As the handheld industry has emerged, Palm has been the industry leader both in revenue and shipments, but the company is expected to lose its revenue leadership position as early as the second quarter of this year, according to Dataquest Inc., a unit of Gartner, Inc. (NYSE: IT and ITB).
Palm will still have a strong lead based on units shipped, but Gartner Dataquest analysts expect it to lose its lead, based on revenue, to Compaq.
Palm is projected to have hardware revenue of $130 million to $135 million for its fiscal fourth quarter (ending June 1). Handspring recently announced that its fiscal fourth quarter (ending June 30) revenue will be in the $60 million to $65 million range. Compaq is expected to sell fewer iPAQ handheld PCs in the second quarter, but Compaq has a much higher average selling price than Palm or Handspring. Compaq appears poised to assume the second quarter 2001 (ending June 30) PDA worldwide market lead on a revenue basis, with revenue exceeding $200 million.
"A growing portion of new users and users who are upgrading want better messaging capabilities, such as access to corporate e-mail, short message services (SMS), wireless LAN (WLAN) or integration of a PDA with a mobile phone. This is especially true of corporate users," said Todd Kort, principal analyst of Gartner Dataquest's Computing Platform Worldwide group. "As better wireless messaging capabilities have become available, many enterprises are considering large volume purchases of PDAs. Palm has little to offer such companies. Palm is well behind the competition in implementing each of these wireless technologies, and this lack of innovation is a big contributor to its declining fortunes."
Gartner analysts said there has been little improved functionality of the Palm OS software since splitting from 3Com in the second quarter of 2000, and this has enabled Microsoft to catch up with Windows CE 3.0. With Microsoft's next version of Windows CE, code named "Talisker" looming at the end of this year, Microsoft may have the necessary ingredients to make a much stronger play for the corporate market.
"Compaq and Sony are gaining ground in the high end of the consumer market. Meanwhile, the corporate market is slowly swinging toward devices running Microsoft's Windows CE operating system, because of its smoother functioning with Outlook and Office applications," said Ken Dulaney, vice president and research director for Gartner's Mobile Business Strategies program. "Palm remains a solid choice for enterprise use. However, users should not commit to any vendor beyond two years, at which time they should evaluate Palm devices against competing offerings."
For Palm to achieve the level of profitability it enjoyed in the past, Gartner analysts said it must make some changes. It must offer a machine with a new operating system, which is expected by the fourth quarter of 2002, and it must offer a Palm VIIx replacement, which is scheduled for the second half of 2001. Gartner analysts warned that these changes alone will not be enough.
"Palm needs to offer a credible high-end device with features that compare to those offered by Compaq's iPAQ," Dulaney said. "The company should be restructured to at least split hardware and software. Both Microsoft and Symbian are software-only ventures with software growth expectations. Palm is a software company with hardware growth expectations. A split company would permit stockholders to benefit from each entity acting in its own best interests."
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