Beleaguered Palm Opens The Door To CompetitionBeleaguered Palm Opens The Door To Competition

GMAC Commercial Mortgage Corp. has handed out more than 550 wireless PDAs to executives so they can access E-mail and customer data while on the road. And though GMAC uses Palm Inc. devices running Palm OS, Research In Motion's BlackBerry running RIM's proprietary operating system, and Compaq's iPaq running Microsoft's Pocket PC, its preference is clear: Pocket PC is emerging as the mortgage company's No. 1 mobile platform.

"We tend to lean not so much towards Palm," says Kevin Farkas, director of emerging technologies and international midrange services at GMAC in Horsham, Pa. "We support it, but we have a huge contingent of iPaqs running Pocket PC," Farkas says. The reason? Pocket PC is the slim, mobile-ready sibling of Windows--a platform GMAC's execs and developers are already familiar with. "Pocket PC looks fairly much the same as Windows, and that to me is a bonus," Farkas says.

GMAC's preference is bad news for Palm, the king of the hill in the PDA market, which last year had an estimated 85% to 90% market share. More and more businesses are picking Compaq iPaqs running Pocket PC and RIM's BlackBerry as the platforms of choice for mobile and wireless initiatives.

Case in point: IBM, a longtime Palm ally, said last week it will hand out 1,400 BlackBerry devices to customer-service engineers in its printing systems division.

And Mitel Networks Corp., a Kanata, Ontario, telco, will do away with more than 200 Palm devices its executives use to wirelessly access Lotus Notes and Domino databases as soon as the necessary software is available for RIM devices.

Mitel may not have to wait too long. Its current supplier of Palm-to-Lotus software is AvantGo Inc., a strategic partner of RIM's that's expected to deliver similar software for the BlackBerry. And last week at Lotus DevCon 2001, RIM and partner Neomar Inc. demonstrated secure access to Lotus Sametime Everyplace applications, another step toward RIM's full support of Lotus software.

Palm's fourth-quarter fiscal 2001 earnings, expected to be released today, will underscore Palm's troubles. Last week, market-research firm Gartner Dataquest estimated Palm would earn $130 million to $150 million, a figure much lower than Palm's previous high-flying earnings. Palm issued a warning last month that its fourth quarter revenue would range from $140 million to $160 million, compared with $471 million in the previous quarter and $350 million the same quarter a year ago.

Meanwhile, Palm's competitors appear to be on the rise. Dataquest estimates Compaq's revenue for its PDA business will be in excess of $200 million. Of course, the iPaq has a higher price point than a Palm device, but analysts say they're still impressed with Compaq's numbers. This week, Compaq will reveal that it has shipped its 1 millionth iPaq device since starting production a year ago, according to John Brandewie, Compaq's product manager for the iPaq Pocket PC."

Compaq's iPaq represents about 80% of Microsoft's Windows CE platform business (Windows CE is the underpinning of the Pocket PC). In a little more than a year, Microsoft has licensed more than 1.5 million copies of the Pocket PC platform.

RIM is also making inroads. Though it has suffered sluggish sales in its most recent quarter--earnings released last week show revenue for RIM's first-quarter fiscal 2002 was $77.1 million, a $13.1 million drop from the previous quarter--revenue was up 184% over the same quarter a year ago.

Granted, Palm's 90% market share will be hard to topple. This year, 73% of the pen-based systems in the United States will be running Palm OS, while Pocket PC and Windows CE will garner only 19%, according to Alex Slawsby, an analyst at International Data Corp. Slawsby says it will take several years for the competition to catch up.

Analysts point to a number of reasons for Palm's slide. For one, Palm needs to boost sales in the corporate market, but it hasn't delivered significant upgrades or added key wireless features crucial to businesses. "Palm's level of innovation has been rather meager," says Todd Kort, principal analyst with Dataquest.

While it's difficult to track exactly how many PDAs are sold to corporate accounts since many devices used in the workplace are still purchased by individuals in retail stores, IDC estimates about 70% of all handhelds are sold to consumers and 30% to companies. Of that 30%, Compaq and Microsoft have the lead, Slawsby says. "Compaq sells the majority to the enterprise," he says. "And we feel that Pocket PCs are going increasingly to the enterprise and Palms to the consumers."

A series of missteps and plummeting sales that started just as the economy slowed added to Palm's decline. The financial drain forced Palm to cancel its proposed acquisition of Extended Systems Inc., a wireless infrastructure firm that was expected to boost Palm's presence in the corporate market.

"The unfortunate thing for Palm is bringing Extended Systems in would have been good for our revenue stream," concedes Michael Mace, chief competitive officer at Palm. "But it was prudent to cancel it given the financial situation."

Palm's troubles gave Microsoft the opening it needed. While Microsoft's first two versions of Windows CE failed to impress, Windows CE 3.0 is a much stronger contender, analysts say.

IT managers have their own reasons for picking platforms other than Palm. In addition to iPaq's and Pocket PC's familiar Windows look and feel, GMAC's Farkas was attracted to the iPaq because it can leverage the same types of modem and wireless cards as standard Compaq notebook PCs.

Carlson Hotels Worldwide went with iPaqs because Pocket PC lets users multitask. Carlson was also able to build a custom wireless app that can send out alerts to executives. "The Windows CE operating system is much more robust," says Nels Erickson, Carlson's lead technical support analyst.

Compass Asset Management, a hedge fund and money manager in Chicago, switched from Palm to RIM because RIM offers a better wireless E-mail tool. "My feeling is that the RIM has been a great device for our industry," says CIO Dorie Boyce. "I feel like Palm is going to have to make a real leap ahead to get us to back. It's going to be some kind of feature that you just have to have and I'm not sure what Palm will be able to do it."

For a long time, Palm made good use of its army of software developers as well as partnerships with major software vendors, including Oracle, Siebel Systems, Sun Microsystems, and, most recently, SAP.

But even close partners such as Siebel, which already provided connections to its customer-relationship management applications for the Pocket PC platform, won't support the Palm OS until later this year, says Paulo Chow, director of product marketing for Siebel.

"Pocket PC gives us more room and more horsepower for our database. We are working on both, but one advantage that Microsoft had is the familiarity that people programming with Windows have with the operating system," Chow says. "The Palm OS is completely different, and the developers have to learn new development practices using different tools."

Palm isn't willing to throw in the towel yet. "In the next year, you'll see us do a lot more deals. You should see a lot more from us in compatibility," says Mace. "If you look across Palm and its licenses, there is an incredible range of things you can do with these products."

The next few months will be crucial for both Microsoft and Palm as each readies new products due out in the fall. Palm will introduce the next version of its Palm VIIx product, code-named m700, while Microsoft will release the next version of its Windows CE platform, code-named Talisker.

How these products are accepted by enterprise customers will likely determine Palm's and Microsoft's future in the corporate PDA market, says Gartner's Kort.

"If Microsoft comes up with a good version of Talisker, then there is a good chance that Microsoft will steamroll the corporate market next spring," Kort says. As for the m700, "if that device does not meet corporate specs, Palm will be relegated to the consumer market."