Handheld sales down but not out

The slow economy clipped the wings of handheld sales during the second quarter, but not enough to ground them completely.

Worldwide shipments of handheld computers plummeted 21 percent from the first quarter to the second, according to new figures from market researcher Dataquest.

But market researchers Context and NPD Intelect don't regard the quarter-over-quarter declines as grim tidings.

"This is one of the categories that in terms of unit sales and customer interest will continue to hold up in the face of the other horrors we've seen this year," NPD analyst Stephen Baker said Monday.

Handheld sales at U.S. retail did decline 7 percent from the first quarter to the second, NPD noted, but they rose 50 percent compared with the second quarter last year. And in Europe, handheld sales were up 65 percent during the first half of the year compared with the same period last year, according to Context.

Baker noted that the second quarter last year also did not accurately reveal the overall sales trend. "Looking at things on a quarterly basis sometimes doesn't tell the whole story," he said.

At the same time that sales of personal digital assistants (PDAs) to consumers sagged, those to corporations picked up momentum, according to Dataquest.

"PDA vendors that do not have a strong enterprise strategy will miss out on the bulk of market growth over the next year," Dataquest analyst Todd Kort said in a statement.

This shift could hurt market leader Palm while helping Compaq Computer. Compaq's iPaq handheld, which runs Microsoft's Pocket PC operating system and leverages the computer maker's expertise with the Microsoft Exchange Server, is in some ways better positioned for the corporate market than Palm.

"The emphasis on corporate sales into business applications is good for Compaq," Context analyst Jeremy Davies said. "Here is where Pocket PC has the edge."

Until recently, the corporate market had resisted handhelds. But wireless and other capabilities are warming businesses up to these devices, Dataquest said.

"This resistance will subside as users are better able to justify the productivity enhancement offered by PDAs with wireless e-mail and applications that sync smoothly with corporate data repositories," Kort said.

Grim numbers for some
Palm retained its lead in both worldwide and U.S. handheld shipments, according to Dataquest. But the company also saw dramatic declines in market share. Palm's worldwide share fell to 32.1 percent in the second quarter from 50.4 percent in the first quarter. Handspring, which uses the Palm operating system, also took a hit, with its share falling to 10.7 percent from 15.9 percent.

During the same period, Compaq's worldwide share rose to 16.1 percent from 7.8 percent. Hewlett-Packard, which like Compaq uses Microsoft's Pocket PC OS, grew to 6.9 percent market share from 3.7 percent.

Research In Motion, maker of the BlackBerry two-way e-mail pager, saw a slight decline to 4.1 percent in the second quarter from 4.6 percent in the first quarter.

In the United States, Palm's market share dropped to 40 percent in the second quarter from 54.2 percent in the first, according to Dataquest. Handspring maintained its No. 2 position, but Compaq closed most of the distance quarter to quarter.

Handspring's share fell to 17.3 percent from 21.7 percent, while Compaq's rose to 16 percent from 7.4 percent. HP saw dramatic gains, with its market share at 8.4 percent in the second quarter vs. 3 percent a quarter earlier. RIM's market share rose to 8.2 percent from 7.6 percent quarter-over-quarter.

In Europe, Palm's unit shipments dropped 37 percent in the second quarter from the same period last year, while Compaq's grew 917 percent, according to Context.

For the first half of the year, Context said, Palm shipments grew 38 percent in Europe compared with the same period last year. This gave Palm 49.4 percent of the overall PDA market. Compaq followed with a 21 percent share. Psion held 11 percent of the market. Handspring captured the No. 4 spot with 6 percent share. HP rounded out the top five at 5 percent.

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Both Baker and Davies emphasized that Palm's second-quarter declines should not be seen as the end of the handheld giant's market share lead.

Dataquest tracks hardware shipments going out from manufacturers to dealers rather than products actually sold to businesses or consumers. Because Palm started the second quarter with a glut of inventory, the company couldn't ship as many units as competitors. While affecting shipment share, the numbers might not necessarily reflect actual sales.

"Palm wasn't shipping a lot during the second quarter because of all those inventory issues," Baker said. "You have to look at sell through, where sales overall continued to increase pretty aggressively on a year-over-year basis."

Davies agreed.

"There is no doubt in (the second quarter) what Palm called transitional issues hurt unit shipments as they struggle to clear out old models to release new ones," Davies said.

Another sign of Palm's resistance to Compaq's advances was the success of the m505 color-screen handheld released in late May.

"Even though Palm released the m505 right at the end of the second quarter, (the product) was still the No. 4" seller at retail for the quarter, Baker said. In fact, he added, Palm had "the seven top sellers" during the second quarter.

Palm is making dramatic business strategy shifts to recover momentum. In late July, the handheld giant said it would create a separate subsidiary for Palm OS.

But upstart Compaq isn't giving up the chase either. The Houston-based PC maker is preparing a new version of its popular iPaq handheld. And in late July, the company said it shipped 450,000 iPaq handhelds during the second quarter.