What Palm Needs to Do to Bounce Back

The last few weeks have been dominated by speculation over two things: the Google Phone and the Apple tablet. One is now a reality. The other is still a myth. And beyond this twin-headed meme, attention has been paid to little else. Forgotten is the fact that BlackBerry (s rimm) is still outselling its rivals and its brand-new 9700 Bold (with touchpad) is arguably the best device the Canadian company has ever made. Also forgotten in the Google vs. Apple battle is a little company called Palm (s PALM).

Palm Pre

Yesterday, I stopped using my Nexus One and resumed using my BlackBerry Bold. (Which explains why I’m once again returning emails and text messages in a timely manner.) I also looked again at the Palm Pre, which had been sitting at the bottom of the drawer, gathering dust. I couldn’t remember exactly why I had stopped using it — though it helped that AT&T’s (s T) mobile chief, Ralph de la Vega, today confirmed that Ma Bell was going to start selling the Pre and its younger brother, the Pixi, in 2010.

Verizon (s VZ) is going to start supporting the Pre as well. With Sprint (s S) already in the bag, it seems like Palm finally has the ability to address a big enough market. Of course, it also means the company can no longer claim it doesn’t have enough carrier partners. Helping it get to this point was the fact Palm’s main investor, Elevation Partners, has kept the faith.

In an interview with Bloomberg, Elevation co-founder Fred Anderson called its investment in the company a “marathon,” and said his firm “hasn’t taken money off the table because we see a huge market opportunity here.” Elevation has invested a total of $460 million in Palm since 2007 and has seen the stock grow threefold in 2009 alone. I admire these guys for keeping the faith.

After coming off my 10-day Nexus One stint, I realized that barring the iPhone OS, webOS, which powers Palm’s devices, is perhaps the most complete and polished operating environment available. It’s also far more elegant and seamless than either Nokia’s (s NOK) Maemo or Google’s Android. I guess that’s one of the reasons why there’s ongoing speculation that someone — Dell, Nokia or Microsoft — will buy Palm.

Maybe — and maybe not! In the meantime, the big question is: Can the company stage a comeback? I have not been shy about my feelings as to Palm’s increasing irrelevance, antagonizing Palm fans in the process. There were four basic challenges that were facing the company, in my opinion:

1. A weak brand.

2. A weak balance sheet.

3. Deep-pocketed competitors, including one with a massive customer base.

4. Being late to the market, thus giving it a weak app store.

What I liked about Palm:

1. Its developer community.

2. webOS.

3. Vertical integration of its hardware and software à la Apple.

Palm Pixi

Palm has had to face the challenges I outlined last year and has continued to struggle. And should the Palm fanboys get upset by that assessment, here is the company’s latest quarterly performance: In the second quarter of its fiscal 2010 period, the company shipped 787,000 smartphones, in line with what Wall Street was expecting — and down 5 percent from what it shipped during the first quarter of fiscal 2010. Which means that five months after it was launched, the Pre is already beginning to lose steam. And don’t forget that also during that fiscal 2010 second quarter, the company put the ultra-cheap Pixi on the market.

That’s why I still think the odds are against Palm. Still, I would give the company a one-in-five chance of being relevant in two years — as long as it does three things:

First, it needs to make its hardware less complex. It took playing around with the Pre again to remember why I had hated the device in the first place. While the team had done a good job of coming out with an attractive product — Droid makes it look like a work of art — the device’s user experience was stuck in a previous era, as evidenced by the multiple input options (keyboard/touch) and multiple buttons. So in fact, what I hated was Palm’s Handspring legacy. What the company needs to do is go back to the drawing board and come out with a simpler touchphone: no keyboards, no buttons, nothing.

Second, it needs to get its app ecosystem going. The single biggest asset Palm has is webOS. As such, it needs to drive home its web-friendliness amongst developers. And in order to do that, all Palm has to do is look at its past — it had developers and apps long before apps were the new black. It needs to get the number of apps up from its woeful 800 to a more respectable number — say, 10,000. It should start by looking at the top 1,000 apps on the iPhone App Store and get them onto webOS. And if it means actually paying developers to keep supporting the platform, so be it. The good news is that the company knows this. Investor Anderson told Bloomberg: “We have to establish a very strong developer ecosystem…a critical mass of very high-quality third-party applications.”

Third, it needs to get over its Apple complex. CEO Jon Rubenstein and other Apple alums who walk the hallways of Palm need to get over their fixation with Apple and Steve Jobs. You guys are not Steve and your company isn’t Apple. What you are is Palm, a once-iconic PDA maker with decent developer support and a brand that is as hip as Fred Perry. The good news is that Fred Perry is hot again. And seriously guys, stop taking media relationship tips from Apple. It is virtually impossible to even get anyone from your company on the phone anymore, including your CEO. That elusiveness doesn’t work for a company that’s having a tough time getting market traction, doesn’t have the story or the products. You needs to get the media on your side, which means talking to the folks who live and breathe this smartphone stuff.

These tips aside, the company needs to show more urgency or it will continue to lose relevance in this high-stakes war.

Related posts:

Palm Should Go All In With Its Pre Marketing

Palm to Developers: We Love You, We Want You.

Spring in feature photo image courtesy image courtesy of Flickr user oskay.

This article also appeared on BusinessWeek.com.

Networks & Their Fear & Loathing of Hulu

Hulu, the online video joint venture of NBC, Fox and Disney that’s funded by Providence Equity Partners, seems to be having familial issues. No, it’s not YouTube or TV Everywhere giving the second-most popular online video service in the U.S. headaches. Instead, internal bickering is causing problems, MediaWeek reports. This is not the first time Hulu’s parents have undermined the service. But it comes as a surprise — traditional media companies have a long history of snatching defeat from the jaws of victory. Continue reading on NewTeeVee.

Rajeev Motwani Memorial Planned for Sept. 25

motwani.gifFriends and family of Rajeev Motwani, a Stanford University professor who was well-known for being an early investor in Google (s goog), are planning to host a memorial service followed by a concert on Sept. 25. Rajeev drowned in his swimming pool earlier this year. Just as he helped me, Rajeev assisted thousands of people in Silicon Valley — whether it was through advice, connections and sometimes money.
We are going to celebrate Rajeev’s life on Sept. 25 at Stanford. You can RSVP here by Sept. 21, 2009. The memorial will start at 3:30 p.m. PDT, followed by a small reception at the Littlefield Center Courtyard and a concert by Indian Ocean at the Frost Amphitheater.

Sargasso Sea

Red Herring :: August 2002 ::If you’re a company executive looking forward to innovative, next-generation broadband services, you might want to pull up a chair. You’re in for a long wait. Why? Because cash-strapped Baby Bell phone companies, like SBC Communications, Verizon, and BellSouth, are too stingy to invest in new network technologies to deliver those services.

In an industry that’s had an insatiable appetite for new technologies over the past few years, this may sound like telecom heresy. But the grim reality has sunk in, and the options are to buckle down and keep costs low, to reduce debt, or to face extinction. “The situation today is similar to the Sargasso Sea: there is no current, no wind, and no waves,” says Allan Tumolillo, chief operating officer of the market research consultancy Probe Research, referring to an area in the Atlantic Ocean where current and atmospheric conditions cause stagnation. “Nothing is going to change for some time,” he adds. “We will drift until 2004.”

Baby Bells and other large players, like Sprint and AT&T, are looking to keep cash-flow positive and thus protect their credit ratings. Many carriers were scared by the pending collapse of WorldCom. Within a week of the company’s debt being downgraded to junk status late this spring, its stock sank below $2 a share (Nasdaq: WCOM). At press time, it was trading for considerably less than $1. Any downward revision on their credit ratings means companies will have to pay more in interest costs, which in turn has an adverse impact on their earnings. “There is a complete lack of faith in the telecom sector, and EBITDA [earnings before interest, taxes, depreciation, and amortization] has become meaningless; everyone is looking for cash flow-positive companies,” says Mr. Tumolillo.

PROCEED WITH CAUTIONLarge telecom carriers are very cautious about investing in new technologies to deliver broadband services. Among the offerings that most observers say will shape the marketplace in the long term are wavelength service, bandwidth on demand, and video on demand.

Wavelength service enables business customers to set aside dedicated bandwidth, assigned to them by their service provider, for specific business purposes, like teleconferencing or large marketing efforts.

Bandwidth on demand is a more dynamic service in which a telecom carrier sells a business customer the right to order large network circuits between two or more points whenever they’re needed. With bandwidth on demand, the customer is assigned a specific color band, or wavelength of light, on an optical network. The ability to order bandwidth only when it’s necessary helps companies avoid costly, long-term fixed contracts for bandwidth.

The much-ballyhooed video on demand, or the delivery of streaming video to an individual Web browser, has faced several technological problems, including clumsy archival features and a lack of adequate bandwidth. The carrier Qwest Communications shut down its Qwest Digital Media operations because of lackluster customer demand and huge debt problems. Earlier this year, Enron Broadband Services bailed out of the business altogether (and a lot of other businesses, as well).

That’s why carriers are sticking with proven, cost-effective moneymakers like T1-circuit (a dedicated connection over which data can be transmitted at 1.5 Mbps, or 30 times faster than a dial-up connection), frame relay (a high-speed packet-switching protocol used in wide area networks, or WANs), and DSL technologies, as well as plain old voice services. Mr. Tumolillo says the Baby Bells, which are eager to cut costs, will continue to sell traditional services like T1 and to make as much profit as possible, since most of their equipment has already been depreciated on their balance sheets. In the coming months, spending on fancy new technologies will continue to drop sharply, as carriers looking for a clear path to profits turn to existing technologies like voice over IP (VOIP), virtual private networks (VPNs), and ethernet over copper.

From Genuity to AT&T, almost all carriers have some sort of VOIP initiative in the works. But it will be a while before this technology has a meaningful impact on their revenue. And VOIP isn’t without its shortcomings. Poor quality of service and problems with packet loss and delays are issues that worry large companies–no one wants choppy or dropped calls, so corporations have been sticking to traditional voice services.

Optimists like Steven Blumenthal, chief technology officer with Genuity, a telecom service provider in Woburn, Massachusetts, are betting that VOIP will be especially attractive to large corporations that need to communicate with multiple international locations within WANs, in which VOIP has proven to be quite effective. VOIP allows large multinationals to circumvent the local switched networks and can save about 17 percent in communications costs within the first 12 months alone, according to the research firm Current Analysis.

Similar economic arguments are being made for VPNs. According to a recent study by the research firm IDC, the total market for IP-based VPN services in the United States will grow from just more than $5.4 billion in 2001 to nearly $14.7 billion in 2006, an annual growth rate of 22 percent. As an increasing percentage of the workforce becomes mobile, most companies are looking for ways to cut costs and still provide their employees with secure access to the corporate networks. While frame relay has been a traditional option, many say that VPNs are cheaper and easier to deploy and manage.

Since carriers are looking to make deep cuts in their operational expenses, which sometimes account for nearly 50 percent of total costs, ethernet over copper is an easier-to-run option, compared to, say, optical networks, DSL, or even T1 technologies. As a primary carrier of data, ethernet over copper could replace DSL in the small and medium-size business markets, which are looking for more bandwidth but refuse to spend $600 a month for a T1 connection.

TELECOM HANGOVERThe telecom industry is paying for its excesses. From 1996 to 2000, telecom carriers of all shapes and sizes spent billions of dollars on new equipment and networks that crisscrossed the globe. The perceived demand for bandwidth, which according to some estimates was doubling every three months, prompted an enormous investment frenzy in infrastructure, the likes of which hadn’t been seen since the railroad boom at the turn of the 20th century.

So what do these dire market conditions mean for startups, and even established players, that were expecting to get new orders for state-of-the-art technology? They aren’t likely to win big orders for their products anytime soon–that is, unless the technology permits the carrier to get a quick return on investment. “It will be two years before the startups get any real orders,” says Greg Blonder, general partner with Morgenthaler Ventures, a venture capital firm based in Menlo Park, California.

The only new technology that might prove successful is ethernet over copper, since it helps Baby Bells compete more aggressively with the cable companies that have started eating into their T1-related revenue.

The indifference toward new technology in the telecom market is a huge concern for large service providers like Genuity, which looks to carriers to provide services that it can then package for sale to its base of 5,000 corporate customers. “There is a fair amount of capacity at both the optical and IP layers, and our focus is on consuming that capacity,” says Mr. Blumenthal. Genuity is also keeping its expenses low, and is interested in service offerings that provide a quick return on investment.

Mr. Blumenthal’s cautious approach is supported by data from RHK, a market research firm in South San Francisco, California, which expects North American telecom capital expenditure in 2002 to fall to between $46 billion and $51 billion, from $77 billion in 2001. And the expenditure level is expected to remain flat throughout 2003. To put things in perspective, two years ago carriers spent more than double their current capital expenditure budgets–a whopping $108 billion–on equipment purchases.

The consensus among research groups is that the first signs of recovery for the telecom industry should begin sometime in 2004. Some observers even say that time frame might be too optimistic. That’s a long time on hold.