Bloomberg News

Palm Unveils Pre in Challenge to IPhone; Shares Jump

January 09, 2009

Palm Inc., setting out to restore its status as a smart-phone innovator, introduced a touch-screen model called the Pre that’s aimed squarely at Apple Inc. (AAPL:US)’s best- selling iPhone. The shares surged 81 percent in two days.

The phone, unveiled yesterday by Chief Executive Officer Ed Colligan at the Consumer Electronics Show in Las Vegas, has a slide-out keyboard and a wireless charging station. It also runs the new Web OS operating system, which lets users shuffle through applications like a deck of cards.

Reeling from six straight quarters of losses, Palm is counting on the Pre to win back customers from the iPhone and Research In Motion Ltd. (RIMM:US)’s BlackBerry. The device, available exclusively through Sprint Nextel Corp., may sell more than a million units a quarter, T. Rowe Price portfolio manager David Eiswert said in an interview. The price hasn’t been set yet for the phone, which is due in the first half of 2009.

“In tech, things can be very extreme -- winner takes all,” said Eiswert, whose firm is Palm’s biggest investor (PALM:US). “If you win, you win big, and I think this is a real example.”

Palm, based in Sunnyvale, California, climbed $1.51, or 34 percent, to $5.96 in Nasdaq Stock Market trading (PALM:US) at 4 p.m. New York time, after jumping 35 percent yesterday. The stock lost 52 percent last year. Sprint rose 1 cent to $2.59.

Playing Catch-Up

Palm’s earlier devices hadn’t kept pace with the features on the BlackBerry and iPhone, spurring an exodus of customers. The Pre’s success may determine Palm’s long-term survival in a market it helped create, said Lawrence Harris, an analyst at CL King & Associates in New York.

“There have been many analysts on Wall Street who said Palm’s future is dim,” said Harris, who has a neutral rating (PALM:US) on the stock and doesn’t own it. “Today the company proved some of those naysayers wrong.”

With a touch screen, the Pre matches the signature feature of the iPhone. The Pre also has 8 gigabytes of storage, global- positioning software, and a 3-megapixel camera with a flash.

Sprint CEO Dan Hesse, who appeared at Palm’s presentation, said the carrier will take pre-orders for the device.

Sprint, the third-largest U.S. provider of mobile-phone service, may not draw as many customers as its larger rivals AT&T Inc. (T:US) and Verizon Wireless would have, Harris said.

“In recent quarters, Verizon and AT&T have been adding customers, and Sprint has not been doing as well,” he said.

Palm Pilot

Palm introduced the Pilot in 1996, developing a category of devices called personal digital assistants. Those products evolved into smart phones by adding wireless features, and Palm’s Treo helped create that market as well.

The BlackBerry overtook Palm by attracting users of corporate e-mail. Sales of Apple’s iPhone, released in 2007, also eclipsed those of the Treo. Palm’s smart-phone shipments dropped 13 percent last quarter.

“Apple thus far has set the standard in terms of ease of use and intuitive nature,” Harris said. “That’s the target Palm went after.”

The Pre’s user interface is solid and the ability to switch between applications and multitask are advantages, Harris said.

Apple veteran Jonathan Rubinstein joined Palm in 2007 when Elevation Partners LP acquired 25 percent of the company. Paul Mercer, a software engineer who helped create Apple’s iPod, was hired earlier that year. Elevation increased its stake by $100 million last month, giving Palm cash to create new phones and to provide a cushion from the U.S. recession.

The smart-phone market overall will grow next year, even as sales of other devices shrink, research firm IDC said last month. The market will expand 8.9 percent worldwide in 2009, compared with a 1.9 percent decline for the rest of the mobile- phone industry, IDC said. That gives Palm a chance to make gains, Harris said.

“It’s a critical juncture in the company’s history,” he said. “This really is their best opportunity. A second opportunity might not make it.”

To contact the reporter on this story: Amy Thomson in Las Vegas at athomson6@bloomberg.net

To contact the editor responsible for this story: Jonathan Thaw at jthaw@bloomberg.net


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