Wish you could have shorted the Microsoft Zune? The problem with shorting the Zune was that it was such a small piece of the Microsoft (MSFT) empire; its lack of sales was insignificant on the share price.
But now we have Zune part 2 coming at us in the form of the Palm (PALM) Pre. Once again, a washed up company is trying to compete with Apple’s (AAPL) dominance; you know how the movie plays out. Only in the sequel, the washed up company isn’t diversified to ensure their survival. Unfortunately, Palm is a one-trick pony whose entire fortune relies on the success of the Pre.
When Apple released the iPhone there was a void in the smartphone market. Consumers wanted a media rich device. The iPhone delivered with its bundle of software that includes the music/movies/tv shows of iTunes, the safari web browser, and the endless functionality provided by the App Store. Research in Motion (RIMM) also fills a void. It caters to the business customer who relies on mobile communication. Data shows that iPhone owners are extremely happy. Blackberry owners are happy. What does Palm have to offer to make anybody switch?
1-Function: The Pre has three features that the iPhone does not; 1) a physical slide out keyboard; 2) Palm's new web OS platform that can run multiple apps at the same time; 3) A removable battery. The new iPhone is rumored to have more memory, a better camera, video recording and editing capabilities, built in FM transmitter, 1.5 times the battery life of current models, double the processing power, and turn by turn directions with the new GPS/compass. Of course these new features are on top of the new iPhone 3.0 software to be released along with the critically-acclaimed safari mobile web browser, iPod functionality and the App store.
2-The App Store: Gartner analyst Robert Cozza says “tighter integration with applications and services around music, mobile e-mail and Internet browsing make all the difference at the high end of the (smartphone) market.” The success of the Apple App store has exceeded even the highest of expectations. Apple CEO Steve jobs remarked that he had never seen anything like it in his career.
Palm’s app store on the other hand is still a question mark. Will any software developer take the time to develop an app for the Palm Apps Catalog after Apple’s store has distributed over 1 billion? This is the difference maker. I’m sure the Pre hardware is a quality smartphone, but they all are. The Palm software needs to offer consumers a real reason to switch; a half-hearted imitation of Apple’s app store will doom the Pre to failure.
3-Price: The Pre only competes with the iPhone $199 price tag after a mail-in rebate. National statistics show that less than 40% of consumers actually redeem mail-in rebates (see here); That’s why companies do it. Palm is trying to make some desperate money by forcing consumers to pay $299. Not a good strategy when you’re competing against Apple.
4-Sales: The Pre is only available through Sprint (S). Sprint is also struggling by the way. Needham & Co estimated that Palm will need to sell 8 million phones this year to justify its current share price. Apple had lines outside of Apple stores for 2 months and managed to sell 6.1 original iPhones in its first five quarters. Apple has now sold 21.4 million iPhones to date. Good luck to Palm on hitting 8 million this year.
For the Pre to achieve success, it needs to fill a void or it needs to offer superior performance vs. its competitors. Apple filled the digital music void with the iPod. Microsoft came along and tried to copy it with the Zune but it failed miserably because it wasn’t any better than the iPod. The critics loved the Zune just like they love the Pre but what the critics don’t understand is that consumers need a substantial reason to switch.
It looks like history is about to repeat itself. Palm is fighting for the company's survival as it suffers from negative operating cash flow, more debt than cash, and revenue growth that is down 71%.
If you’re invested in the tech sector and are looking for a good hedge, Palm appears to be a good short play. Strike 1: no need for the product. Strike 2: Sprint only. Strike 3: $299. In these beginning stages of the economic recovery I am leery of any short ideas but this one is intriguing. I wished I could have shorted the Zune, now I can.
Disclosure: Long Apple