Palm tries to hang on in booming industry

SUNNYVALE, Calif. - Palm Inc.'s death knell has been rung over and over - on Wall Street, in headlines, and by a growing number of discontented fans.

The smart-phone pioneer has been pummeled by deep-pocketed rivals and maimed by missteps, and is shackled to an aging operating system.

The Palm OS has fallen behind in user-friendly features, and the company's vital signs are taking a hit. Palm recently said it expects to see a loss of 1 cent per share or break even for its fiscal quarter ended Aug. 31. The company is scheduled to report earnings tomorrow.

If it is to succeed even as a small player in the fast-growing industry, it will have to act deftly, analysts say.

"They can hang on for a while longer," Gartner Inc. analyst Ken Dulaney said. "But they really can't afford many more mistakes."

High profit margins and the growing popularity of phones that are Swiss Army Knives of data, voice and Web capabilities have drawn intensifying interest from rivals, ranging from phone giants like Nokia Corp. and Samsung Electronics Co. to tech titans like Apple Inc. and Hewlett-Packard Co.

As competitors trotted out sleek new smart phones over the last year, Palm veered little from the once-beloved, but now-bulky design of the Treo 600, which debuted in 2003. Others adopted software platforms aimed at today's multimedia, multitasking culture, but Palm has been relying mainly on an operating system that has had only minor revisions over five years.

Officials at the Sunnyvale-based company acknowledge that the Palm OS's underlying architecture isn't agile enough. The software, which languished amid ownership switches first from Palm to a spin-off and now to Access Co. Ltd., can't handle voice and data functions simultaneously, thus leaving some users wondering why their Treos, for instance, can't toggle seamlessly between a phone call and video playback.

Palm is building a new operating system based on Linux, but it's a huge undertaking and nobody knows yet how it will stack up. The company recently canceled its much maligned Foleo, a laptop-like gadget, to shift resources to the next-generation platform.

"They have a lot of work to catch up from being behind for 18 months," Dulaney said.

Meanwhile, Palm is banking on continued sales growth of its Microsoft Corp. Windows-based models, which debuted in 2006. But analysts say that operating system also has shortcomings, and Palm must differentiate its products from other smart phones that use it.

Palm's profit plunged 43 percent to $15.4 million in its fiscal fourth quarter, which ended June 1, even though it posted record Treo sales of $344.2 million. In comparison, income at longtime rival Research in Motion Ltd., maker of the BlackBerry, surged 73 percent to $223.2 million for the same period.

Unless Palm delivers more compelling products and the brand regains its cachet, analysts predict the company will continue to get squeezed. The worldwide smart-phone market grew 23 percent in the first quarter, but Palm's slice stayed at about 3 percent while RIM's increased from 3 percent to 5.7 percent, and Nokia's grew from 48 percent to 52.6 percent, according to Gartner.

"They had one great product - the Treo - and they've never been able to follow it up," said Jeff Embersits, an analyst at Shareholder Value Management.

Palm unveiled in Europe this month a slimmer Treo 500v - its first significant hardware revamp in five years. A similarly thinner model dubbed the Centro is also expected to launch soon in the United States.

Lehman Brothers analyst Tim Long echoed other observers in calling it an "evolutionary improvement . . . rather than a major step forward."

"Palm really would have to knock it out of the park to succeed," said Hugues De La Vergne, an analyst at Gartner.