PDA market could shrink to two players as Sony exits and Dell considers Palm bid

Rethink IT, July, 2004

Sony is to quit the European and American PDA markets, a sign of the decline of this class of devices, and a blow for its operating system partner PalmSource. But shares in the former hardware arm of Palm leapt 12% on rumors that Dell could make a bid. These two moves would reduce the once buoyant sector to two major players, Dell and Hewlett-Packard.

Sony had previously said it would evolve its PDA, the Clie, into a personal video recorder, in line with its strategy of focusing on digital media devices. However, with the wireless Portable PlayStation on the horizon, such a product could be a distraction, and it now says it will review its entire PDA strategy, even in Japan, where for now it will continue to sell the Clie.

"Sony is taking this time to examine the conventional PDA business and how it will transition into the future," the company said.

The Clie has 9.3% global market share but sales of standalone handhelds fell by 12% to 2.2m units, according to IDC, in the first quarter, squeezed between smartphones and ultra-light portable PCs.

Sony is also the second largest licensee of PalmSource's PalmOS, after the software house's former Hardware arm, PalmOne. Even PalmOne has indicated that it is not necessarily wedded to PalmOS in the future, saying it evaluates the best operating system for every new model it produces. Such signals, combined with Sony's decision, spell bad news for PalmSource, especially as the other smartphone platforms gain ground. Symbian and Windows Mobile have more heavyweight support while Palm-Source's clear advantage over those two--its relative malleability in the hands of the operators--is diminishing in the face of mobile Linux.

It seems likely that Sony will withdraw or reposition its PDA in Asia too, although there are dramatic regional variations in the nascent smartphone market. In EMEA in Q1, 60% of high end mobile devices shipped were running SymbianOS, while in North America, the strength of Teen and Sony put PalmOS in number one position with 47%, compared to only 6% for Symbian and 28% for Windows Mobile--also a minor performer in Europe.

In the first quarter, smartphones represented 63% of shipments of high end mobile devices, up from 35% a year earlier, according to Canalys, while standalone PDAs fell back from 40% to 29%. Sony suffered the most from the decline in the North American PDA market, which accounts for the vast majority of its Clie sales, with shipments almost halving year-on-year. This is because the Clie is very consumer focused, so it has not taken advantage of the rise in spending on mobile enterprise devices, but its features, such as MP3 and cameras, are now commonplace on midrange cellphones.

Sony may not be the only contender to exit the handheld market. Toshiba is rumored to be planning to pull out of this game in the US, and there is also talk that Dell could make a bid for PalmOne. This would reduce the PDA race to two players, Hewlett-Packard and Dell, with the latter marginally ahead in share.

A PalmOne acquisition would saddle Dell with two operating systems, at least until it could potentially shift the range to Windows, but it would also bring it a readymade and strong smartphone, putting it several steps ahead of HP which has not yet launched its planned cellular PDA, the iPaq h6300.

The company was keen last summer to move into the smartphone market, but later backed away from its plans, claiming rivals like Nokia would be too strong for it to enter the mainstream cellphone game, although it would continue to add more wireless capabilities to its Axim PDA. Now that the Teen is gaining ground, particularly among carriers and resellers that target business users, Dell may be rethinking its decision.

The problem with the Treo is that it is sold mainly through operators. Dell has built its fortune on direct sales and cutting out the channel and the cellphone business model would sit uncomfortably with its culture. However, with Nokia trying to enter the enterprise market and position the smartphone against the mobile PC, Dell may feel it needs a better defense in a core market than the Axim.