Three Strikes from Apple and Palm May Be Out 55 comments
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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
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This article has 55 comments:
I realize the smartphone market is growing, but it's also crowded. Not sure how PALM earns enough to justify its share price even if the Pre is a success. And I'm not sure that consumers are dying to pay $300 for a Palm Pre on Sprint during one of the worst consumer environments of the past two decades.
I could be wrong, but it seems like a long shot to me. If I had to wager, I'd guess the Pre has good initial sales but then fades a little bit, but never really comes close to earning what current shareholders believe it will.
If it spikes around the launch date, I have funds ready to short more.
Furthermore, the financials related to the Pre are really a case of smoke and mirrors for Palm, which has been losing money by the fistful in recent quarters. Apple makes at least $380 in gross profit for each iPhone ($550 subsidized revenue from carrier minus estimated $170 in supply costs), and sells, on an ongoing basis, 18 million per year. The quarter in which the 3G launched saw 6.9 million alone.
Palm, as a smaller competitor, would need make this much to compete, but in fact may make only about $162 per phone. That's not very much. (gpsobsessed.com/palm-p.../)
The only possible outcome that will yield gains for Palm shareholders is if one of the giants who have bungled or aborted their own smartphone business (Microsoft, Dell, Nokia) purchase Palm at an inflated price. Which, by the way, would end any significant further innovation from Palm, and Apple wins again.
OTOH, once reviewers get the Pre in their hands for heavy-duty testing, flaws will be found, probably, that will deflate their current "wowed" attitude.
This is true. But keep in mind that most of the computer critics are Microsoft fans writing for Microsoft fans, and by definition have nothing good to say about Apple. It's like rooting for the other team, literally. There is a substantial 'anything but Apple' crowd in the tech arena, but most of the general public don't care and have now come to see Apple as top of the line. Microsoft's own ads are now reinforcing this perception.
In tech...it's not just innovation..it's speedy innovation that takes the prize, and that's Apple. So even if Palm could release the mother of all smartphones it'll only matter for a minute or two.
Dusty old Treo in closet, guess it is time to donate to my favorite Green Landfill, or maybe keep for the museum of defunct companies :-)
To compare Apple and Palm is ludicrous! Palm is maybe a 1 trick pony, Apple's 28 Billion in the bank could buy palm, and distinguish the brand without missing a heartbeat.
If the prospects were so "good" for Palm and the pre, don't you think Balmer in his almighty wisdom would have snapped them up? Even he knows there is no investment there...
On May 21 10:15 AM Anthony C wrote:
> How soon we forget that mighty Apple would have disappeared about
> a decade ago if it wasn't for an infusion of funds from none other
> than Microsoft! And what saved them after that desperate measure?
> A single product: the iPod. If the iPod hadn't become a hit I think
> that Apple would have become just another PC clone maker. Palm has
> the opportunity to make a big recovery and looks like the Pre is
> a device to do it for them. Palm is not dead, they are just Apple
> 12 years ago.
Sprint + Clearwire is rolling out Sprint's Xhom 4G technology. Based on what I read, its speed has peak of about 4 MBit/s and averages 3 MBit/s. This is currently only available mostly in major east coast metropolitan area. The build-out will reach 80 million people by end of 2009, 140 million by end of 2010 and in 2011, it will match all of Sprint's current network coverage. This tidbit is taken from an article in Network World, author is Brian Nadel, posted 10/10/2008.
According to the article, ATT 3G speed was only 1.7 MBit/s when compared against Xhom.
According to Kevin Fitchard of Telephony Magazine, in an article dated 4/20/2009, AT&T is in the process of doubling 3G speed from 3.6 Mbit/s to 7.2 MBit/s. This is achieved by migrating 3G to HSPA+ as an intermediate step before jumping straight for LTE. ATT is testing this new upgrade in two test markets.
According to Patricia Resende of NewsFactor, ATT expects to switch to the new HSPA+ network by end of this year, 2009. So it is likely that come 2010, ATT will be running at 7.2 MBit/s or an average of 3 MBit/s or 4 Mbit/s given how the current 3.6 MBit/s system is delivering an average of 1.7 MBit/s.
So in terms of competition between Sprint and ATT, as long as ATT delivers as reported, the speed race is even?
If ATT's new HSPA+ actually can deliver better than 50% of specification, meaning it can go above half of 7.2 MBits/s on average, we are looking at an average of 4 or 5 MBit/s? 6 Mbit/s?
So, again, be very careful with research and data.
It is best to actually look at what Sprint is really doing and really delivering in terms of real world speed.
On May 21 12:21 PM Aryamehr wrote:
> Two aforementioned questions: Speed and wherewithal; Sprint's 3G
> download speeds are already the fastest in the industry and I can
> only assume their Wimax 4G is substantially faster or else they would
> have never invested 10's of billions into it. With regard to Sprint's
> wherewithal all you need to do is looks at their latest financials
> and you will notice they have $4.5 billion in cash and $3 billion
> dollars in cashflow with a $1.4 billion dollar credit line. They
> have the best prepaid subsidary, Boost, in the market and the Pre
> will be their ace in the hole. Their subsidary, Clearwire, which
> is 51% owned by Sprint was created with a consortium that included
> the dream team of Tech; Intel, Google, Samsung. They also include
> investors such as Time/Warner and Comcast. You can rest assured this
> was not done in vain. According to clearwires public statements they
> will have 10 major US cities covered with 4G by the end of this year.
> This should give Sprint a two year reprieve to catch up with ATT
> and VZ.
ATT's jump into HSPA+ has the potential to net 21 Mb/s but that is theoretical, I will believe it when it actually happens. Qualcomm did report that it was able to make the first HSPA+ 20+ Mb/s call, so that is impressive if it is possible in the future.
What sells the Iphone is the software and services - the same goes for Blackberry. Palm has squared itself to go up against both - trying to be a business phone with its keybaord and a media device with its touchscreen.
So the real question is who wants a bit of both worlds but the best of neither?
As for one bird in hand versus thousands somewhere else, it unfortunately cuts both ways :-).
Pre is a bird not yet in hand nor do we know if it will sell 300,000, 3 million or 8 million in a year. That is the "thousands somewhere else", not any bird in hand yet. :-)
iPhone, RIMM and Nokia are shipping millions each quarter with RIMM gaining 50% and Apple gaining 106% in one quarter in the "smart phone" (I dislike this term) segment, that is the "millions in hand".
Sprint is rolling out Xhom with impressive speed, so is ATT and the speed difference will soon be moot. So Sprint will have one bird in hand for now but soon ATT will also have its bird. Soon could be end of 2009, in six months or by mid-2010, within 12 months.
:-) Sorry, your analogy is too good to ignore :-).
I like the Pre although my daily usage requires the iPhone and my corporate Blackberry. I hope Sprint survives because it will push VZN and ATT along. I also hope Palm survives because it is the second vendor capable of producing a nice UI, after Apple and that will push Apple along. In the end, we consumers benefit from honest competition.
The hype though is where consumers get burned. Whenever there is any sort of hype, it is good to look deeper and debunk it when possible or provide real data to put that hype into perspective. That is all.
Peace!
The Microsoft payment was for settling a dispute between Apple and Microsoft, it was not charity. Please research this.
As for iPod being the sole savior of Apple, it is not completely true. Apple was a niche player until the Blueberry Macbook and Bondi Blue iMac. These were introduced well before the iPod. The colors got a lot of attention and Apple finally got some attention from consumers, especially in education. My kids wanted them right away because we were all tired of the IBM professional "beige".
Later, it was the "Titanium" Aluminum laptop that got even more attention by professionals.
iPod, unlike Pre, did not receive favorable press upon release. In fact, most media type expected iPod to fail. When iTune came out, I read and heard laughters about how it would take a hundred years to make a million using iTune. Pre has had much more favorable press than iPod ever did.
While iPod slowly earned its way into consumer's hands, Apple was continuing to sell its colorful Mac's and evolving the Mac offerings with a new OS, the OS/X.
So while iPod gained traction, Apple was selling other products and gaining market shares in other areas and generating revenue and profit. iPod was not the sole money maker at the time.
Palm has no such luxury, it has only the Pre. Pre has to take the market by storm in the next 6 months for investors to want to put more money into Palm.
Apple got $150 million by selling AAPL at market value to Microsoft, Office for Mac for at least 5 years and cross licensing with Microsoft for also 5 years.
Microsoft got the suit dropped, IE as default browser on Macs, and cross licensing with Apple for 5 years.
This was their win-win. Microsoft sold the last of this AAPL in 2004. Even at that time, the gains were in multiples. The $150 million investment was not so much infusion of capital as it was infusion of confidence to a "beleaguered" Apple. Office 98 for Macs, continued IE development on Macs and the 5 year cross licensing agreement also served that role.
The rest of rebuilding Apple was up to Apple. And yes, iPod was a great success for the company. It was their effort in a market that did not take off on its own. And certainly, it was an effort not foreseen and executed by anyone else. But it was not just the device. The integration with iTunes was the key to its success. Much like HW is limited without good SW, the new model is HW driven by SW supported by service. No one were able to integrate it like Apple. They've all tried in the late 90s and early 2000s but failed miserably. This new HW, SW, service model continues with iPhones. When 3.0 is released it will extend this model to include HW extensions.
Here's an interesting pattern. Many people states that what Apple brings has already been done. This is true elementally speaking. MP3 players, Music stores, Smart phones, 3rd party mobile apps and some 3rd party hw extensibility for mobile devices did exist before Apple's entry into the market. But ultimately, they are not reaching the wider market because of poor integration and usability. I think history shows that Apple has often integrated all of it and made it into platforms that work. That's just not because of a single device like the iPod. Many of Apple's competitors often fail by executing elementally like this.
On May 21 10:15 AM Anthony C wrote:
> How soon we forget that mighty Apple would have disappeared about
> a decade ago if it wasn't for an infusion of funds from none other
> than Microsoft! And what saved them after that desperate measure?
> A single product: the iPod. If the iPod hadn't become a hit I think
> that Apple would have become just another PC clone maker. Palm has
> the opportunity to make a big recovery and looks like the Pre is
> a device to do it for them. Palm is not dead, they are just Apple
> 12 years ago.
with the initial restriction to USA Sprint users only, the Pre is instead going directly against the other Sprint smartphone options - RIM, WinMobile, Nokia, Android, etc. this is the battle it has to win to survive this year. it is only competing with Apple for the smaller market fraction of likely "switchers" to/from any telco, but that is a side issue for it in 2009.
Palm is very happy, tho, to see all the iPhone vs. Pre write ups in the press like this one. because that gives it tons of free publicity that it needs to make a real market impact. it can't afford to buy its own. that's why it will release the Pre two days before Apple's WWDC next month, to really set up those comparison pieces. and if the Pre gets a lot of positive reviews, that strategy is likely to work.
yes, the Pre needs to sell 8 million units a year - in 2010. but in 2009 it just needs to sell half that to get established, and then expand sales internationally. that should be achievable if it is a good product compared to the other non-Apple 2009 smartphones.
on price, the rebate approach is a drawback. but Sprint apparently has chosen to compete instead on the monthly service plan cost, pushing that down somewhat. over the lifetime of the contract that is a notably bigger number of course. we'll see how the market responds to this approach.
if the Pre with its apps is a good consumer product - we don't really know yet - it has a good chance because the smartphone market outside of Apple and RIM is really up in the air. and if it expands its availability in 2010 internationally and then to other US telcos, Palm actually could come back from near death.
as to stock prices, that is all BS speculation gaming anyway. i'm amazed anyone still thinks the short term market is anything more than that.
Why bring up the Zune? it's basically a side business for MSFT whereas PALM is 100% in for WebOS....that's right detractors, something of a hail mary. Notice though I said WebOS, not Pre. I've also seen a lot of concentration on valuation and PALM '09 sales. Going only by that it's definetly a tall order but is it a foregone conclusion that PALM only has a year? Does anybody subscribe to the notion of valuation based on PEG? (three or five year?) Everybody's basically whistling in the wind as we don't have enough pertinent tangibles to work with yet, but if you're objective I would think you have to admit that the circumstantial evidence is very positive. Is Elevation Partners stupid enough to invest hundreds of millions and expect to recoup their investment within 3 years and if not by then lose it all?
Let's not go overboard with the speed issue. It's about usability, once you get to a certain point it doesn't matter for most tasks - if you're trying to bit torrent on your smartphone I say get a life!
Sprint will be first to market but will have a small window of speed "exclusivity". Again though USABILITY, PRACTICALITY. How many of you know that the Kindle runs on the Sprint network? IMHO w\the coming use of the analog TV spectrum Kindle and netbook type devices will be big; consumer devices where the technical details of function are invisible, you just turn it on and do what you want to do.
btw WebOS has been built from the ground up to run on mobile devices and mobile processors. I may be wrong, but isn't iPhone 3.0 an incremental release of a mobile OS derived from a desktop OS?
On May 21 09:41 AM Aryamehr wrote:
> One thing you fail to mention is the Pre's ability to function on
> 4G platform, which is 10 times faster than 3G. ATT according to
> the pundits will be lucky to have a fully funcitoning 4G platform
> before 2012. Now tell me how Apple will counter that when it is
> constrained to ATT?
I agree with CGP no one can accurately predict what will happen with the Pre but one thing is for certain Apple will not have its way forever with the Iphone. If Palm fails someone else will take up the fight as this one (excuse the pun) is not a sprint but a marathon!
On May 21 08:29 AM JamesApple wrote:
> Pre will be one of many blackberry-killers. As smartphone sales skyrocket,
> people will adopt more superior offerings like iPhone, Nokia and
> Pre, HTC etc, inferior and giveaway blackberry will die.
Elevation Parners reminds me of typical Palo Alto VC. Yes, these people will sink millions into a company AND expect a return soon. Three years to see a profit sounds about right.
If they behave like normal VC, they will be watching the Pre launch like a hawk and soon decide whether to continue as is, seek more control in the company by forcing changes, or sink in more money happily or start agitating for a sale of the company. One or all of the above can happen quickly or slowly depending on Pre sales.
The end result is how well will Pre sell. Pre is a nice device with a nice UI that does a set of tasks very well. I personally think it will sell well but "well" is undefined :-).
I disagree with the many wrong and misleading claims such as WebOS is "revolutionary" or an "Advanced" OS or "new" and thus better than everyone else, that "Multitasking" is so special, that "Sprint" is light years ahead of others in speed and on and on.
No, WebOS is not revolutionary, advanced or new, it is Linux based. Separate the OS from the UI.
Multitasking is not new, nothing special, RIMM, WinMO and even iPhone do it, it is a matter of what is allowed to multi-task on a device.
Speed is Sprint's to tout for now but ATT and VZN are catching up so that is not going to make Pre any more than what it is.
So let's see the Pre for what it truly is, a handheld device with a very good communications and life-data integration UI, period. Many people who care about these types of applications will love the Pre and they will buy it. If it sells 8 million in 12 months, that will be fantastic because Palm will have made it back but let's just not go all crazy hyped.
iPhone is clearly NOT the best phone out there for everything. It is puzzling to see posts where people seem to either think RIMM is it or Pre is it or iPhone is it or WinMo is it or Nokia is it. No folks, nobody has a monopoly at this time.
Nokia only owns 40+% of the market, not even half. RIMM only 19+%, Apple only 10% and everyone else owns the rest. No one has the numero uno, uber alles, "bestest in the universe" device.
So posts that tout any one device as the best will always garner opposing views :-). The only way to have meaningful discussion is to provide facts and be objective.
In the long run will we continue to purchase separate music players and phones or have one all in device? Or will we have a high end smart phone with a smaller music player for the gym?
So do we buy iPod or Zune and then iPhone or ZuPhone? I don't think so. I think a smart mobile device will begin to tighten its integration based on user patterns. Smart mobile device is actually very practical tools. It can be a calculators, a compass, a music box, a decent camera (still worse than SLR's), a passable video camera, a communication device (voice, mail, text, location), multi-media display (news, sports, movies, educational material), universal translator, scribe, scratch pad (bigger screen), etc.
As miniaturization becomes more advanced, it may even become possible to have dedicated (isolated) audio, video/graphics, GPS and other chip set for ultra-high-end capabilities. Such a device can theoretically play music in the background while you play some sophisticated multi-person game connected to other devices miles away. THis becomes something smaller than a netbook but as powerful as a laptop. Give us 10 years :).
There are many human activities that are possible and feasible on a hand held device. The keys are CPU, RAM, power and software capabilities (OS, UI, App framework). Whoever can come out with a low-consumption high performance CPU with meaningful amount of RAM (1G ?) and an efficient but powerful OS that supports a powerful and easy to use application framework and UI doctrine will be the first device and company that begins to dominate.
Who is best positioned today (one bird in hand) to do that :)? RIMM? Palm? Nokia? Microsoft? Apple?
Who will be left in three to five years? :)
We will see.
Palm first year sales target has to beat the 6m first generation Iphones Apple sold in their first calendar year. Trailing 4 quarters they have sold 12.7m Iphones (all from Gartner).
So expecting Palm to hit a target of 8m in their first year is perhaps a tall order.
On May 21 10:15 AM Anthony C wrote:
> How soon we forget that mighty Apple would have disappeared about
> a decade ago if it wasn't for an infusion of funds from none other
> than Microsoft! And what saved them after that desperate measure?
> A single product: the iPod. If the iPod hadn't become a hit I think
> that Apple would have become just another PC clone maker. Palm has
> the opportunity to make a big recovery and looks like the Pre is
> a device to do it for them. Palm is not dead, they are just Apple
> 12 years ago.
Step 1: Listen to heavily biased apple fanboy nonsense.
Step 2: Short stock cause palm = lolz
Step 3: ???
Step 4: Profit!
I think Palm has played safe and gone for a small production run as it seems that there will be shortages from day 1 - tinyurl.com/o8svvu
On May 21 09:41 AM Aryamehr wrote:
> One thing you fail to mention is the Pre's ability to function on
> 4G platform, which is 10 times faster than 3G. ATT according to the
> pundits will be lucky to have a fully funcitoning 4G platform before
> 2012. Now tell me how Apple will counter that when it is constrained
> to ATT?
<<No, WebOS is not revolutionary, advanced or new, it is Linux based. Separate the OS from the UI. >>
- I may be wrong but wouldn't a good UI benefit from a well designed and integrated OS? Wasn't Unix originally designed by AT&T to run on terminals and clients that depended on a central server for processing - the original cloud/thin client? (not sure about the WebOS to Unix connection so I'll check)
<<Elevation Parners reminds me of typical Palo Alto VC>>
- Do you have more specific insight into Elevation? Roger McNamee?
<<If they behave like normal VC, they will be watching the Pre launch like a hawk and soon decide whether to continue as is, seek more control in the company by forcing changes, or sink in more money happily or start agitating for a sale of the company. One or all of the above can happen quickly or slowly depending on Pre sales>>
- OK, already assumed for any VC, but from web videos and what I've read (internet and earnings transcripts) 2010 is a midpoint, not the end. The possibility for failure is open but imho a positive outcome is more probable (define that as you wish; loosely I'll say make a few bucks, investors and Palm, and a competitive smartphone market). If there's dilution, OK, it means Palm has prospects. If they're sold, OK too, Palm lives on with bigger pockets backing them. Maybe a partnership?
<<The real issue is does Palm have enough cashflow to pay those Far Eastern supliers and then wait for Sprint to pay them?>>
I agree, cash flow is key, if Pre launches well the upper limit on sales would be their ability finance and produce to keep up with demand. I'm thinking though that this water torture is built into their plan, out of necessity and marketing design, hopefully it doesn't blow up in their faces. Also seeing the Gartner #'s, isn't the underlying assumption Palm has a lot of room to grow w\o having to take share from the major players? assuming they can make it through 2010
Critics hated the Zune.
The Zune had poor software. It did not have the iTunes experience. The Zune market sucked big time. It was not better than the iPod by a long shot. It doesn't even compare. The iPod wins.
Please provide the survey links showing Sprextel has better service than any other carrier so we can all verify, as everything I've seen from reputable sources (again; RCR, Wireless Week, JD Powers, etc.) say different.
Well, to be accurate... There is NO 4G chip in the Pre, it can NOT do 4G at all. Actually, Sprint's product description reads "3G speeds where available".
The cheapest AT&T plan is 70 USD and the cheapest Sprint plan is 70 USD (but includes texting). For somebody like me, not sending text messages ever and normally talking less than 100 minutes per month, savings are zero. Considering vacations and working abroad, the absence of roll-over minutes might even make it more expensive.
On May 30 09:01 AM Aryamehr wrote:
> In case you didn't know, the Pre is designed to work on Sprint's
> 4G platform and is much cheaper than the iPhone, $50/month, which
> is $1,200 over the life of the two year contract. Great deal! a
> better phone than the iPhone, a 4G platform compared to ATT's 3G
> and $1,200 cheaper.