Sony to exit key handheld arenas

update "Reassessing" the handheld market, the Japanese electronics giant plans to soon stop making existing Clie models for U.S. consumers and will hold off from producing new models.

Ina Fried Former Staff writer, CNET News
During her years at CNET News, Ina Fried changed beats several times, changed genders once, and covered both of the Pirates of Silicon Valley.
Ina Fried
5 min read
update Sony is scaling back its Clie handheld line and will bow out of the U.S. and European markets for PDAs, and in so doing puts new pressure on operating system maker PalmSource.

The consumer electronics giant, which entered the PDA (personal digital assistant) market in the United States with its Clie in August 2000, plans to continue to sell Clies in Japan. But it will wind down production and exit other geographic areas later this year, as it re-evaluates the handheld market, Sony spokeswoman Kelly Gaffney said Tuesday.


What's new:
Sony plans to scale back its Clie line and exit the U.S. and European markets this year as it re-evaluates the handheld market.

Bottom line:
The surprise move reflects changes in the market for handhelds, as traditional models make way for devices such as smart phones. It also comes as a blow to PalmSource, which makes the operating system for the Clies.

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"Presently, Sony is reassessing the direction of the conventional PDA, and Sony will not introduce any new handheld Clie models in the United States this fall," Sony said in a statement that Gaffney read to CNET News.com. "Product development and sales continue for the Japanese market only. Sony is taking this time to examine the conventional PDA business and how it will transition into the future."

Sony's decision comes as Palm is rapidly losing ground to Microsoft in the PDA market. In the first quarter of this year, market share for the Palm OS dropped more than 20 percent, according to research firm Gartner, with Palm and Windows CE each with about 40 percent of the market. Four years earlier, Windows CE had just 11 percent market share.

The move is bound to create some upheaval in the handheld market, as Sony turns its attention to expanding its Vaio computer brand. Other companies, including Hewlett-Packard, Dell and PalmOne, are sure to fight it out for Sony's stake in PDAs. And PalmSource is left to figure out how to handle the loss of one of its largest customers for the Palm OS. Sony pledged to continue to support PalmSource, but analysts said that the software maker could take a revenue hit nonetheless.

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On the news, PalmSource shares declined about 13 percent.

PalmSource declined to comment on the financial effect of Sony's move but noted that the company's worldwide share of the handheld market has declined in recent quarters. Sony remains the largest outside investor in PalmSource, as well as a technology collaborator, said David Limp, PalmSource's senior vice president of corporate and business development.

Limp said that the traditional handheld market continues to consolidate but that PalmSource sees its growth coming from the market for smart phones--devices that combine the features of a cell phone and handheld organizer.

"We are bullish about the smart-phone market and our ability to lead in that," he said.

NPD analyst Stephen Baker said that the appeal of smart phones is making it tough for high-end organizer devices to compete.

Handheld shifts (chart)

"The big-dollar (handhelds) have turned into cell phone combos," Baker said. "Without all of those pieces, it's pretty hard to justify the price on design and spiffiness alone."

Although Sony added a lot of features to its devices, many of its devices had high price tags.

"It has been attempting to sell $500 to $600, feature-laden PDAs. Those just don't seem to resonate with customers...at least not consumers," Baker said.

Sony will continue to offer tech support and honor Clie warranties. It will also continue to manufacture United States-spec Clies for an undisclosed period of time, Gaffney said. But once manufacturing halts and U.S. inventories sell out, the company has no plans to replenish those stocks.

Sony's standing
After a slow start, Sony rose to become the second-largest seller of Palm OS-based devices and the third-leading seller of devices overall. The company did so through a furious pace of product revisions, often introducing new products twice as often as rivals, and by being first with features like MP3 music playback and built-in digital cameras.

The company, though, had been somewhat slow to move to wireless devices, though many of its newest devices did have built-in Wi-Fi. Sony recognizes that wireless is an important aspect of its business, said Gaffney, pointing to future development in that area, including continued work in its cell phone venture with Sony Ericsson.

Analysts said that although Sony will be continuing in Japan, where its market share is strongest, the decision to pull back from the European and U.S. markets was somewhat unexpected.

"I'm a little surprised Sony would exit, given its strong position," said IDC analyst Kevin Burden. "But it realizes that (handhelds) is not a growth market."

Sony was the third-largest handheld maker in 2003, shipping 1.4 million Clies out of a worldwide market of about 10.7 million units, according to IDC. Although it did not have a breakdown of Sony's unit sales in Japan, IDC research shows the Japan market as a whole only accounted for 484,000 unit shipments in 2003, Burden said. Thus, by exiting the U.S. and European markets, Sony, and by extension PalmSource, are likely to see a major reduction in shipments.

PalmSource was spun out of Palm Computing as part of plans to make the Palm OS more attractive to new licensees. However, the company has seen its base of big-name licensees consolidate, rather than grow.

Palm, meanwhile, acquired Handspring and became PalmOne. One-time licensee Acer is now locked in a contract dispute with PalmSource in which both companies have filed suit against each other.

Sony is PalmSource's second-biggest licensee, next to PalmOne. Last quarter, Sony accounted for 14 percent of PalmSource's revenue.

It's unclear how much the change might crimp PalmSource's revenue. Most of it comes from a license fee for each handheld sold using the company's operating system. PalmSource says that, on average, it receives a royalty of 3 percent to 6 percent of the price that hardware makers receive when they sell a handheld into the channel. So, assuming it was 5 percent, for example, PalmSource would receive $10 from a device that Sony sold to resellers for $200.

"When you look at (PalmSource) licensees, it was PalmOne and Sony as their two hallmarks. It's certainly not good news for PalmSource" to lose a major portion of Sony's business, Burden said.

"However," he added, "when you have an OS like Palm OS Cobalt (PalmSource's latest system software, which shipped to licensees last year) coming out--the idea is that it can be a very flexible operating system and go into devices that won't necessarily be PDAs--we don't know what other types of licensees PalmSource can find."