Palm Pre's Inevitable Collision With Free

It's not a fire sale, but it doesn't hurt to locate the nearest emergency exit, hydrant, or glass-encased ax.

Palm's (Nasdaq: PALM  ) Pre keeps getting cheaper. The revolutionary smartphone, introduced at $199 with a two-year Sprint-Nextel (NYSE: S  ) contract, has been going in for a flurry of haircuts lately.

  • Sprint knocked down the price to $149 earlier this month.
  • (Nasdaq: AMZN  ) chopped that down to $99 last week, briefly pushing the device to the top of its best-seller list.
  • Not to be outdone, Wal-Mart (NYSE: WMT  ) is now offering the Pre at a mere $79 price point.

In short, it's been a September to dismember for Palm.

We still don't know whether the recent wave of price cuts is the result of Palm shaving its prices, or Sprint being willing to take a larger subsidized hit to move units. It may very well be a combination of both.

The sticker-price whacks are necessary. Apple (Nasdaq: AAPL  ) stole Palm's $199 thunder by marking down entry-level 3G devices to $99 just weeks after Palm hit the market. It also doesn't help that one analyst's concerns about fading Pre sales were all but confirmed by Palm's recent quarterly report, which featured a bleak outlook for the current quarter.

There were conflicting reports last week about whether Verizon's (NYSE: VZ  ) wireless group would introduce the Pre to its base. The cheaper the Pre gets through Sprint, the harder it will be for Verizon to make a dent without subsidizing the Pre entirely.

The silver lining here is that Palm's WebOS revolution doesn't end with the Pre. The sleek Pixi is on the way, and more devices will follow.

Palm still can't afford to play it safe. Every passing quarter finds Research In Motion (Nasdaq: RIMM  ) and Apple locking in millions of new smartphone shoppers to two-year contracts. Handset and computing heavies also want a little more skin in this game. However, the rat-a-tat price cuts have to confuse consumers, who are right to be reluctant in buying a Pre until they see the prices truly bottom out.

Until Palm and Sprint realize what a Pre is worth -- and stick to it -- it's a slippery slope to zero.

Which smartphone stock is the smartest investment right now? Share your thoughts in the comment box below.

Wal-Mart and Sprint are Motley Fool Inside Value selections. Apple and are Motley Fool Stock Advisor picks. Try any of our Foolish newsletter services, free for 30 days.

Longtime Fool contributor Rick Munarriz is starting to see more smartphone products creep into his home lately, but he does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 28, 2009, at 11:22 AM, Jamison046 wrote:

    Didn't the Motley Fool tell me to throw Palm's stock away a few months ago and it has since more than doubled? Keep on trying to Short, meh.

  • Report this Comment On September 28, 2009, at 11:38 AM, FreeRange1 wrote:

    Palm is making the worst mistake that a company can make. If their phone is so great, why would you want it given away for free? The value of something given away for free is "0", zilch, nothing! It is stupid mistakes like this that put companies out of business. The phone should be selling at a premium to other smart phones if in fact it is a superior device. This company has shot itself in the foot. There is probably no return from such a misguided blunder.

  • Report this Comment On September 28, 2009, at 1:41 PM, glamajamma wrote:

    How many times does Motley Fool have to be wrong about the Palm, before they just give up?

    Anyone reading this please read all of Motley Fool's articles on Palm since January. They have been negative since day one. They have been consistently wrong on the stocks as well.

    These articles are being written with clear bias.

  • Report this Comment On September 28, 2009, at 2:11 PM, reallywilly wrote:

    The price tag on the phone is completely irrelevant.

    The customer is buying a two year contract for $2400+ from the carrier, not a phone. Palm, RIM or Apple get paid the same if they sell the phone for $300 or $1...

    The carrier could care less which device a consumer buys it's all about ARPU. As long as the device requires a data plan carrier revenue and profit is maximized. This is one reason smartphones are heavily subsidized by the carriers.

    A free phone just means the Manufaturer will sell more units. With the carrier; instead of the consumer paying the bill.

    Nice try to put negative spin on this.

  • Report this Comment On September 28, 2009, at 5:46 PM, hatoncat wrote:

    Uh, for the next 72 hours, has announced that they are selling the Palm Pre for free.

    So, I guess "inevitable" means "today" :)

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