Palm CEO puts his cards on the table


Former Apple exec Jon Rubinstein remains committed to Palm’s success, even as takeover rumors swirl.

But sales disappointed, first with Sprint, then with Verizon, which offered customers Motorola’s Droid – which runs Google’s Android operating system – before Palm’s Pre and Pixi. Palm’s holiday sales were weak, and its financial guidance has been cautious, sending its stock below $4. With investors and industry pundits doubting Palm’sability to survive, Rubinstein sat down with Fortune’s Adam Lashinsky to discuss why he’s still bullish on Palm’s future. Maybe it’s muscle memory from his Apple (AAPL) days, but Rubinstein is committed to the idea that outstanding products will eventually carry the day.

The conventional wisdom is that Palm has blown it and either is going to run out of money or get sold or both.

Clearly we’ve hit a speed bump. No question about it. It’s really disappointing, and it’s frustrating. But, the company has tremendous assets.  We’ve got a great team we’ve built over the last couple of years.  Remember this whole thing was a transformation story.  It  wasn’t like we took something that was working and didn’t run it well.  We started off with a company that had no future, and we have been transforming it. We have arguably the best mobile operating system out there. It’s clearly the easiest to use and has the most intuitive user interface. We’ve got good products that get critical acclaim.  It’s in its early stages still, but we’ve got great quality of apps, and new apps coming all the time.  By the time you get this published, we’ll have commerce going in Europe, which is a big milestone for us.  We’ve got good relationships with carriers.

We’ve got all those things going for us, and what we need to do is get more commercial success and get to scale.  And that’s going to take longer than we’d hoped, obviously, but that doesn’t mean we can’t get there.  We do have $590 million in the bank, and we have a plan that carries this company forward. Now, we need to be frugal and we need to invest in those areas that have the best return for us, but when I read that we’re going out of business or our stock is worth zero or those kinds of things, it defies logic to me.

So let’s talk about some of Palm’s issues, starting with you’ve said has been poor execution.

Sure. If you start from the very beginning, remember that we launched a first generation operating system. It always takes a while for an OS to mature.  We’ve made significant improvements on battery life to where today we’re very competitive. We’ve made significant improvements on performance. Both those things were issues in the very early days.  When we came out of the chute with Sprint (S), there were a variety of hardware issues.  Those are all behind us now, and the quality of the product is really good.

With the Verizon (RIMM) Blackberry and a tremendous amount of effort and energy training on Droid. They got this third new thing which was just completely different and didn’t know what to do with it. So we very quickly pulled together a brand ambassador program, and sent our people into the Verizon stores to train them on webOS and on Palm products, and they’re going into a couple hundred stores a day and working their way around the country right now.

Didn’t you just encapsulate what one of the fundamental challenges for Palm?  Verizon alone had three years of experience on RIM, they spent a significant amount of time on Droid, and their salespeople have to learn to sell Palm.  Is there room for the third player?  Moreover, Verizon’s salespeople aren’t even selling Apple’s iPhone yet.

If you talk to the carriers, they would argue that they have to sell devices from multiple suppliers. They used to put all their energy behind a ‘hero’ device.  They’ve really switched their strategies to wanting to give consumers choice. Lowell McAdams, who is the CEO of Verizon Wireless, gave a talk a couple months ago,  where he talked about how he’s going to have premier devices in each class of device.  And so for the smart phone it was [Blackberry] Storm, Droid, and [Palm’s] Pre, and there were different ones for messaging and different ones for feature phones. That’s fairly typical of what the carriers are trying to accomplish. This is where I think the training is so important in that when someone walks into a store they’re going to ask about the different products, and if they don’t know about our product, then we don’t get a fair shake.

One Wall Street analyst says the [Palm] webOS no longer is a major differentiator because there are enough good mobile operating systems. You obviously disagree.

I would disagree.  Look, webOS, has all the capabilities you’d expect from a world-class smart phone. It does email and messaging. It does Web browsing and video capture.  And then it has some things that most don’t have: capabilities to share and edit video, and immersive 3D gaming.  There’s a whole list of things that you’d expect the top tier to have, and we have those all in webOS. Then we have additional things, like real multitasking. So, if you’re playing 3D games and you want to go check your calendar or email, you can just switch between tasks and come back to your game.  And then if you have multitasking, you really need unobtrusive notifications so that when you’re doing something you can get a notification of what’s going on in the world without interrupting what you’re working on.  We also have a feature called Synergy that gives users the ability to have a single view of their data from various sources in the cloud, from Facebook and LinkedIn and Exchange and Google (GOOG) and Yahoo (YHOO). We have universal search, so you just start typing, which goes back to Palm’s original DNA of really minimizing the number of steps you have to take to accomplish it. And it goes on and on.

Please forgive the downer questions, but here’s another …

That’s okay, go ahead.  I’m bummed out too, by things like not taking off at Verizon.  One of the analysts on our earnings call asked if we had launched when Droid launched, and Droid launched when [we] launched at Verizon, would the story have been opposite?  I said I think we have a better product than Droid, and customers would have been happier with it.

So the question becomes on a number of fronts is, are you too much in the hole?  Aren’t developers, for example, already too busy developing for Apple, Android, RIM and even Symbian to turn their attention to Palm?

We’re not seeing that in working with our developers. Our potential pool of developers is bigger, because I think a lot more people know how to develop a Web site then know how to do embedded development for Symbian, for example.  So, while we don’t talk to all the developers in the world, obviously, and our objective is not to get every iPhone developer or every Symbian developer to develop on webOS.  Our goal is to get really great, high-quality apps on top of webOS, and we find that when we go out and work with the developer, that we’ve had a lot of success with them.

But you’ve got only 2,000 apps to date.

Twenty-two hundred, please.

Points for humor duly awarded. But Apple has about 150,000, and even Android has far more than Palm. If you were to double in a year it still wouldn’t be an impressive number.

Our curve is a lot faster than doubling in a year.

What will success look like?

I’m not going to throw out a number, but I think as long as we’re growing rapidly, that’s what counts, number one. Number two is we really focus on the quality of apps, right?  I mean, if you look at the long tail of the 150,000 or 180,000, or whatever number Apple has got these days, it’s an amazing number. The reality is that it’s the first thousand or so that matter and the rest of it is long tail.

Now, that doesn’t mean there aren’t specialty apps that people want. But there’s also a lot of junk out there. So we’ve tried to do two things. One is we’ve really tried to focus on getting quality apps on the platform.  We’ve also given users an alternate approach to discovery, which we think is really interesting, and developers really like. We have our unique URL mechanism, which gives developers a URL they can Tweet, or Facebook or e-mail or message or build a Web site that has a directory of apps that are particularly interesting to them.  And then you click on that URL, it asks you for your phone number, and you get a notification on your device that says, ‘Would you like to download this app?’

So Palm clearly is a company of interesting ideas. But you have some financial headwind. For example, you’ve had unsatisfactory sales at retail, and as a result you have a lot of inventory sitting out there. Will carriers will be hesitant to order more product if they haven’t sold what they’ve got?

Particularly on that one carrier, Verizon. Yes, I would agree with that. We ramped up production for the Verizon launch and in anticipation of the Chinese New Year holiday, right, and it’s not like we did something weird or stuffed the channel or anything like that.  Verizon is a big carrier.  And they wanted to have certain launch quantities, and they gave us a forecast of what they would want after that. We’re all guessing when we do this. So over the holidays and through early January we turned on the production really, really hard and we pumped a lot of volume into Verizon. When we didn’t see the sell-through we pulled the reins back a bit. Also, Verizon has taken actions.  They changed their advertising, for example. They initially targeted moms, and they switched it to a more broad-based commercial.  They dropped the price of Pixi to $79, and we did a buy-one-get-one-free offer on both the Pixi and the Pre.

Was it a mistake to debut with Sprint in the first place?

Hindsight is always 20/20, but you have to understand that we had a long-term relationship with Sprint. Sprint wanted to do an aggressive launch on webOS.  They were willing to invest significant marketing dollars.   But the quid pro quo for that is that we had to do an exclusive with Sprint. Now, if I sit today and I kind of roll back the clock and go, okay, now if I could have launched in October with Verizon, and done a shorter exclusive with Sprint, and the world would be completely different today, yeah, I mean, that’s easy to say. But you don’t know these things at the time. And Sprint has been a really good partner for Palm.  They continue to be a really good partner for Palm.

It’s interesting: the old Palm was in the penalty box with Wall Street. You got Palm out of the box with a great launch of the Pre at the Consumer Electronics show in 2009. Now you’re back in the penalty box. And the consensus is that your nearly $600 million in cash won’t really take you that far, what with the investments you need to make and the marketing budgets you have to support.

We have a plan that allows us to execute moving forward.  We’re going to have to be frugal. We may not be able to spend the kind of dollars we’d like to spend on things like brand advertising. We’re going to have to focus much more on things like viral marketing as we go forward.

Can you succeed being frugal when the competition is going pedal to the metal spending money and has the resources to do it?

Necessity is the mother of invention, right?  I mean, would I rather have a spare billion dollars to go spend on brand advertising around the world?  Of course I would. But that’s not the reality. So it may take us a while, but we will work our way through this, and we’re continuing to invest very heavily in engineering on both webOS development and on new product development.

There is a way to get a billion dollars, of course, which is to sell Palm to a company that has a billion dollars to spend on marketing.

Remember that the carriers have something to do with all this too in that they get to pick and choose what products they’re going to sell. They want to make sure the customers have choice. As long as we have their support, I think we can succeed.  It may take longer than we’d like, but I think we can get there.

Palm’s strategic thesis has been that even a small share of a large smart phone market would lead to a successful business. Is it possible that the thesis misses the point that it takes massive resources to succeed in this market?

I still believe that there’s going to be likely five successful players in this space.  It’s a huge and rapidly growing market.  And I think that having a small share of that market you can have a successful company. We just need to get up to scale, and that’s our number one goal.  It’s not profitability, it’s to get to scale. When we get to scale the economics of the business completely change. We went through that same thing at Apple, by the way.  I mean, it was a similar situation many, many years ago where you just didn’t have the economies of scale.  And once we crossed over that Apple became a cash machine.

You beat me to the punch line on the Apple analogy, which is that Apple existed and prospered for years and years before the iPhone came along.

Yes, with two and a half percent market share. When I got to Apple the company was dying. We brought out the iMac, and the company was really successful, and then the economy cratered, and we went through a major dip, which took like two years to dig our way out of.  And during that time period we invested very heavily in R&D and Wall Street was very unhappy with us, because the numbers looked ugly.  But then when the economy turned, we had a bunch of really cool products ready to go, the iPod being one of them, and the company quickly scaled up to the point where the economics just made sense.

Do you dispute the analysts who say that the company has about two to three quarters financially to turn around its problems?

We’ve said we have a plan that takes us to profitability.

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