Palm's New CEO Faces Tough ChallengesPalm's New CEO Faces Tough Challenges

As Jon Rubinstein prepares to take the reins of Palm from Ed Colligan, analysts are optimistic about his ability to turn around the company that was once synonymous with handheld computing devices.

The market appeared to like the move, as Palm's stock price rose about 12% in the first full day after the move was made public. Rubinstein retired from Apple in 2005 as the head of its red-hot iPod division, and has spent the last two years with Palm developing its next operating system and the Pre smartphone.

The Pre launched June 6 and has broken Sprint sales records while receiving mainly positive reviews from the press. One of the most well-regarded features of the device is the WebOS operating system, which can aggregate multiple Web-based services into a single finger-friendly user interface.

"The timing was certainly awkward, coming just four days after the launch of the Pre," said Thomas Weisel Partners analyst Matthew Sheerin about the leadership change, in a note to investors. "Our take is that Rubinstein was being groomed for the last two years to run the company, and is ready for the next challenge, having put together a solid engineering team."

Palm faces multiple challenges though, as the smartphone space is lined with deep-pocketed companies such as Apple, Google, Microsoft, and Nokia. Palm has reported seven consecutive quarterly losses, and it has been kept afloat over the last few years by more than $400 million from Elevation Partners, which owns about a third of the company.

Palm won't have to worry much about cash if it continues to develop good products like the Pre, said Gerry Purdy, chief analyst at Frost & Sullivan. Purdy said Rubinstein's experience in the consumer electronics world, as well as strong forecasts of growth in the smartphone market, means Palm should be able to differentiate from Nokia, Apple, and Research In Motion to carve out a decent amount of market share.

"I think he took this position to do something significant, and he's going to go for a home run," said Purdy. "He knows how to make great products, and I think the Pre is just the tip of the iceberg."

Purdy said Palm needs to work on increasing its manufacturing capacities before it can become a major player again. For example, the Pre sold out in multiple locations at launch, but analysts estimate Sprint and Palm sold about 50,000 units. By contrast, Apple's iPhone 3G sold more than a million units during its launch weekend, although it was selling in more markets than the Pre.

Palm does have strong relationships and deals with enterprises, Purdy said, and the company could leverage this to gain a competitive advantage over Apple. While it will be difficult to displace RIM's BlackBerry in the corporate world, Purdy said the Pre's elegant user interface, security, and ActiveSync support could make it a good candidate for mobile professionals.

But hardware is only one front of the smartphone battle, as the platforms themselves are becoming increasingly important. Apple's App Store for the iPhone and iPod Touch is generally seen as being in the lead, as the store has more than 50,000 apps, and has seen more than a billion downloads in less than a year.

With Android, BlackBerry, iPhone, Symbian, Windows Mobile, and now WebOS, there is some concern in the industry that developers are getting spread too thin, and Palm's platform could be a candidate for contraction. Palm said it created WebOS with developers in mind, as content creators can use HTML, CSS, JavaScript, and other standard Web technologies to create mobile apps. This should open the door for Web developers to quickly and easily create apps, even if they don't have much experience in the mobile space.

"Smartphones are only 10% of the entire mobile market, but that will quickly grow to 40% or 50% over the next 10 years," said Purdy. "I would say later on, when we have a more mature market, it may be time to talk about operating system consolidation, but right now there's too much room for growth to be worried about that."

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