How Palm Could Lose Everything

Welcome to the second day of our Foolish look at Palm (Nasdaq: PALM  ) , and what it might announce at a Jan. 8 press event at the Consumer Electronics Show in Las Vegas.

Yesterday, I wrote of my hope that Palm's new Nova smartphone operating system would change everything with a breakthrough in handwriting recognition, borrowing from the Graffiti language that made its cultish PalmPilot a commercial success.

And if it doesn't? Today, we'll look at what might happen if Palm chooses incremental improvement over rebellious innovation -- and consider how this once-proud tech titan could go the way of the dodo.

But first, here's what smartphone success looks like ...
As a stock picker, observation has always been more important to me than numbers. That's also true of most of my Rule Breakers teammates. We're business-focused investors who enjoy studying history and business models, because patterns matter.

I mention this because the smartphone industry is following a pattern right now. Closed systems are crushing open systems:

Company

Q3 2008 Shipments

% Market Share

Q3 2007 Shipments

% Market Share

Nokia

15.485 mil

38.9%

16.025 mil

51.4%

Apple

6.899 mil

17.3%

1.107 mil

3.6%

Research In Motion

6.051 mil

15.2%

3.298 mil

10.6%

Motorola

2.313 mil

5.8%

2.058 mil

6.6%

High Tech Computer

2.308 mil

5.8%

0.850 mil

2.7%

All Others

6.791 mil

17.0%

7.816 mil

25.1%

Source: Canalys.

Nokia (NYSE: NOK  ) , Apple (Nasdaq: AAPL  ) , and Research In Motion (Nasdaq: RIMM  ) all have closed systems -- they own and maintain the operating systems their devices depend on. They also design a fair portion of the hardware.

Not so for fourth-ranked Motorola (NYSE: MOT  ) , which already sells handsets that host Microsoft's Windows Mobile OS and is planning phones based on Google's (Nasdaq: GOOG  ) Android environment. Palm hasn't committed to Android, but it has been shipping Treos with Windows Mobile since 2005.

In other words, Palm uses an open environment. Investors haven't been well-served by that choice. Carriers like the closed systems better, argues CAPS investor squished18:

The biggest problem is the answer to the question "who sells smartphones?" The answer is CARRIERS. If you can't get the carriers to promote, sell, and support your products, you are DEAD in the smartphone game. That's why RIM is kicking butt. BlackBerry is a product that carriers can make [boatloads] of money from and is relatively painless to support. Plus BlackBerry has a massive customer support infrastructure that makes it easier on the carriers if there is a problem with the device. Not so for Palm.

Fair point. RIM distributes the BlackBerry through most major U.S. carriers, and it brokered an exclusive deal with Verizon Wireless, a joint venture between Vodafone and Verizon (NYSE: VZ  ) , for the rollout of the BlackBerry Storm. When's the last time your local mall-cart-cum-smartphone-vendor was pushing a Treo in your face? I haven't seen one in at least a couple of years.

"Success will depend on the hardware"
It simply can't be a coincidence that Palm's openness has followed its decline. Nova offers an opportunity to reverse the slide, to close the platform as Steve Jobs cut off Mac cloners shortly after returning to Apple in 1997.

Palm's relatively new executive chairman, Jon Rubinstein, is the perfect man to lead the effort. He's been involved with closed systems since 1990, when he worked with Jobs at NeXT. Seven years later, he rejoined Jobs, this time at Apple, where he led the development of one of history's most successful closed systems: the iPod.

All signs point to Nova being the moment at which Palm parts ways with Mr. Softy.

And if it doesn't? If Nova is just another OS for the Treo? If CEO Ed Colligan chooses choice over innovation? Imagine the confusion. Buy the Windows Treo! No, buy the Nova Treo! It'd be the Foleo all over again: Two systems, incompatible, fighting for space in the customer's confused mind.

Or as blogger Josh Catone of sitepoint.com predicted recently, "The Nova operating system will look like something that could challenge Android, Blackberry, and the iPhone in the mobile market, but success will depend on the hardware." [Emphasis added.]

Let's hope not, Josh. If the history of mobile computing tells us anything, it's that neither hardware, nor software, but the whole product matters most. A closed system, self-contained and elegantly designed.

Ship anything less, Palm, and this Nova will burn you.

Apple is a Stock Advisor selection. Microsoft and Nokia are Inside Value picks. Google is a Rule Breakers recommendation. Try any of these Foolish services free for 30 days. There's no obligation to subscribe.

Fool contributor Tim Beyers is a member of the Rule Breakers team; he had stock and options positions in Apple and Google, and a stock position in Nokia, at the time of publication. Check out his portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy needs a good night's sleep. Shhhhhhhh.


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