Palm/Handspring Combination Makes For Tough Microsoft Competitor

As growth of new handheld sales and solutions continues to stagnate, the Palm-Handspring alliance offers both companies an opportunity to streamline operations and, at the same time, combine Palm's market-leading PDAs with Handsprings popular Treo Communicator format, analysts and solution providers said.

"This really needed to happen," said Dan Elliott, vice president of mobile technologies at CompuCom, Dallas. "The expertise of these two companies is now under one umbrella."

Elliott said the two companies together provide a powerful combination with Palm's recent Tungsten C Wi-Fi device and the Treo Communicator in cellular wireless. Moreover, they can leverage their strengths to help maintain market share, he said.

Palm announced plans Wednesday to acquire Handspring, a Palm licensee that has been focusing on the smartphone market, for an estimated $170 million in stock (see related story).

Both companies have been struggling in the down market, while Microsoft's mobile group has been weathering the storm as part of the larger, profitable tech giant.

In March, Palm reported a net loss of $172.3 million, or $5.93 per share, for its fiscal third quarter, down significantly from a profit of $2.9 million, or 10 cents per share, during the same period in 2002.

In April, Handspring reported a net loss of $90.4 million, or 62 cents per share, compared with a net loss of $23.6 million, or 18 cents per share, for the third quarter of 2002.

Money was so tight for Handspring, in fact, that at best the company had only enough cash to see it through to the end of the year, according to several industry sources. Handspring's reunion with Palm was really its best option for survival given market conditions, these sources said.

As part of the acquisition agreement, Palm extended Handspring a $10 million line of credit that can be increased to $20 million. Palm declined to comment in depth on Handspring's cash position. But the $10 million can definitely be viewed as "a cushion," said Ken Wirt, senior vice president of sales and marketing at Palm. "I don't know it was the difference between solvency and insolvency."

In addition to capital, Handspring also gets access to Palm's mature channel relationships, particularly in the retail market.

Jeff Hawkins, Handspring chairman and chief product officer, said the agreement with Palm will help Handspring get its Treo Communicator into the retail market. "We really left retail when we left the [Handspring] Organizer behind [in favor of the Communicator product line]," Hawkins said.

Palm, on the other hand, gets access to the close ties with carriers that Handspring has developed with its Communicator product, along with the company's Treo Communicator and follow-on products. These two elements are crucial in the company's ability to effectively compete against Microsoft, analysts and solution providers said.

Microsoft's share of the PDA market is still below Palm, but the company is catching up, particularly with Dell as a new entrant in the market, said Russ Sealfon, an analyst at IDC.

Dell, which entered the handheld market in the fourth quarter, is already the No. 4 seller of handheld devices, according to IDC. Palm still claims the top spot, followed by Hewlett-Packard, with its PocketPC-based iPaq, and Sony, with its Palm devices.

Still, solution providers said Microsoft has had challenges breaking into the smartphone space. The company's PocketPC Phone Edition device has not been received well. Solution providers said battery life is low and the implementation of the wireless features is clunky.

In addition, at least one solution provider, who requested anonymity, said Microsoft's recent licensing changes have weakened its credibility with corporate customers. While Microsoft has powerful allies in HP and Dell, this solution provider believes Palm is now well-positioned to grab share while Microsoft works on mending fences with customers.