HI, THIS IS TH ELATEST FROM THE NY TIMES ABOUT THE TREO 600, TAKE CARE, JAY

February 23, 2004
Palm's Marriage of Convenience to Handspring Shows Promise
By LAURIE J. FLYNN

AN FRANCISCO, Feb. 22 - Todd Bradley, PalmOne's president and chief executive, recalls meetings last year with product designers of the company's predecessor, Palm Inc., to work out details of their next line of hand-held computers.

With the market taking off for cellphones that could do more than receive calls, while demand shrank for the stand-alone hand-held devices that were their specialty, the executives knew that Palm's future depended on quickly introducing the right product.

The next move would be considered sacrilege in many corners of Silicon Valley: the executives dumped their project and bought someone else's technology.

After trying for nearly two years to design a new line of products, Palm announced last June that it would acquire Handspring, the rival that had grabbed the high-end market for multipurpose hand-held devices with its popular Treo line. Although Palm had virtually invented the market for hand-held computers with its first PalmPilot in 1996, Handspring - founded five years ago in Mountain View, Calif., by former Palm executives who had helped develop the PalmPilot - had emerged as the innovator.

The Handspring acquisition, which was completed in October, was a remarriage of sorts. Palm, based in Milpitas, Calif., was larger, but the Handspring executives who have been brought back are helping to reinvent the product line and drive the merged company, which adopted the name PalmOne, in a new direction.

Sales of calculator-sized "personal digital assistants" with appointment calendars and address books have been declining. In the last year, consumers have been moving toward so-called smart phones -mobile phones that have those simpler functions as well as advanced functions like the ability to run spreadsheets, connect to corporate databases, access e-mail messages, download music and take photographs.

"By the end of the decade, the majority of phones will be what today we refer to as smart phones," said David Nagel, the chief executive of PalmSource, the company that supplies the operating system for PalmOne's devices. "You don't have to convince someone to buy a phone, just to buy a certain kind of phone."

Handspring jumped into the smart phone market in 2002 with Treo, a phone with all the functions of an advanced hand-held computer, after abandoning its low-end line of hand-held devices because of slumping sales. By acquiring Handspring and the Treo line, Mr. Bradley said, PalmOne entered the smart phone business nine months earlier than it would have on its own.

Though Handspring won rave reviews for Treo, it had run out of cash and lost money for the last three years. "We were never going to be a leader in smart phones" because of financial problems and the difficulty of competing with much larger companies, said Ed Colligan, formerly president of Handspring, who now runs PalmOne's wireless business.

Palm and Handspring each reported losses in the quarter before they joined, and executives from each company said that they had become convinced that the merger would help bring financial stability.

"We will be able to get to profitability sooner together than separately," said Donna Dubinsky, a founder of Palm, on a conference call with analysts when the merger was announced.

Ms. Dubinsky, who is now on the PalmOne board, founded Palm with Jeff Hawkins in 1992, and in March 1996 they released the PalmPilot. In 1998, Ms. Dubinsky and Mr. Hawkins left Palm abruptly in a dispute with the chairman, Eric Benhamou, and set off to create Handspring.

For the next five years, Handspring and Palm competed in the hand-held device business, with each company facing ever more difficult challenges in a rapidly changing market.

Palm's share of that market was declining steadily. In May 1999, Palm owned nearly 73 percent of American market for hand-held computers, and more than 68 percent of the market worldwide. Its market share has dropped to 38.5 percent this year.

And as far back as 2000, Palm had significant production difficulties, including problems at the company's plant in Hungary. Mr. Nagel, who was running Palm's software business, said that the company could not meet demand for its newest product, the Palm V, and sales dried up.

Mr. Bradley, formerly executive vice president for global operations of Gateway, was hired in 2001 as chief operating officer to try to improve operations. "When I got here, my focus was to dig us out of the hole," he said. While the company's financial condition has improved, it still lost money in the most recent quarter. Last month, Palm said it would lay off 12 percent of its work force, roughly 100 people, in hopes of becoming profitable by 2005.

For Handspring, the merger with Palm occurred as its losses were mounting. After rising steadily in 2000 and 2001, Handspring's sales fell sharply in 2002 to $241 million, from $371 million the year before. The company lost money every year after it went public in 2000.

As competition in the hand-held device market intensified, Handspring tried to differentiate itself by focusing on the market for converged devices, products that combine phones with computer features, and began investing heavily in the development of what would become the Treo line. But Treo could not stanch the losses.

With the merger, PalmOne has gained some of the industry's most notable engineers and executives - Mr. Hawkins, for example, is now chief technology officer of PalmOne. Equally important, the company inherited Handspring's relationships with mobile providers like Sprint PCS, Cingular Wireless and AT&T Wireless, which support Treo phones. PalmOne has shipped more than 100,000 Treo 600's since its release at the end of 2003.

PalmOne executives say Treo's success is critical. But it has had problems meeting demand, which the company said have been caused, in part, by the complexity of the merger.

Last month, PalmOne announced that it was reorganizing its staff to focus on development of new smart phones, a move industry analysts said was necessary for the company to keep up with rapid growth in the smart phone market.

"Redeploying resources in that direction makes a lot of sense," said Todd Kort, an analyst with Gartner Inc., the market research group.

Today, PalmOne is still the leader in United States market for simpler hand-held devices with its Zire and Tungsten products. But its market share was only 38.5 percent last quarter, followed by Hewlett-Packard with 25 percent, according to IDC, a research firm. Sony holds third place, with roughly 14 percent of the market.

In the smart phone market, PalmOne's most serious competitors are the cellphone manufacturers. Although Mr. Bradley argues that sophisticated cellphones, like the Nokia 3650, are not really smart phones because they are made mostly for voice calls and have very small screens and touch pads, those products are competing in the consumer market with PalmOne's devices.

According to a recent IDC report, Nokia shipped 5.4 million smart phones worldwide last year, more than double what it shipped the year before. Motorola, another competitor, shipped nearly 800,000 smart phones last year, also roughly doubling over 2002. PalmOne, by contrast, shipped only about 270,000 devices with phone capability like the Treo in 2003.

Meanwhile, PalmOne also faces strong competition from Research in Motion, the maker of the BlackBerry, the device that popularized wireless e-mail service and has a loyal following among mobile workers, particularly those in the financial, insurance and health care industries. Most BlackBerry users, however, still carry a cellphone because the BlackBerry's shape makes it unwieldy as a phone, Mr. Bradley said.

PalmOne also said there is a crucial difference between its smart phones and sophisticated cellphones: small software companies have developed thousands of add-on programs for Palm devices that can be customized to a user's specific needs. In fact, the excitement surrounding software development for hand-held devices is beginning to resemble that for the personal computer industry in the late 1980's, say analysts and developers.

"These are the same industry dynamics that propelled the PC industry to explode," said Daniel Shader, the chief executive of Good Technology, which provides the e-mail program that runs on the Treo.

PalmOne executives say they hope that dynamism will give their products an advantage.