Desperate times for Palm

With sales of the Palm Pre sagging amid fierce competition, financial analysts are starting to wonder when--not if--Palm is forced to give up.

Tom Krazit Former Staff writer, CNET News
Tom Krazit writes about the ever-expanding world of Google, as the most prominent company on the Internet defends its search juggernaut while expanding into nearly anything it thinks possible. He has previously written about Apple, the traditional PC industry, and chip companies. E-mail Tom.
Tom Krazit
3 min read

A sad chapter in the history of one of the computing industry's most storied companies is about to begin.

When you report earnings in March, madness is not exactly the term you would like associated with your announcement. However, that's exactly what is surrounding Palm a day after it reported that its comeback hopes are dwindling as consumers fail to respond to the Palm Pre, Pixi, and its WebOS operating system in general.

Palm Pre
Sales of the Palm Pre have not lived up to Palm's expectations, which is not good when you're counting on the product to save your fortunes. CNET

Palm sold just 408,000 smartphones to consumers in its last quarter. But it shipped 960,000 smartphones to its retail partners, meaning there were more Palm phones sitting on the sidelines during the quarter than were actually sold to real people, well over a year after Palm captivated the tech industry by unveiling the Palm Pre at CES 2009.

There's really no way to sugarcoat this: Palm is heavily leveraged in a fiercely competitive market and unable to generate interest for a well-received product as it burns cash amid mounting inventory. That's a whole lot of bad stuff to deal with at one time.

Palm's stock was down 26 percent in midday trading Friday. Financial analysts are recommending that their clients dump the stock while there's still time. Two went so far as to cut their target price for the company's stock to $0, essentially declaring it worthless.

It's almost like watching a legendary boxer well past his prime summon the will to come out for the 10th round. There's a part of you that's rooting for him to find that spark that's still somewhere inside. There's another part of you that is cringing at the prospect of the beating that's to come.

Elevation Partners, a private investment firm, still thought there was some life left in Palm when it agreed to invest $325 million in the company three years ago and an additional $100 million in late 2008 just before the debut of the Pre. But with a market cap of $695 million on Friday afternoon on a stock price below $5 (compared to $7.71 a year ago and a 52-week high of $18.09), Elevation investor Bono still hasn't found what he's looking for from Palm.

Palm executives are still confident they can turn the ship around, promising to double-down on training programs for sales reps at carrier partners and hinting at a new line of magical products to come.

At some point, however, it becomes clear that this is the beginning of the end for Palm. Mobile followers have long known that consolidation is inevitable in this market: developers simply can't support six operating systems and carriers aren't crazy about subsidizing phones that people don't want.

The company will live on in some fashion: the product is too good, the engineers are too smart, and the brand still has enough life to attract some attention. It would not be hard for a deep-pocketed competitor--a list that includes Apple, Google, Microsoft, Hewlett-Packard, Dell, Research in Motion, Nokia, Sony, and a host of others--to absorb Palm, and you can bet that Elevation employees are currently preparing copies of Palm's financial data for potential buyers.

Palm is one of the most important companies the computer industry has produced. The Palm Pilot introduced the public to mobile computing. The Treo was the logical extension of that idea, providing a glimpse of what might be possible with the Internet in your pocket.

But Palm might be the first casualty of the iPhone. Palm's software, stagnant for years even by 2007 standards, immediately looked pedestrian against the iPhone. And it simply took too long for the company to come up with its answer--WebOS--which even if it was perfect might have been too late.

Palm backers will surely point to other proud companies--such as CEO Jon Rubenstein's former employer, Apple--which dusted themselves off when the world thought they were dead and came back even stronger. The difference is that Apple resurrected itself by changing the game it wished to play, from legacy computers to music, media, and mobile, while Palm is fighting desperately to maintain relevance in a game it practically invented.

When you've toiled to produce your best effort--only to watch interest decline a full year after the product appeared--it's time to reassess.

We're in the middle of one of the most fundamental transitions in the era of the computer: the shift from desktop to mobile. One of the companies that showed the world the way likely won't live to see the end.