The trouble with Palm and its Treo

November 28, 2006, 10:05 AM UTC
Fortune

Palmlogo

Palm’s (PALM) stock tanked about 8 percent Tuesday from $15.37 to just over $14 per share on its news late Monday that its Treo 750 will be late because of carrier issues. That’s got investors (and Treo users) wondering: Is this is just a blip, or is it evidence of a larger problem?

My answer: Both.

The case for the blip is that smartphones are a growth category, and Palm today is in a good position in the U.S. to capitalize. The Palm Treo is probably second only to BlackBerry (RIMM) in its consumer name recognition as a data device, and though other phone makers have recently rolled out a number of low-cost smartphones (such as the Motorola Q), so far they’re not much competition for Palm’s easy-to-use solution.

True, it hurts that the 750 is late; but in the near term the Treo 680 is likely to be the bigger seller for Palm, given that Cingular has chosen to push the subsidized price of that colorful phone down to $200. At that price, Palm will capture a bit more of the professional crowd that might have wanted to dabble with a data device, but couldn’t make the numbers add up between the phone cost and the monthly charges.

But indeed, Palm does have a larger problem: The company is at the mercy of the wireless carriers who largely control when, where for how much Treos are sold. It’s also at the mercy of Access, the Japanese company that bought the Palm operating system many months ago and so far has shown no ability to push it into the next decade. Palm spokespeople have been left to make excuses for why they’re stuck with a spruced-up version of a years-old operating system while Microsoft and Symbian continue to improve their platforms.

Two turns of events in 2007 could save Palm. One would be Google intensifying its push into mobile phone services, thus giving data-centric device makers like Palm more leverage in dealing with carriers. The other would be Access loosening its grip on the Palm OS, and allowing Palm to officially drive the platform’s future.

And what of the talk about Palm as an acquisition target?

There are only a couple of companies that would make sense as acquirers (Hewlett-Packard (HPQ), Motorola (MOT) and Cisco Systems (CSCO) would be my prime candidates), but there’s little reason to believe they’re interested and even less reason to believe Palm management would want to sell. Palm’s history is replete with acquisitions, mergers and splits that did the products absolutely no good at the end of the day (see U.S. Robotics, 3Com, Handspring rift, Palm/PalmSource split). The one merger move that made sense was bringing the founders back when Palm bought Handspring and decided to chart its own course again. I’d be surprised to see the company merge itself into oblivion now.