The failure to implement useful copy-and-paste features also removes much of the fun and value of a smart phone. Recent software updates now make it possible to copy and paste text in email messages, but text on web pages is still impossible to copy.

The business model also reflects a focus on short term me-too gains rather than long-term success. This is exemplified by the horrific decision to not allow technical support people, at least in the first few months of the Pre, to have the phones they were supporting in order to get more ini the marketplace. I discussed some of the ramifications of this at

While multitasking and other features are nicely implemented, and the ability to interface with Outlook calendars is terrific when it works, deliver on many basic features shows lack of connection to users. It should take lots of steps and staring at a screen to hang up during a phone call. It should not be so easy to erase data with no undo feature. It should not take so long to make a call, and speed dialing should be easy and speedy, not slow and inconvenient.

The ability to watch TV or YouTube is probably nice (not something I care to do much), but on the tiny screen and with slow data transfer rates it’s not that great. It’s great to be able to surf the web, but again, it’s usually so slow that it doesn’t work much of the time. Better stick with a real computer for that.

Overall, it was a launch that smacks of a desperate effort to get out there and do something without properly directing energy to solving the real needs that consumers face.

I paid a lot to jump on the Palm Pre bandwagon, but after many hours of technical support frustrations and many months of use, I still often miss the old tiny Motorola V320 phone that had autocomplete, voice commands, ability to record sound, easy speed dialing for at least 100 numbers, and easy means for hanging up whenever I wanted to.

Jeff Lindsay Wednesday, March 24, 2010 at 3:56 PM PT


On a broad level, Palm has not given end users enough reasons to brag about owning a Pre or a Pixi. It is all tell and not enough show.

In a former life doing PR for Verizon Wireless (before the iPhone came onto the scene), much of our approach was about being unique by going out there and showing people things you can only do with VCAST or BlackBerry.

For Palm to become relevant once again, they need to show us the things we can only do with Palm. On parallel tracks, be aggressive about promoting this, and developing new tools.

Apple, for example, has executed this with brilliance on the consumer side through its App Store, a catalog of magic tricks that has made us forget about its chips, digits, and shortcomings.

Palm is finally getting it right with its “Don’t Miss a Thing” campaign, where they show us we can do things faster, better, and easier with WebOS. It brings together its technical strengths and lifestyle message in a way we hadn’t previously seen.

It’s not too late for Palm to give us more evidence their existence matters. They certainly have the engineering talents. Palm needs to show us more tricks you can only do with a Palm. Let’s see some magic.


Philip Chang Wednesday, March 24, 2010 at 5:20 PM PT

Yes, but they need a fundamental change in strategy from consumer to enterprise, which I don’t see any indication of thus far. Engineering talent yes. Marketing talent no. That’s the net of this situation.

Sramana Mitra Wednesday, March 24, 2010 at 5:25 PM PT

I work as a senior software engineer for Antenna Software – a leader in mobility for the enterprise and Palm was one of the platforms we supported.

Palm started out as an innovator and a leader. They had the most amazing device at the right price points with software anyone could understand and use. Unfortunately, that software quickly grew stale. Palm took way too long to get away from PDA’s and get into Smartphones. On top of that, their aging Garnet OS, could not support the mobile internet or a decent web browsing experience – which was becoming more and more important. Palm promised its users a new, modern OS. This OS was delayed time and time again, allowing Microsoft, Blackberry and later, the iPhone to leapfrog them. In the meantime, they were going through a number of branding changes that seemed unnecessary and wasting time on weird devices (remember the Folio?) instead of focusing on their core users and what they wanted.
In the end, the new webOS devices did seem like they’d bring Palm back from the dead, but it was too little too late. Choosing Sprint as their exclusive network was the final nail in the coffin.
In the enterprise sector, Palm is dead. We haven’t had any Palm related work in years as clients have moved onto better Blackberries, WinMo, iPhone and Android devices.

Michael Drob Wednesday, March 24, 2010 at 8:38 PM PT

Palm went wrong not in technology, not because of a small screen, cramped keyboard or software limitations such as lack of cut and paste, no Palm failed in the execution of their product rollout, and this goes well beyond their bad ad campaign. It is just like politics: when they announced the Pre, they created tremendous ‘buzz” around the new device. As an industry executive myself, and an iPhone user, for the first time since 2007 I saw maybe not a so-called “iPhone killer”, but certainly something new and innovative, worth looking at, a smartphone with features that I truly wished I had on my iPhone, a feeling that I honestly have not had ever since, even with the plethora of nice ‘me too” android or WinMo powered slab recently announced or released. Palm killed my desire, and many other’s at the same time, by failing to wisely spend that “buzz capital” that they had accumulated, and now they must come up with their own healthcare plan if they want to turn that company around.

Before missing out on the general public, the consumers, Palm failed to reach out to the developer community, that untapped pool of resources that could have started building those now essential applications in order to fill the shelves of the upcoming store for the Pre. Instead, Palm kept people in the dark regarding the actual release of the Pre, and kept missing deadlines for the availability of the SDK. Compare that to Apple, which had set the expectations for developers, with clear product release dates, and regular SDK updates and you can easily see why application publishers have now decided to invest in other platforms such as Android, and even not even Beta Windows Phone … now that is a scary thought !

Another huge mistake was to release the Pre through the very “USA only” Sprint. Now everybody knows that the two companies shared some success in the past namely with the release of the Palm Treo 650, but many things have changed since then. The smartphone market is global, and as such the buzz around a new device must be felt worldwide, not only in the US. By releasing a CDMA only device, with NO PLAN whatsoever announced (or leaked) for a GSM version, Palm cut itself from a huge portion of its potential customers: Europe completely lost interest in the Pre and WebOS. Some will be quick to point out that the first iPhone was only on ATT, that is true, but with quite a nuance: being a quad band GSM device, it had a worldwide potential footprint and appeal, and hackers everywhere united to unlock the device to use it in their countries. So when the iPhone 3G was released worldwide, developers and consumers everywhere were ready for it. The Pre on the other hand only managed to gather a dwindling interest by a few users of the US-only “Now Network”. Case in point, the smartphone companies that think globally, like RIM and Apple are thriving, while others like Sony-Ericsson, Nokia are having difficulties for reason similar yet opposite to Palm: virtually no US presence. Palm with the Pre is a US-centric failure.

As a result today Palm has a store with only a few thousand apps, a second US carrier that is already almost giving away the device, more inventory than installed base, and serious financial difficulties. Yes they finally have announced a GSM version of the Pre, but nobody is waiting in line for it. Unless through an acquisition, or other means they find a way to put somebody that can execute a plan at the helm, this smartphone pioneer seems doomed .

Patrick Gilbert Wednesday, March 24, 2010 at 11:57 PM PT

Not in touch with the changing market

Too complex from release date to current date

while easy access products are flooding the marketplace

Did not keep up with the technology to become “user friendly”

Sheila Holm Thursday, March 25, 2010 at 10:50 AM PT

Palm got into this mess because they vacillated on their platform strategy for a few too many years. First there was Palm OS, a good/reliable entry into the smartphone market, but not an OS suitable for the pace of innovation to come. Then they split their efforts between Garnet OS (ACCESS) and Windows Mobile, with most saying Windows Mobile was a stop-gap to get them by until they could ready Garnet OS for market. By the time Garnet OS came to market, the PalmSource/Palm split had happened, and then Garnet OS drifted into oblivion while Palm simultaneously eased off of building Windows Mobile based phones. Confused yet? I was. I’ve been in the mobile industry for a decade and I’ve never seen a company do so much to confuse and alienate their loyalists as what Palm did up to that point.

After the above debacle, in my view Palm had one last play in their playbook, and they bet boldly but in the end not successfully. The idea of WebOS, and the technology itself, is all well and good. However, what the world needs now is not another smartphone OS, especially in the shadow of billion dollar marketing pushes from five firms with deeper pockets than Palm — Google, Microsoft, Nokia, BlackBerry, and Apple. Who goes into a competitive analysis against a cadre like that and expects to emerge unscathed (or even emerge a survivor)?

I’m not sure what I would have done differently at that point, but its tough to characterize WebOS as anything more than a Hail Mary pass against incredible odds.

Now Palm faces a situation where app variety and availability is a primary differentiator that all smartphone players compete on. Palm is against great odds on this front. If most mobile ISVs think of the smartphone market anything like we do at my company, they prioritize app development on each platform based in large part on market share. And few developers have the wherewithal to work their way down the market share list all the way to Palm. My company has been bold enough to develop apps for four of the top smartphone families (iPhone, BlackBerry, Android, Windows Mobile), but even folks like us that bet on multiple platforms won’t make the leap to bet on Palm.

Palm, we loved thee, but the market share erosion tells a sad story that seems unlikely to reverse.

Who will buy the remnants of Palm? My bet is on a Taiwanese manufacturer that has smartphone manufacturing capabilities and limited software development capabilities but no brand recognition. Many smartphone ODMs in Taiwan are surely salivating over the success that HTC has had in going from a “white label” manufacturer to a recognized brand. For many of HTC’s competitors in Taiwan, the only way to replicate that success might be to “buy” a brand.

Phillip Leslie Thursday, March 25, 2010 at 2:14 PM PT

Palm suffered initially from not having the applications available, as well as falling out of fashion. When Blackberry came about the only application was email, and Blackberry had it packaged up in a easy-to-use model that worked. RIM did an excellent job of penetrating the consumer and enterprise markets, so acceptance among business users was high. Then the PDA became more and more of a fashion statement, and Blackberry was hip. These factors created a rush to Blackberry and a void for Palm. Then the iPhone came out and we learned that applications can be much more than just email. Apple’s iPhone also greatly upped the ante in the fashion category for PDA’s.

Even if Palm came out with the most innovative phone tomorrow, they just don’t have the name recognition at this point to get market share. Actually they might be better off releasing new products under a different company name.

According to comScore, in January 2010 Google had 7.1% of all PDA subscribers with Palm falling to 5.7%. Even at a bargain-basement price, does an HP or Dell really need/want 5.7% share of the market (and Palm’s numbers have been falling each quarter).

I would suggest that Palm’s best bet is to strike an alliance with a Mobility player that doesn’t have the hardware manufacturing capabilities. Microsoft comes to mind — and whether Microsoft is willing to partner or purchase Palm remains to be seen. Such an alliance would provide hope for Palm and another opportunity for Microsoft to counter Google and Apple.

Scott Archibald Thursday, March 25, 2010 at 3:02 PM PT

We believe pressures facing Palm are mounting given weak consumer demand, falling ASPs ($367 in F3Q10, down from $375 in F2Q10), significant operating expenses, and working capital needs. These factors are contributing to increased cash burn and decelerating revenue, in our view. We expect revenues to decline in CY2011 as demand for Palm products fade despite unchanged plans for new carrier launches.

Smartphones became too competitive for Palm. The Palm phones launched with a weak carrier, Sprint. By the time Palm connected with Verizon, the phone game was over. Their sales were weak and the competition included Motorola, HTC, Blackberry and Apple, so Palm could not differentiate itself.

The Palm apps became a chicken-and-egg story. App designers did not want to waste time writing apps for a phone that only sold 2 million units a year while the customers did not want to buy a phone with no apps.

We are now doubtful about Palm’s survival for a number of reasons:

1) We are skeptical that Palm’s efforts at training Verizon representatives are going to have a meaningful impact on consumer demand.

2) Despite Palm’s efforts at conserving cash, we estimate that it may only have sufficient cash to operate through mid-CY2011 given expected cash burn and net losses

3) We do not anticipate a strategic buyer approaching Palm.

We believe rumors of Palm as a potential buy-out candidate for larger technology companies such as Microsoft, Dell, Nokia, and Hewlett-Packard, among others, has little merit. Since the release of the Palm Pre back in January 2009, rumors of Palm being a possible takeout candidate have frequented blogs and news wires.

Despite the recent correction in Palm’s shares (-45% since February 12), we do not believe many of the rumored buyers offer much promise for Palm investors hoping to receive a premium for the company’s shares.

Reviewing Candidates:


Dell has tried its hand in the Smartphone market with a phone in China and Brazil, and a launch with AT&T is expected sometime this year. Essentially, Dell is allowing an OEM to use its name as a brand. We believe that Dell has very little at stake in this deal and the option of investing and taking some equity, should it prove to be successful. As such, with Dell’s focus on its core businesses, we do not believe that Dell would want to provide resources, or capital, or have better distribution to offer Palm.


We believe HP is positioned similar to Dell in that HP would not likely be able to bring much to the table to improve Palm’s lot in the Smartphone space.


As primarily a software company, we believe that Microsoft would have little to gain from the acquisition of Palm. We do not think synergies exist from a software perspective given Microsoft’s positioning with its
Windows Phone 7 series. By acquiring Palm, Microsoft would automatically become a competitor to its customers (Smartphone vendors) and Microsoft’s management has already stated it has contemplated making
a Smartphone, but opted to stick with software. However, we view this comment with some skepticism as rumors have circulated to the contrary. We think it’s unlikely that Microsoft acquires Palm.

Last week, Palm reported F3Q10 non-GAAP sales and a non-GAAP EPS loss of $366mm and $0.61, respectively. The better than anticipated results were due to the unexpected delivery of in-transit shipments in the last few days of the quarter. More importantly, management guided F4Q10 revenue to less than $150mm after weak sell-through rates at carrier customers in F3Q10. We note that Palm also incurred a $45mm charge for reserves made for inventory purchase commitments. As such, gross margins were 17.3%, significantly lower than our 26.0% estimate.

We expect margins to be negatively impacted in F4Q10 as well. Given the weaker than expected sell-through rates and high levels of inventory at carriers, we are lowering our estimates for CY2010 and introducing CY2011 estimates. Further, we are downgrading Palm shares to SELL with a $0 price target, from a Hold.

Ilya Grozovsky
Technology Analyst
Morgan Joseph

Ilya Grozovsky Thursday, March 25, 2010 at 3:15 PM PT