For of all sad words of tongue or pen,
The saddest are these: "It might have been!"
-- John Greenleaf Whittier
I wonder if an exec at Palm (Nasdaq: PALM ) has had those "sad words" cross his mind in recent months, as his company has delivered two quarters of uninspiring results in the wake of the launch of the Palm Pre and its younger sibling, the Pixi.
The Pre, as you might recall, was meant to restore Palm's status as a big player in the smartphone wars -- a status that had fallen apart as the company's Treo line of Palm OS and Windows Mobile smartphones was battered by competition from Apple (Nasdaq: AAPL ) and Research In Motion (Nasdaq: RIMM ) in its core North American market. And for a little while, as the Pre received great reviews thanks to its innovative webOS operating system (and was given a much-hyped release by Sprint Nextel (NYSE: S ) ), it looked like that just might happen.
But after Palm's latest earnings report, you have to wonder if Palm and webOS are doomed to remain in also-ran status. Adjusted earnings came in at a loss of $0.37 per share ($0.05 worse than expected), and while revenues and unit shipments came ahead of estimates, that was only because of a massive inventory buildup of Palm phones by carriers. Palm's sell-through (i.e., the number of phones actually purchased by consumers) was a mere 573,000 units -- a full 210,000 below its unit shipments. And as a BMO Capital Markets analyst noted, with 20% of sell-through involved non-webOS products, the inventory build for the Pre and Pixi is likely even worse than that gap.
I think some of the weaker-than-expected demand can be chalked off to Palm's exclusive distribution agreement with Sprint, a carrier that's been bleeding market share for quite some time and has a weak competitive position in the corporate world. But the bigger issue, without a doubt, is the stranglehold that competing smartphone platforms have on the attention spans and wallets of consumers.
The iPhone's extraordinary success needs no explanation, nor does the cult-like following that BlackBerrys have among email and messaging addicts. And the ecosystems that Apple and RIM have built around their platforms -- in the iPhone's case, the App Store, and in the BlackBerry's case, its corporate IT support -- make it even harder for an outsider with limited resources to break in.
Now, Palm also has to deal with a major push from Google (Nasdaq: GOOG ) and its Android platform, which has gained the support of Motorola (NYSE: MOT ) , Samsung, and other smartphone also-rans. Android's momentum is especially troubling for Palm since one of the platform's key supporters, Verizon (NYSE: VZ ) , is the carrier that Palm is counting on to give it a lift in 2010, after its exclusivity agreement with Sprint runs out. All things considered, Palm's "window of opportunity" to succeed may have already come and gone.
In the aftermath of Palm's earnings dud, estimates took a huge nosedive. The company's now expected to lose $0.75 per share in its May 2010 fiscal year, and post a profit of just $0.02 per share in the following year, as soaring sales and marketing expenses help offset revenue growth. Now more than ever, a marriage between Palm and Nokia (NYSE: NOK ) , would make sound business sense. Palm's ability to succeed as an independent company is very much in question at this point, and Nokia, for its part, is steadily bleeding smartphone share to Apple and RIM (and maybe soon, the Android bunch).
Nokia, unlike Palm, does have the resources and brand power to reverse its smartphone fortunes. But as Palm's struggles show, this is a market where time is of the essence.