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Commentary: Reading Palm's future

Palm is banking on licensing fees to boost its revenue, but the company shouldn't expect too much, too soon.

By Abha Garg, Gartner Dataquest Analyst

When does a revenue trickle become a revenue stream? It takes more than one quarter, for sure.

See news story:
Palm to shareholders: We're more than hardware
Palm is banking on fees--from licensing of its handheld operating system, content and access--becoming the path to sustained revenue growth. However, it needs more time--and revenue--before it can accurately tout its chances of success.

Hardware revenue still makes for a huge proportion of Palm's revenues, accounting for 97 percent in Palm's fiscal first quarter, which ended Sept. 1. Content fees joined those from access and licenses to represent just 3 percent of Palm's revenue that quarter. (For the first time, Palm counted content fees, which are comprised of placement fees for Web clipping applications and advertising revenue from AnyDay.com's Web calendar service.)

Nonetheless, with other makers of handheld devices--Handspring and Sony--now selling Palm OS-based units, the trend for Palm's fee-based revenue might be swinging upward.

Handspring, for example, is aiming for the consumer segment and wooing consumers through the Web, consumer-electronics retail chains, and mass merchandisers such as Target. The more successful Handspring becomes in selling its handheld devices, the more licensing revenue goes to Palm. Although it appears that Palm is competing with its licensees for product market share, Palm will benefit through licensing revenue.

As a business strategy, diverting the revenue-growth focus from hardware to operating system usage fees makes sense. As with all new products, prices for Palm-branded handhelds will eventually fall as technology advances. However, competition from Microsoft Windows CE-based handhelds will make inroads against Palm devices.

Although Palm is investing millions of dollars in an advertising campaign to promote its OS, instead of the devices themselves, the marketplace has yet to see concrete steps to support the new strategy. Gartner believes that Palm's long-term success will depend not only on selling more devices but also on a proliferation of devices that are based on its OS and of applications that increase the functionality of a handheld device.

(For related commentary on Palm, see TechRepublic.com--free registration required.)

Entire contents, Copyright © 2000 Gartner Group, Inc. All rights reserved. The information contained herein represents Gartner's initial commentary and analysis and has been obtained from sources believed to be reliable. Positions taken are subject to change as more information becomes available and further analysis is undertaken. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of the information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.

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