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Reading, writing, revenue for PDAs?

Handheld makers are turning to the education market for a little financial aid--none more ravenously than PalmOne.

When the Newport-Mesa Unified School District was awarded federal funding for classroom technology this summer, adminstrators took the unusual step of buying handhelds instead of PCs.

With the price set at about $200 apiece, the school was able to purchase 1,100 PalmOne Tungsten E devices--meaning that it got many times more handhelds than the number of desktop computers or laptops it could have afforded. Early next year, it will begin to hand them out to some students and teachers to see if the devices can improve student learning.

"We wanted a tool that we could put into everyone's hands," said Steve Glyer, the director of educational technology for the Southern California district.

Handheld makers who are looking for a shot in the arm are increasingly turning to the education market, much as Apple Computer targeted schools two decades ago. If they're successful, they could help cushion flagging sales with a dependable source of publicly funded customers, while seeding future demand among generations of high school graduates.

Interest in handhelds among educators comes as overall sales for the industry have declined in recent quarters, raising a cloud over the mass market prospects for devices that have caught on primarily among the technology elite. In the second quarter, worldwide handheld shipments were down 10.7 percent, to 2.27 million units, compared with the same period a year ago. That quarter is a traditionally slow selling season, but shipments in the first quarter were also down--more than 21 percent, according to IDC.

And although many in the industry continue to see the business world as their biggest opportunity, corporate adoption has been slower than expected. At the same time, handheld makers are beginning to face increased competition from "converged" mobile phones, which combine organizer functions with phone capabilities.

The industry's woes were highlighted this week with the merger of pioneers Palm and Handspring into PalmOne, and the creation of a new company called PalmSource, which will develop and license Palm's operating system. (Before its merger with Palm, Handspring had already shifted its bet from traditional handhelds to combination devices.)

Although demand for handhelds has been slowing overall, PalmOne and others are beginning to see encouraging signs for growth in grade schools and high schools. In fact, if analysts' projections pan out, schools could soon represent a sizable chunk of the total handheld market.

"Handhelds should certainly be a part of the increasing emphasis on using technology to improve learning," said Jeanne Hayes, president of educational research and data firm Quality Education Data (QED), which tracks technology spending in schools.

U.S. public schools spent just $9.5 million on mobile devices for the 2001-2002 school year, even as it spent $5.1 billion on technology overall, according to research firm IDC. However, new lower-cost, more powerful devices, along with a push to develop software, are starting to ease educators' concerns and open up the market for device makers.

These factors have analysts projecting potentially significant growth in the coming years. For the 2003-2004 school year, spending on mobile devices among public grade schools and high schools is expected to reach $42.7 million and, by 2005-2006, nearly $310 million, according to IDC.

PalmOne aims for the top of the class
All handheld makers stand to benefit from the trend. But none is eyeing the nascent education market more ravenously than market leader PalmOne. During the quarter ended Aug. 29, shipments for its predecessor Palm were down 21 percent compared with the same quarter a year earlier, to 645,000 units.

Prices have been recovering somewhat recently, but Palm, before its split into PalmOne and PalmSource, had seen revenue drop about 44 percent over the last couple years, from $1.56 billion in fiscal 2001 to $872 million in fiscal 2003.

Entering the education market would likely help the handheld industry and PalmOne the way it helped desktop computers and Apple, the company credited with creating the first consumer handheld computer, the Newton, in 1993.

Adding the faithful book bag crowd would give a boost to the company, as it waits for the slow-growing briefcase audience to start buying. The move nuzzles into the warm and fuzzy feeling of helping students, teachers and schools, but it's also good business, analysts said.

"Once you're established in this community, there is a very high degree of loyalty--it's yours to lose, once you're in," said Ray Boggs, an analyst at IDC who covers technology for the education market.

To be sure, the formula isn't foolproof. Apple has seen its share of the public school market steadily decline in recent years in the face of competition from Dell and other contenders. Dell now ranks as the top-selling PC brand in public grade schools, with slightly more than a third of the market, followed by Apple, according to QED.

Analysts cautioned that signs of an uptick in school handheld sales are still early, noting recent resistance among education technology buyers.

"There haven't been a lot of accelerators, but there have been a lot of inhibitors for mobile devices in education," IDC analyst Kevin Burden said.

PalmOne is looking to replicate what Apple and its education program did--help popularize computers with students and vault itself into the top market share spot in the education market for many years. (As fate would have it, Steve Jobs, Apple's co-founder and CEO, had at one point coveted Palm and its technology.)

Among other things, PalmOne has hired Apple's former education head to lead its own school marketing. Those efforts include underwriting research that's aimed at validating the use of handhelds as teaching tools. In 2000, Palm spent $2.3 million on a study research firm SRI International conducted that found that handhelds are more suitable than PCs for in-class instruction.

In a marketing coup last month, U.S. Education Secretary Rod Paige highlighted a handheld-assisted reading program at Wagon Mound Elementary School in New Mexico as one of four notable school technology success stories.

To capitalize on its momentum, PalmOne has developed low-priced products that have features likely to appeal to educators.

Those efforts were capped by the recent introduction of two new devices, the $199 Tungsten E and the $99 Zire 21, which are a good fit for the education market, because they are less expensive than previous models and come with enough memory or an expansion slot to hold large amounts of data such as dictionaries and tests.

The Tungsten E will be PalmOne's flagship device for the education market because of its price tag and its high-resolution color screen, 400MHz processor and 64MB of memory, said PalmOne's vice president of education, Mike Lorion, who once held a similar position at Apple.

PalmOne has also been working with developers to create applications for the education market and has helped amass about 4,000 applications in about three years.

"Education is a good, available market," said Lorion, who noted that 70 percent of education revenue came from the public grade school and high school segment, with the rest coming from higher education. "It makes you feel good, but you can't just treat it like philanthropy."