Although analysts were dismayed Thursday to see Palm cut its sales forecast for the current quarter, some were more alarmed that the company appears to be retreating from its efforts to launch devices with built-in wireless capabilities.
"This company is so focused on near-term issues (that) every single strategic initiative is stalling: the wireless products, the enterprise and improvements to the operating system," JP Morgan analyst Paul Coster said Friday.
Along with slashing the forecast for its holiday quarter, Palm announced Thursday that it would not debut a wireless handheld with built-in wireless capabilities by the end of 2001. The company had been promising to do so since last year.
In addition, Palm said it has scrapped separate projects with Nokia and Motorola to combine a cell phone with Palm's operating system.
The moves have left some industry watchers wondering exactly what is happening to Palm's wireless strategy a year and a half after the company announced plans to add built-in wireless capabilities throughout its product line.
Palm asserts that its vision remains the same and that the changes are simply the result of short-term necessity in the face of a sluggish market.
Michael Mace, Palm's chief competitive officer, acknowledged Friday that the delay of the product is "embarrassing."
But he asserted that "the strategy is still intact."
Palm not alone
Palm is not the only company pushing back wireless plans. Wireless Web browsing was once touted as the next big thing, but it has failed to gain wide acceptance on today's slow networks. And new networks that promise improved data speeds have been slow in coming amid a general slowdown in telecommunications spending.
The danger for Palm, many analysts believe, is that handheld organizers without wireless access will one day be a small niche at the low end of the market, with the real money in devices that can access data over a variety of wireless networks.
Mace said he still believes that most Palm devices will eventually have wireless capabilities. At the same time, he repeated Palm's contention that many handhelds may not have their own built-in radio, instead relying on short-range wireless technology such as Bluetooth to piggyback on the radio built into other devices, such as a cell phone.
Palm still plans to build Bluetooth capabilities into all its handhelds once the cost of the technology comes down, Mace said. He also took issue with those contending that Bluetooth will be a niche technology, edged out by 802.11 and other wireless networking standards.
Although Palm never formally announced the product it has now delayed, details of a wireless device, the i705 handheld, became known after CNET News.com reported last month that the device had received regulatory approval from the Federal Communications Commission. The unit fits the description of the wireless device Palm had been promising by year's end. It offered access to corporate data and always-on e-mail.
CIBC World Markets analyst Thomas Sepenzis said he understands that Palm doesn't want to introduce the wireless product into the market when demand for handhelds is so low. But he added that it is psychologically important to the market that Palm keep its word.
"I can understand their rationalizations, certainly," Sepenzis said. But "it's frustrating to see them keep crushing expectations."
Investors weren't pleased with Palm's product delay or its new earnings forecast. On Friday, the stock closed down 38 cents, or 18 percent, at $1.77--its lowest close since going public around $95 in spring 2000.
Speculation about cash woes
Some analysts speculate that Palm's cash woes may be at the root of the delay.
On Thursday, Palm said its cash reserves dropped to $321.2 million in its first quarter that ended in August, down from $513.8 million in the prior quarter. Reserves are likely to drop further in the current quarter as Palm expects another operating loss and remains on the hook for some $68 million in canceled component orders.
"In the end, I think the reason (for the product delay) is very simple: They've got limited cash, and inventory is building up," JP Morgan's Coster said. "In order to bring a wireless device to market, they're going to have to buy all the components, assemble them, and build up inventory of the product. I just don't think they've got the capital to do that."
Instead, Coster said, Palm chose this week to introduce a midrange handheld, the m125. Coster asserts that the m125 has little chance of increasing Palm's revenue and could instead eat into sales of Palm's m500, a product that is already building up on store shelves and at distributors.
"I think that was the wrong decision," Coster said of Palm releasing the m125 and not the i705.
Mace disputed that view, adding that Palm is not changing its manufacturing schedule for its wireless device. As a result, Palm is apparently sticking with plans this year to build any planned wireless handheld. Therefore, the only cost savings will come from delaying the marketing of the device until next year.
Though he didn't put a specific time frame on the delay, Mace said it would not be an extended one.
"This is not a six-month slip," Mace said. "It is a relatively small change in the schedule."
Good for RIM?
Coster said that Palm's delay creates a window of opportunity for Research In Motion, which makes the BlackBerry e-mail pager.
"Although it's a horrible market, I think RIM's got an open playing field," Coster said.
However, CIBC's Sepenzis countered that assertion.
"The enterprise market is completely shut down," he said. "Even RIM is going to run into some problems."
Handspring also has built-in wireless products that are close to being ready, although the Treo series appears to be aimed at the GSM (Global System for Mobile Communications) networks, meaning the devices would still be dependent on the launch of GPRS (General Packet Radio Service) to achieve the always-on e-mail capability that businesses are looking for.
Although Mace acknowledged the embarrassment of delaying a product, he said Palm very much wanted to avoid the problems it had this spring when it announced the m500 and m505 well before they were widely available.
"Six months from now, the business will be healthier because of it," Mace said of the decision. "I'd rather take some lumps for making a good business decision than maintain some short-term credibility and screw up the business in the process."