Handheld demand not black and white

While monochrome models are mainstays at the low end of the market, buyers willing to spend several hundred dollars are increasingly opting for color models. This sudden segmentation of the market has not only contributed to the severe woes facing Palm and Handspring, but could make it difficult for the companies to reduce their bulging inventories of high-priced, grayscale devices.

Both Palm's m500 and Handspring's Visor Edge--both of which feature monochrome screens-- have been slow sellers since their launch this spring. On Thursday, Palm slashed the price of its m500 by $70 to $329. In late August, Handspring chopped the price of its Visor Edge by $100 to $299.

UBS Warburg analyst Don Young said in a recent report that as much as 35 weeks of inventory of the Edge may have accumulated between its March introduction and July 1, with August sales not appearing any more promising.

Color envy isn't the only factor hurting the market for pricey black-and-white handhelds from Palm and Handspring. The two also must contend with less-expensive devices that offer similar features to their models.

In late June, Sony introduced the monochrome Clie PEG-S320, a $199 handheld that combines a relatively thin design with expandability through a Memory Stick slot. The unit has apparently been doing well. A Sony representative asserts that it is the No. 3 handheld at retail.

In addition, Compaq Computer recently cut the price its black-and-white handheld, which uses the Microsoft Pocket PC operating system, to $149 after a $50 rebate.

The result of such models is an expectation among handheld buyers that if they are willing to accept a monochrome screen, they should be able to get it for $200 or less.

A Palm representative declined to comment on the company's monochrome sales. Handspring spokesman Brian Jaquet said that although there are still not many applications that take advantage of color screens, the narrowing price difference is making color models more attractive.

"I think you will see fewer and fewer high-end machines go black and white," Jaquet said, adding that over time, color screens will move into midrange machines and eventually into entry-level ones.

"It will eventually be all color," Jaquet said.

Adding to the pressure of justifying an expensive handheld with a black-and-white display is the movement away from monochrome to color displays by manufacturers that are using Microsoft's Pocket PC OS--the rival to Palm's operating system. On Thursday, Hewlett-Packard announced two Jornada handhelds with Pocket PC 2002 that offer displays supporting up to 65,000 colors--the highest number of colors available on handhelds. The models cost $599 and $649, and come with a $50 rebate.

U.S. Bancorp Piper Jaffray analyst William Crawford asserts that Palm and Handspring may need to further discount their priciest black-and-white models or accept significantly lower sales.

"Either Palm brings down the price to $199, or they have to be satisfied with reduced sales of the m500," Crawford said.

He added that it is unclear what long-term effect Sony's $199 Clie will have on the monochrome market. But the model is clearly reshaping the landscape.

"It's either wrecking the market or will dramatically expand it" by attracting new buyers, Crawford said. "But from a competitive perspective, it is hurting" Palm and Handspring.

Part of Palm's problems with the m500 may have stemmed from its initial decision to charge only slightly more for the m505, which came out at the same time and offers a color screen.

"It was certainly worth more than 50 bucks (extra), and that is all they were charging," Crawford said.

As for Compaq and Sony, Crawford said, they aren't as dependent on a single product category, so they can afford to be more aggressive on handheld prices than the likes of Palm and Handspring.

One reason Sony may be selling a unit with so many features for such a low price is that it is trying to push its Memory Stick flash-memory format. The best way to convince developers to create products for the format is to get a large number of Memory Stick-equipped devices in consumers' hands.

Palm is in a similar position to Sony with its handhelds and a flash memory format. Palm is trying to make Secure Digital flash memory a standard. As a member of the Secure Digital consortium, Palm has also been trying to spur other electronics makers to use the postage stamp-size card.

Sony's gains in the handheld market--it has been garnering as much as 10 percent of the retail market in recent weeks--come after a weak start. Sony's first-generation Clie handheld was largely panned because the $399 device was viewed as too expensive and didn't offer any groundbreaking capabilities.

"It was overpriced and underfeatured," NPD Intelect analyst Stephen Baker said earlier this year.

But with the introduction of the first of its new Clie devices--a $499 color-screen device and the first Palm OS-based handheld to play MP3 music files--the consumer-electronics giant's handheld fortunes have changed.