Editor's introduction: We recently wrote about Palm Inc. (Nasdaq: PALM) for our high-growth study, and through the speed of email, the column made the rounds at Palm. Our column prompted Mr. Michael Mace, Palm's chief competitive officer and VP of product planning, to send us an email. He had several thoughts to share, so we invited him to share them with everyone, in a column. The following is Mr. Mace's column, sent from Palm HQ, about Palm and its competition.
Handheld computing is still in a very early growth stage, and reasonable people can disagree about which companies will be the ultimate winners, or even what the ultimate industry will look like. But before you pass judgment on Palm's business, we think there's some additional information that deserves consideration.
Mobile phones vs. handhelds
Many people contend that the mobile phone handset companies have an advantage in setting handheld computing standards because of their large user base. That makes a lot of sense in theory, but in practice they have a terrible record of understanding the information management (as opposed to voice management) needs and behaviors of normal human beings. For an example of this, you only have to look at the history of WAP [wireless application protocol], which the phone companies forced into the hands of millions of users and which has been an abject failure.
We think handheld information management is a fundamentally different form of computing, with its own set of rules and customer behaviors. It took us years to figure out how this new computing industry works. If you look at high-tech history, existing companies usually don't do a good job of making the transition to a new paradigm. For example, most of the big minicomputer and terminal companies (DEC, Unisys (NYSE: UIS), Wang, etc.) blew the transition to PCs and were overcome by startups that focused on PCs (Compaq (NYSE: CPQ), Dell (Nasdaq: DELL), etc). Today I think most of the PC and telecom companies don't understand handhelds. Some of them will make the transition, but you should also keep a close eye on the handheld startups, such as Palm, Handspring (Nasdaq: HAND), and others.
Ultimately, users will choose whichever handheld computing system works best for them, and vendors will follow the customers. I think Palm has easily enough licensees and market momentum to give customers a great selection of Palm Powered systems to choose from.
Microsoft's Pocket PC
Is Microsoft's (Nasdaq: MSFT) Pocket PC a competitor? Sure, and we would never underestimate anything Microsoft does. But think about what I said up above about the minicomputer companies. They argued for a long time that people didn't want a PC; what they really wanted was a minicomputer shrunken down to fit on a desktop. Those companies were terribly wrong.
Now today Microsoft tells you that what you really want is a PC shrunken down to fit in your pocket. I beg to differ. It makes sense to shove a lot of features into a PC, because there's no downside -- who cares if your PC weighs a few more ounces; it's sitting on your desk. In a handheld, which you carry all day in your pocket or purse, you have to carefully balance out weight, size, and battery life against features. Most customers will choose a thinner and lighter handheld that makes the bells and whistles optional, so they can add just what they want. That's Palm's approach, and I think the public is rewarding it. Despite all the press and advertising hype for Pocket PC, the cold, hard fact is that its market share in U.S. retail is lower than it was two years ago.
Sustainable advantages through software applications
Some people have argued that there is no application lock-in for handheld users. No offense, but our tracking of our own customers tells a different story. The Palm applications base is a very strong factor in system purchase for more and more of our customers. Roughly 60% of Palm users are now adding third-party software to their systems, and the Palm OS software base is growing very rapidly. There are more than 8,700 software products for Palm Powered systems, compared to about 450 for Pocket PC, and fewer than 300 for Symbian (the phone companies' darling). We think we're seeing the beginnings of a virtuous circle in which more software = more customers = even more software. History shows that the platform with the largest software base almost always wins.
Like any emerging industry, there is risk in handheld computing. But we're very pleased with our success and momentum to date, and we think we're going in the right direction. At one time personal computing companies seemed extremely speculative too. By the time it was clear to everyone that PCs were becoming a standard, some of the biggest investment opportunities had already passed.
Thanks for listening,
Chief competitive officer & VP of product planning
Editor's postscript: We appreciate Mr. Mace's thoughts, and we are obliged to remind you, in relation to the Fool's full disclosure policy, that of course Mr. Mace has an interest in Palm doing well. Read his thoughts and analysis critically, just as you should with every Fool column, and make your own investment decisions.
Since we wrote about Palm two weeks ago, the stock has fallen 36% to a new low. It is now near $14 per share. Its high was $165. At this price, the company is valued at $8.4 billion, or about 5.5 times trailing 12-month sales. It trades at 64 times earnings per share estimates for the year ended May 2002. Arguably, for the first time since it came public, the price is getting attractive to this Fool.
To discuss Palm and to ask questions, post on the Palm discussion board; Mr. Mace will check the board.
Michael Mace of Palm Inc. has beneficial interest in the company. The commenting Fool editor, Jeff Fischer, does not own shares in any companies mentioned. The Fool is investors writing for investors.