How Handset-Maker Palm Lost Its Punch in 2007

Palm, the U.S. handset maker known for its PDAs and Treo smartphones, has been struggling for sometime to regain its status as a leader in the business phone space, but recent developments, including massive financial losses, layoffs and a failed product launch, suggest the company may finally be on its way out.

The past year has been particularly rough on Sunnyvale, Calif.-based Palm, with rivals like Research In Motion (RIM), Nokia and High Tech Computer (HTC), announcing various new devices and product innovations while Palm’s flagship product, the Treo, has mostly kept the same look and functionality it’s had since 2003, when the Treo 600 was first launched. RIM and HTC have also both been successful in penetrating the vast consumer market, while Palm and its Treo 680 smartphone, the first Treo aimed at consumers, hasn’t built much of a user base. (Perhaps because the Treo 680 looks just like its bulky Treo siblings, expect for a lack of an external antennae, which has become a Treo fixture and the fact that it comes in a variety of colors. It also featured the same old Palm OS, which hasn’t received a major upgrade in five years.)

Palm Treo 750

In March, various news outlets reported that Palm was considering a sale of the company, or at least seeking funding from venture capitalists. Nokia or Motorola seemed like the leading contenders. Later that month, Palm reported that its quarterly profit had dropped nearly 17 percent from its previous quarter to $16.5 million. And its net income in the most recent quarter plummeted 43 percent to $15.4 million, according to BusinessWeek.com.

This was right around the time I reviewed Palm’s latest Treo, the Treo 750, and it was immediately apparent why Palm was being swept away by the competition: the device was the largest and heaviest of the phones I included in my review, and its battery life was horrendous in comparison to the other phones. Palm users have long complained about the Palm OS’s lack of reliability due to frequent crashes and other issues, but the Treo 750 is one of the few Treo devices that runs on Windows Mobile, so I didn’t experience those problems firsthand.

In what seemed like it could be the start of a turnaround, Palm in late May unveiled a new product at a Wall Street Journal technology conference, called Foleo, which it dubbed a “smartphone companion.” The product was a light, Linux-based PC that looked like a small laptop or subnotebook, and it was meant to make e-mail management easier for users by providing a larger screen and keyboard. I remember immediately questioning its viability after reading a brief description of the Foleo demonstration, though I was impressed that Palm had finally tried something new and different.

Then the company caught a break when Elevation Partners, a private equity firm, said it would it sink some $325 million into the firm in exchange for a 25 percent equity stake. Rock star Bono, of the uber popular Irish band U2, is one of five partners at the private equity firm. But the excitement around the investment was short-lived, as Palm soon after announced a layoff of “a small percentage” of its roughly 1,200 staffers. Many of the affected came from its U.S. development group, according to reports.

Until a couple of weeks ago, Palm had largely fallen off my radar, but then came the announcement that it was scratching the planned Foleo launch and doing away with the product completely. The company’s CEO, Ed Colligan, said it would take a charge of less than $10 million in relation to the cancelled launch.

And that brings us to present day. Though, Palm is still a profitable company, and it’s finally introducing new, consumer-oriented products like the Palm 500, which is currently available in Europe, it remains to be seen whether or not the Foleo failure will prove to be one more cycle in Palm’s downward spiral. Something tells me the Palm 500 won’t be its savior. The device is the first smartphone from Palm that doesn’t feature a touch screen, and I can’t help but question the decision to do away with it as the iPhone has rekindled the interest of consumers and business users in touch interfaces. In other words, people are now looking specifically for phones with quality touch screens, and Palm could capitalize on the trend. It’s also set to launch the Centro smartphone later this year, according to BusinessWeek, and the name sounds consumer-oriented to me, but there’s not much more information available.

I leave you with a few questions. First of all, straight to the point: Is Palm on its way out?

I know there many loyal Treo and Palm PDA users out there who absolutely love their devices. (Check out the comments on a BusinessWeek story about Palm’s current status in the smartphone space to see what I mean.) But will those loyal users remain that way and invest in the company’s products while it’s apparent that it is being muscled out of the space by other more innovative firms?

What do you think went wrong with Palm? What can it do to get itself back on the path to success? Or is it too late?