FOOL PLATE SPECIAL: An Investment Opinion
Hybrid Handhelds on the Horizon

While Palm's earnings report yesterday was solid, several recent announcements indicate that the future of personal digital assistants (PDAs) and other mobile devices is anything but clear. A slew of PDA and mobile phone companies are working on combining the functions of the two. Investors in any handheld equipment maker should pay close attention to how this plays out.

By Chris Rugaber (TMF RFK)
September 26, 2000

Personal digital assistant (PDA) manufacturer Palm (Nasdaq: PALM) reported strong first-quarter sales and earnings growth last night, with sales up 127% to $401 million and profits jumping 79% to $17.3 million. Excluding amortization and other charges, the company's earnings per share (EPS) clocked in at $0.04, double last year's number and twice analysts' estimates.

Just as impressive were the company's unit sales: Palm shipped 1.5 million units, a 36% increase from the previous quarter. Clearly, PDAs are moving from gadgets for business types toward mass consumer acceptance.

Here come the hybrids
However, there's no time for Palm or investors in the company to relax or celebrate. While yesterday's earnings announcement is certainly impressive, there have been several developments in recent days that may scramble the competitive landscape.

Last week, Palm competitor Handspring (Nasdaq: HAND) unveiled a new mobile phone add-on to its popular Visor PDA, appropriately named VisorPhone. Yesterday, Palm announced its own initiative, an alliance with Motorola (NYSE: MOT) to develop a phone/PDA hybrid, while Research In Motion (Nasdaq: RIMM) zoomed upward almost 12% on speculation that its phone/PDA hybrid may beat Palm's to market. Palm and Motorola don't expect their product to be ready until early 2002, while Handspring plans to sell the VisorPhone over its website by the end of this year.

In addition, there are plenty of developments on the mobile phone side of things, with Microsoft (Nasdaq: MSFT) working on a "smart phone" built for wireless Web access, which will compete with Web-enabled phones from the so-called "Symbian" alliance of mobile phone makers Nokia (NYSE: NOK), Ericsson (Nasdaq: ERICY), and Motorola.

All of this certainly makes the future of PDAs and mobile phones a bit cloudier, and this will affect plenty of companies, in addition to Palm. Motorola, for one, seems to be hedging its bets by participating in both the Symbian initiative and striking the deal with Palm, while Sony (NYSE: SNE), as was pointed out in our recent Dueling Fools over Palm, has licensed both Palm's operating system and Symbian's technology.

Why now? Wireless Data
While a phone/PDA hybrid makes plenty of sense, both products have been around for years. Why all these announcements, all of a sudden? Probably one reason you haven't heard much until recently is that previous attempts to combine the two products flopped, as The Wall Street Journal pointed out yesterday.

Nevertheless, now we have the much-hyped "wireless Web" added to the mix. So-called 2.5 generation (2.5G) and third-generation (3G) networks should increase wireless Internet access speeds significantly, boosting the appeal of wireless data to consumers and business users.

Who wants two?
As a result, it makes much more sense to combine the larger screen and easier text input of a PDA with the device that most people already use for mobile communications: their cell phones. A PDA is likely to be a much better way to view information, read e-mail, and compose messages.

In addition, as more and more PDAs link to the 'Net, consumers are potentially faced with not only two handheld gadgets, but two wireless subscriptions. While some electronic gadget enthusiasts might like having two different devices, who wants two wireless bills?

Smart phones vs. handheld communicators
The question for investors is how this might change the handheld device landscape, both for PDA and mobile phone companies. Will some form of the two devices remain on the market indefinitely, or will converged devices eventually dominate? In addition, will consumers prefer PDAs with phone capabilities from companies like Palm or Handspring, or will they prefer "smart phones" with personal information software from companies like Nokia or Ericsson?

Investors' own consumer experiences can be as useful a guide as any in answering these questions. In addition, what Philip Fisher referred to as "scuttlebutt" is also important: Find out what others are thinking, and what they are buying.

Personally, I am looking for a PDA and will probably buy a Visor from Handspring, so I will have the option to add the phone later. My wife recently purchased both a mobile phone and PDA (Palm M100), and would have just as soon bought one device.

Your Turn:
How about you? Let us know in this poll on our Wireless World discussion board:

Are you interested in buying a combined PDA/mobile phone, or do you think they'll perform neither function adequately?

• I'd prefer buying a combined device.
• I'd consider it but it depends on the actual product.
• I think the two devices will continue to flop when combined.
• I just need a wireless phone, and would prefer that by itself.
• I just need the PDA.