Reading Palm's future

SAN JOSE, Calif.—Once upon a time—in a simpler world before cell phones became teenage accessories and workplace necessities—a small Silicon Valley start-up called Palm launched a mobile revolution.

Its creation of the PalmPilot, an easy-to-use handheld computing device, meant people were no longer tethered to their PCs. It could hold addresses, phone numbers and to-do lists—all in the “palm” of your hand. More than a million were sold within 18 months.

But that was a decade ago, and this fairy tale is still awaiting a happy ending.

Along the way, Palm has changed ownership, lost its creators, won the creators back again and most recently found itself looking for new ownership options.

At the same time, the company that changed the mobile landscape failed to keep pace with consumers’ changing taste. It was late to mobile e-mail, and lost momentum to the BlackBerry. It most recently failed to anticipate the preference for slim smart-phones, continuing to sell the relatively hefty Treo.

“Palm is viewed as somewhat antiquated in the minds of consumers,” said Tavis McCourt, a financial analyst with research and investing firm Morgan Keegan.

So when the iconic Sunnyvale, Calif., company agreed earlier this month to sell a 25 percent stake to a star-powered private equity firm that would inject money and bring in fresh talent, investors believed they may have found Prince Charming.

Elevation Partners, which was co-founded by U2 lead singer Bono, will infuse Palm with $325 million in cash. As part of the deal, former Apple senior vice president Jon Rubinstein will become executive chairman at Palm. Rubinstein was a key executive in creating Apple’s phenomenally popular iPod digital device.

But this latest twist in the story offers no guarantees. The new team faces two immediate and daunting challenges: introducing a new thin phone and competing with the much-anticipated iPhone.

While Palm executives say it will take years to see any new phones or gadgets from the deal, Wall Street says the company will need to move fast to catch up with the rapidly changing mobile marketplace.

By Christmas, Palm will need to introduce a thinner, sleeker version of its latest commercial success, the Palm Treo smartphone, which was introduced in 2002, analysts warned.

When other phone companies such as Samsung, Motorola and Research in Motion launched wildly successful thin smart-phones last fall, Palm missed the thin trend. It merely added colors and barely changed the thicker Treo.

“They really missed the product cycle last year,” McCourt said.

Ken Dulaney, who has watched Palm since its creation and is the vice president of mobile computing at Gartner Research, says the Treo is like “a classic car”—it’s a wonderfully designed device that can last forever, but most consumers want something new.

The average turnover time for a mobile phone is 12 to 18 months, according to industry research.

“It’s kind of like movie studios, they’re all about their latest hit product,” Dulaney said. With so many companies already in the market it’s getting tougher to do “wow” ideas, he said.

Can Palm do it? “I’m worried,” Dulaney said.

The day after Palm announces fourth-quarter earnings this week, technology darling Apple is expected to begin selling the much-anticipated Apple iPhone.

“They are going to get hit probably significantly by this iPhone,” Dulaney said. “Frankly, a lot of people have allegiance to Palm but I think they probably have bigger allegiance to Apple.”

Palm, which was founded in 1992 by now legendary inventor Jeff Hawkins, has kept loyal customers even as it has had a roller-coaster ride. Hawkins’ technology has been owned by a confounding mix of companies: U.S. Robotics, 3Com, Palm Computing, Handspring, PalmOne and eventually just Palm again.

In the late 1990s, during the heyday of handheld computing, the technology was owned by two different companies and even competed against itself. That’s when Hawkins, along with Donna Dubinsky and Ed Colligan, currently the president and chief executive of Palm, left the 3Com subsidiary called Palm to open Handspring and began selling another version of the Pilot, essentially competing against their former owner.

In 2000, both Handspring and Palm had initial public offerings. Handspring opened at $27 and hit a high of $28.25, before moving lower to close at $26.94 in trading on the Nasdaq Stock Market. In comparison, Palm’s initial public offering a few months earlier was for $38 a share and its stock rose to a then-stratospheric $165 in its first day of trading before plunging back down.

Eventually, Palm and Handspring combined and Hawkins and his team were back with Palm.

The stock now trades in the $17 range.

These days, ironically, Palm is finding inspiration from its competitor Apple.

When Elevation Partners announced its plans, co-founder and managing director Roger McNamee compared the company with Apple and noted that not long ago Apple was struggling.

“We’re very optimistic and very bullish about what this says about the prospects for the category,” he said.

During a joint interview on the day of the announcement, McNamee and Palm President and Chief Executive Colligan said the deal wouldn’t make an immediate impact on the company’s product line. Rather, Colligan said five years from now they expect to be “the world’s leading mobile computing company.”

The two executives have known each other for 20 years and started talking about the deal about seven months ago, after a casual phone call.

For his part, Colligan felt the two companies could make a great team—both from a business and creative position.

And almost immediately, the deal had enough star-power to become a fairy tale rescue.

McNamee said Bono, who was in Tanzania at the time of the announcement, asked him to forward Palm’s employees a message that had all the flourish of his song lyrics: “Let me join you in this great adventure. Let us change the world together.”