First Smartphone War Casualty – Palm

Palm’s had a horrible two weeks, but really the worst news possible has been rumored/leaked today.

Palm has stopped production of their two phone products the Pre Plus and Pixi. Palm is trying to deny this story right now.

What might force Palm to make this desperate move? I’ll have to defer to Jean Louis Gassée (who knows a thing or two about companies with new Operating Systems failing).

It gets worse. Behind the scenes, Palm engaged in a classical desperation move: stuffing the channel. The expression means force-feeding your distribution network, shipping more inventory than needed. The hope is distributors will work harder, stimulated by price concessions or other marketing incentives. But, if the channels barf, the desperation move turns lethal.
With this in mind, we turn to Palm’s latest quarterly numbers released March 18th, 2010: 960,000 units shipped but… only 408,000 “sold-through”. The latter terms refers to units actually sold to paying customers, as opposed to the 960,000 shipped to distribution channels such as Verizon and Sprint. That’s what we mean by stuffing the channel.
Unfortunately, the situation turns out to be even worse than suggested by the 552,000 difference between units shipped and sold through. One analyst, Morgan Stanley’s Ehud Geldblum, looked at earlier quarterly numbers and pegs the total unsold inventory at 1.15 million units. That’s half a year of sales – if things go well. If sales tank because consumers lose faith, or because competitors do a good job, or if you need to introduce a new model that obsoletes the aging inventory, the channels backfires. Backfiring, or barfing, those are terms of art, refers to the return clause in many distribution agreements. Said clause gives resellers the right to ship inventory back for credit. This forces the seller, Palm, to deeply discount, to take a loss on the excess inventory in order to clear shelves.”

This problem if real, and Palm is not denying the inventory numbers laid out here, could be the death nail in Palm’s plan to become relevant again in the Smartphone space. As bad as all the lost revenue and the complete erosion of their pricing model, it’s unclear in unloading these devices in the channel how Palm will maintain the Pre Plus’s premium status over the Pixi Plus.

The bigger problem is if Palm has to halt production and clear this inventory over the next 3 or 4 months. By the time, Palm can start back up again, they will be facing probably by mid summer a new iPhone/iPhone 4.0 OS (especially if as rumored Apple eliminates the WebOS multi-tasking edge), and the next wave of Android hardware from a myriad of vendors. Palm’s ability to leverage any real marketing dollars from Verizon or Sprint will probably be reduced. Their stock price has already been smashed, and might drop lower if the Street believes that there’s no buyer out there for Palm.

Who should buy Palm? The search for Palm’ s white knight has officially started with Google being suggested as one buyer.  Nokia makes the most sense. But the Finnish giant seems committed to following some absurd two OS phone strategy that might not supply a true iPhone/Android competitor OS until 2011. Even then, their App store strategy is currently a mess and continues to give Apple/Google a massive lead. The iPad is only to increase Apple’s catalog of productive/money making application companies who are going to be unwilling to divert their attention to new platforms with limited installed bases. Nokia could purchase Palm, and deploy a variety of Web OS phones in a relatively rapid fashion (at least faster than Symbian seems to be moving). Nokia’s brand name and market share would quickly be a massive boost to convince developers to pickup the Web OS SDK. Finally, Nokia would add all of the smartphone patents for their prolonged showdown with Apple. This dream scenario for Palm and Palm user is just that. Nokia is so wedded to Symbian/Maemo that purchasing a new OS would appear to be a huge confirmation of failure. Nokia just isn’t there yet. Nokia’s going to need a Toyota acceleration type humbling event before reaching out to buy another company’s smartphone OS.

With a massive war chest, Microsoft does not have the deficits of Palm, but still Palm is attempting what Microsoft is now going to try. Palm’s lack of success has to be a massive warning sign to Microsoft. Microsoft cannot afford a single misstep. WinPOS7 cannot slip launch date wise. It cannot have software problems. It has to have a compelling catalog of software. It’s got to have a powerful, successful marketing campaign. It’s got to launch on multiple carriers, and get significant carrier marketing commitments. It’s been a long time since MS has been able to execute all those pieces successfully, and it’s never done it in the mobile/wireless space. All the while, MS is missing a massive opportunity to bring Office to the iPhone, iPad, and Android.

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