PalmOne plans to make its mark in the smartphone arena with Treo

Rethink IT, June, 2004

PalmOne has launched its first products since splitting off its software arm, now PalmSource, amid depressing figures for the non wireless PDA market. The new models are both in the consumer oriented Zire range, which is propping up the traditional PDA business for Palm, even as it looks for real growth to the smartphone unit acquired last year with Handspring.

PalmOne is uniquely dependent on maintaining as much momentum as possible behind its traditional range even as the market starts to Falter. Its main rivals either count PDAs as relatively minor items that serve to fill out a broader range, as Hewlett-Packard does, or are shifting to a software model to counter pressure on devices, as RIM and Good have done. With PalmSource spun off, PalmOne needs to maintain its market share in conventional PDAs and pin its hopes on the smartphone boom.

So far it is having some success--in a market declining by almost 12% year-on-year in Q1, to just 2.2m units, it is at least retaining its marker lead, with 36.1% share in the first quarter of this year, according to IDC, ahead of HP on 25.7% (although this lead is narrowing, down from 39.2% in Q1 last year). It expects sales unit growth of 4-10% this year, the upper figure boosted by Europe. This is less than HP, which saw first quarter sales rise by almost 25%, but healthy compared to third ranked Sony, with a sales decline of almost 50% and market share under 10%.

VITAL FOR THE FUTURE

But the Treo is viral to continuing growth--worldwide, it is now PalmOne's best selling model and its 37% growth balanced a similar decline in sales of other devices. But PalmOne cannot defocus on the standalones yet--in Europe, 75% of revenue is from traditional PDAs even while the Treo is the best selling single product.

The Zire launches show that PalmOne is becoming more focused--in past years, it has often launched a whole range of handhelds in its spring collection, whereas this time it showed just two, and none in the high end Tungsten range, reflecting the shift of resources to Treo, which will gain new models later this year.

The new models are the Zire 72 and Zire 31, the latter priced at only $149. The 72 is the first in this entry level range to feature wireless connectivity, although only Bluetooth, plus a built-in camera and audio/video capture. The Zire is the Fastest selling PDA ever, with 3m shipped in less than two years, but it has razor thin margins. It is important to PalmOne for retaining volumes and market share and for penetrating the low end market, one that may eventually upgrade to Treos.

Since only 5% of Europeans have a PDA, PalmOne believes there is still a significant first-time user market seeking to replace paper, something that the smartphone does not yet easily do. The company is also following the other main user of PalmOS, Sony, in "expanding the concept of personal information" to include video and possibly television.

At the high end, the weaker focus on Tungsten also reflects how the enterprise is shifting to Microsoft-based devices, throwing PalmOne back on the consumer market and its smartphone hopes.

SMALL FISH IN A LARGE POND

All this points to the Treo as the critical product, but of course, it is a small fish in a pond where giant sharks like Nokia are circling, with their massive R&D budgets and well established relationships with carriers. Those relationships are often fraught though, and Vesey Crichton, head of marketing at PalmOne Europe, believes smaller vendors can take advantage of the operators' suspicion of both Nokia/Symbian and Microsoft by providing a more carrier-friendly approach (for which read greater control for the operators).

The differentiators on which Treo will pin its hopes for carving out share alongside Symbian and Windows handsets center on its usability. The Palm interface is geared to maximum usage with its simplicity and its easy synchronization with PC applications, therefore ARPU tends to be high on Palm handsets. According to Orange, the only current European operator to carry the Treo, ARPU is 140 [euro] for the 600 model, compared to g 120 [euro] for a Sony Ericsson P800/900, 100 [euro] for a Microsoft SPV and 40-50 [euro] for a basic cellphone.

Also, Crichton points out, operators know that there is an installed base of 20m Palm users and developers, who are tomorrow's smartphone users and may be keen to migrate to a Familiar environment. One operator says that 50% of Treo buyers have come off another network because they specifically want that device and interface--an advantage that, of course, Microsoft shares.

THE BEST OPERATING SYSTEM

Which brings us to the question of operating systems. PalmOne has no contractual obligation to its former sister company's software, though so far it has not brought out a non-PalmOS model. However, it does have the luxury of being able to go where the market dictates. "For each device, we do go through the exercise of figuring out the best operating system for that device according to the usual criteria," said Crichton.