Palm’s Road to Nowhere — Is It Really Worth $1B?

Pip Coburn, who runs an investment advisory firm and is the author of “The Change Function,” likes to say that turnarounds rarely turn around. For proof, look no further than Palm (s PALM), which has been a perennial turnaround candidate for as long as…well, since it stopped making the Palm V. But let’s face it: When a company has the foresight to develop a product as iconic as the Treo long before anyone else has even started dreaming of an Internet-connected smartphone, yet utterly fails to capitalize on its first-mover advantage, it only has itself to blame.
At the risk of offending my friends who are fans of The New York Mets, I think the team makes an apt metaphor for Palm. Like the Mets, Palm inspires more hope than actual achievements. And just as the Mets bought ace pitcher Johan Santana and slugger Carlos Beltran and dreamed of a championship, Palm brought in former Apple executive (and all-star) Jon Rubenstein. But it didn’t matter.
Nor did the $460 million that Elevation Partners has sunk into Palm. No amount of money is enough for this company. Why? Because you can’t graft corporate DNA — once a loser, always a loser.

Of course, no one saw that back in January 2009. Rubenstein and his team were viewed as saviors, thanks to a nice-looking phone (Palm Pre) and a great operating system (webOS.) But I didn’t buy it. Having watched baseball long enough, I know that anyone can be a champion before the season starts. What matters is who finishes with the pennant.
And Palm, despite the boasting, wasn’t going to win it. In a post entitled Can Pre Save Palm From Being Put Out to Pasture?, I wrote:

While most gadget gurus and lots of readers who follow me on Twitter) seem to be quite taken with the newest shiniest object, thanks to Palm Chairman Jon Rubenstein’s magic, the power of a press release and the drama of a CES keynote, I remain highly skeptical of Palm’s chance to succeed with this new effort. I may be the only one who isn’t buying it. I don’t think Pre has done anything to move the needle forward, though its backers — including the affable Roger McNamee — are waxing eloquent about its potential. In a market where the iPhone sets the pace, Palm is woefully behind the curve.

The Pre, which will be available on the Sprint network, won’t be released until sometime in the first half of 2009. From now till the time Pre launches is going to be a crucial time for Palm. Every single day will push the company deeper and deeper into the hole it’s dug.

Why? By announcing its product too early, Palm has turned up the hype cycle around its new product offering, and that means fewer sales for its existing products. Palm and its carrier partners were already having a tough time pushing Treos out the door, and now those carrier partners are going to be none too happy. With a new Palm device on the horizon, carriers have less of an incentive to push the company’s current devices, and that means a further decline in shipments.

The question now is, will Palm be able to get a lot of developers to come and develop for the platform? Yes, we know they have a loyal community and millions of developers, but the momentum is with Apple and Google. As I pointed out earlier today, the iPod touch is the secret weapon that makes the iPhone platform attractive to the developers.

Nevertheless, we have been following the story of Palm’s demise since the start so in order to save you time, I’ve summed it up in seven points:

  1. Palm announces a major new mobile OS and attractive hardware.
  2. It partners with a down-on-its-luck carrier for a six-month exclusive.
  3. It finds that rivals and other carriers have more money to spend on marketing.
  4. It develops ads that only a Zen master can decipher.
  5. It fails to generate sales.
  6. The lack of sales makes it difficult for the company to attract developers.
  7. It starts to spiral downwards.

So where does it go from here? To the highest bidder, apparently. Some think it could be sold for $1-$2 billion, even though there’s really only one serious buyer, HTC. And I’m not sure why HTC should pay that much money for a company that’s fallen this far.
Palm had about $592 million in cash as of late February, and is estimated to have spent $80-$90 million so far in the current quarter. Kaufman Brothers’ analyst Shaw Wu told the Wall Street Journal that while it’s hard to value Palm in light of its ongoing operating losses, he thinks it’s worth at least $600 million. Others, of course, disagree.
From my perspective, the smartphone monsters — Apple with its iPhone and Google with Android — have too much momentum, developer attention and cash to be beaten in this market. Rubenstein and his backers clearly agree and as such, their decision to fold now is a smart one.
Here is a series of posts we’ve written on Palm and its slow road to nowhere:

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