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Commentary: In the long run, Palm beats Handspring

Handspring's late arrival with a color screen for its handheld computer is not a significant problem, but the company does face other long-term issues.

    Handspring's late arrival with a color-screen handheld computer is not a significant problem for the company because the high cost for color systems had faced limited market interest so far and because Handspring had been targeting the low end of the market.

    See news story:
    Handspring brings color to new organizer
    However, we see the demand for color increasing next year because of applications that can exploit it and a falling price premium for gadgets with color displays.

    Color will become a more important issue in the personal digital assistant (PDA) market as these devices are used for wireless Web browsing and other applications in which color is used to add value to the information or application. This includes both business applications and entertainment-oriented ones, such as games.

    During the past year, the premium for color capabilities on PDAs has fallen from more than 50 percent to about 25 to 35 percent. As this premium declines to a range of 20 percent to 25 percent, large numbers of people will be willing to pay for color because PDAs with color screens do provide more value.

    In the color PDA market, the Windows CE operating system has provided high-resolution, full-color capabilities from its inception. Palm had long contended that color was of no significant value in PDAs. However, we believe this stance was driven by the fact that the original processor used for the PalmPilot could not support color. As this has changed, Palm has added color, though at a lower resolution compared with Windows CE systems. Handspring, which uses the Palm OS, closes this gap.

    Still, Handspring faces other significant long-term challenges. The company's primary problem is its use of nonstandard technology.

    Other PDA makers, such as TRG, Hewlett-Packard and Compaq Computer, are providing industry-standard compact flash ports to enable people to add compact flash memory, a modem, a bar code scanner and other cards to their base units. But Handspring has chosen to develop its own Springboard technology instead.

    Although Springboard technology may be more technically elegant in some ways, the fact that Handspring is alone in using it limits the market and raises the effective cost of peripherals. Upgrade options are also limited.

    For example, Handspring chose to use a serial port on the bottom of the unit that differs from the Palm serial port, which is the de facto standard. This means that Palm owners who buy a Handspring Visor must replace their clip-on keyboards, modems and other hardware devices. This quickly raises the price of the switch, giving Handspring a disadvantage in the replacement market.

    In the low end of the PDA market, where Handspring has priced its Visors lower than comparable Palm systems, Handspring's proprietary model has not been a major issue. This market segment has not generally been interested in add-ons such as a keyboard, modem or camera.

    In the high-end market of color PDAs that Handspring is now entering, however, people want more than basic software for personal information manager (PIM) functions. In addition, the peripheral issue will loom large.

    Moreover, we expect even the traditional low-end consumer market to become increasingly interested in peripherals. Springboard-based modules often cost as much as the PDA itself, eliminating much of Handspring's cost advantage vs. Palm when people look at complete systems.

    Regardless of whether Handspring's claim of superior technology is justified, many consumers and vendors do not take proprietary nonstandard platforms seriously because they do not have enough critical mass to sustain a market.

    We recommend that corporate users standardize their use of color-screens PDAs in 2001 as the price premium drops to 20 percent vs. monochrome systems, particularly if the devices will be used for more than PIM functions. And people comparing Palm and Handspring systems should choose the former because of its larger market share, control of technology, and standard platform strategy, which enhances upgrade options.

    Meta Group analysts David Cearley, Jack Gold, Dale Kutnick, Peter Burris and Val Sribar contributed to this article.

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