SUNNYVALE, CA - Palm Inc.'s death knell has been rung over and over -- on Wall Street, in headlines, and by a growing number of discontented fans.
Whether on death watch or not, the smart phone pioneer is struggling. Palm has been pummeled by deep-pocketed rivals and maimed by missteps, and it remains shackled to an aging operating system.
The Palm OS has fallen behind others in user-friendly features, and the company's vital signs are taking a hit. Palm said Wednesday it expects to see a loss of 1 cent per share or break even for its fiscal quarter ending Aug. 31.
If the company is to succeed even as a small player in the fast-growing industry, analysts say it will have to act deftly.
"They can hang on for a while longer," Gartner Inc. vice president and analyst Ken Dulaney said. "But they really can't afford many more mistakes."
High profit margins and the growing popularity of phones that are Swiss Army knives of data, voice and Web capabilities have drawn intensifying interest from rivals ranging from phone giants like Nokia Corp. and Samsung Electronics Co., to tech titans like Apple Inc. and Hewlett-Packard Co.
As competitors trotted out sleek new smart phones over the past year, Palm veered little from the once-beloved but now-bulky design of the Treo 600, which debuted in 2003. Others adopted software platforms aimed at today's multimedia multitasking culture, but Palm has been relying mainly on an operating system that has seen only minor revisions over five years.
Officials at the Sunnyvale-based company acknowledge the Palm OS's underlying architecture isn't agile enough. The software, which languished amid ownership switches first from Palm to a spinoff and now to Access Co. Ltd., can't handle voice and data functions simultaneously, thus leaving some users wondering why their Treos, for instance, can't toggle seamlessly between a phone call and video playback.
Palm is building a new operating system based on Linux, but it's a huge undertaking and nobody knows yet how it will stack up. In fact, the company recently canceled its much maligned Foleo, a laptop-like gadget, to shift resources to the next-generation platform.
"They have a lot of work to catch up from being behind for 18 months," Dulaney said.
Meanwhile, Palm is banking on continued sales growth of its Microsoft Corp. Windows-based models, which debuted in 2006. But analysts say that operating system also has shortcomings, and Palm must differentiate its products from other smart phones using it.
Palm's profits plunged 43 percent to $15.4 million in its fiscal fourth quarter, which ended June 1, even though it posted record Treo sales of $344.2 million. In comparison, longtime rival Research in Motion Ltd., maker of the BlackBerry, saw income surge 73 percent to $223.2 million for the same period.
Unless Palm delivers more compelling products and the brand regains its cachet, analysts predict the company will continue to get squeezed. The worldwide smart phone market grew 23 percent in the first quarter, but Palm's slice stayed at about 3 percent while RIM's increased from 3 percent to 5.7 percent, and Nokia's grew from 48 percent to 52.6 percent, according to Gartner.
"They had one great product -- the Treo -- and they've never been able to follow it up," said Jeff Embersits, analyst at Shareholder Value Management.
Palm first made its mark a decade ago in personal digital assistants, or handheld computers, before turning its focus to smart phones. But while Palm sifted through management changes, rivals like RIM only grew stronger and locked a foothold on the corporate market.
Competitors armed with large marketing budgets and manufacturing efficiencies then swarmed in, targeting consumer segments where Palm had a loyal following.
Motorola Inc. and Nokia were each rumored in the first half of this year to be interested in buying Palm.
"It has gotten a lot more competitive in the last 12 months, and we have to redouble our efforts," Brodie Keast, Palm's senior vice president of marketing, acknowledged.
In June, the company laid off about 8 percent of its workforce.
British cellular operator Vodafone Group PLC, Microsoft and Palm jointly spent $30 million this year marketing Treos in Europe. But sales so far have fallen short of Palm's expectations, and Lehman Brothers analyst Tim Long predicts Palm will lag farther behind rivals in Europe as well as at home.
Adding salt to Palm's wounds, Apple proclaimed last week it sold a million iPhones in its first 74 days in the smart phone market. Palm has yet to sell that many Treos in a quarter.
Seeking "a change in dynamics," the company signed a deal in June to sell a 25 percent stake to private equity firm Elevation Partners. An impetus, Palm President and CEO Ed Colligan said, was to get Jon Rubinstein, the former head of Apple's iPod division, to join Palm's ranks.
After the transaction closes, Rubinstein will become Palm's executive chair, and his associates at Elevation -- former Apple chief financial officer Fred Anderson and veteran Silicon Valley investor Roger McNamee -- will become board members.
It may take 18 months before the public sees results from the management changes, Colligan estimated. That's partly because Palm's product roadmap was set before the deal.
But, "we haven't been sitting on our hands," Colligan said, adding that "it's still early in the market."
Palm unveiled last week in Europe a slimmer Treo 500v -- its first significant hardware revamp in five years.
A similarly thinner model dubbed the Centro is also expected to launch soon in the United States. Long echoed other observers in calling it an "evolutionary improvement ... rather than a major step forward."
"Palm really would have to knock it out of the park to succeed," said Hugues De La Vergne, analyst at Gartner.
