Preparing for the Pre: Palm and Sprint must get it right

Palm and Sprint are betting heavily on the success of the forthcoming Palm Pre smartphone. Here’s what they need to do to get it right.

Palm and Sprint have put a huge bet on the Palm Pre smartphone, due out by June. If the Pre fails, it could sink Palm and badly wound Sprint, its exclusive U.S. carrier.

Slideshow: Palm Pre vs. Apple iPhone - How they stack up

The Pre was unveiled in January at the Consumer Electronics Show, sparking a jolt of excitement. Both companies say that the 3G smartphone with its innovative webOS and multi-touch user interface is on schedule. Everything depends, say a squad of analysts who track the mobile space, on a smooth execution, a marketing campaign that can fuel user anticipation, a user “experience” with both device and network that will satisfy that anticipation, and enthusiastic backing from software developers.

Whether the companies can pull it off is something analysts are divided over.

“The Pre should be very successful,” says Philippe Winthrop, director of business mobility solutions for Strategy Analytics, a research firm based on Newton, Mass. “It’s a great user interface that addresses many of the frustrations people have had with the iPhone, especially the lack of a physical keyboard.”

“I looked at the Pre and thought, ‘cute.’ But this is a company that’s abandoned it’s developer community, and to some degree its customers,” says Michael Disabato, vice president, networking and telecoms strategy service, with Burton Group, a technology research firm based in Midvale, Utah. “Now, hook them up with a [cellular] carrier that’s languishing. That’s a recipe for disaster.”

The numbers may not prove Disabato’s point, but they do show how much is riding on the Pre for both Palm and Sprint.

Palm’s most recent quarterly financials show how much is riding on the Pre’s success. The company lost $98 million in the third quarter, compared to $57 million a year earlier. The company sold 482,000 devices in the period, a plunge of 42% year over year. Analysts speculate that demand for Palm’s older PalmOS handhelds and some of its Windows Mobile handsets is being hurt as potential buyers decide to wait for the Pre. Palm executives say they expect the fourth quarter to be equally “challenging.”

The stock price got a slight reprieve when a Deutsche Bank analyst raised his target price for the stock, from $2 to $12, specifically due to confidence that the Pre, and as yet-unnamed additional form factors also using Palm’s new webOS software, will be successful.

Sprint’s performance was even worse, reporting in February a $1.2 billion loss for the just-ended fourth quarter, and continuing to shed customers, even as it attempts to create a brand new 4G data service by wholesaling WiMAX connectivity from its joint venture, Clearwire.

Sprint recently confirmed the service plans that will be available for the Pre, but neither company yet has revealed anything about the phone’s final price.

The key question is whether users will want the Pre, enough to switch from existing, older Palm products, or to upgrade from an existing 2G phone to a 3G device. In general, analysts say the Pre has a good chance to generate the same kind of excitement as Apple’s iPhone.

“This is not your father’s Palm,” says Ramon Llamas, senior research analyst, mobile devices, at IDC, a market researcher in Framingham, Mass. “The Pre and webOS are vastly different [from the older Palm platform].” Pre’s strength’s include its slick multi-touch screen and UI, with a full slide-down QWERTY keyboard, the simplified on-screen navigation among various applications, and the integration of information across applications.

“The device and the OS are fresh, and appealing,” says Winthrop. “It’s a monumental leap forward from the legacy PalmOS devices.”

Burton Group’s Disabato, who had been using Palm devices for years until he switched last year to an iPhone, is less impressed. “It’s similar to the PalmOS interface, which I thought was a good interface, but it’s nothing earth-shattering,” he says.

He wonders if the Pre will even match the utility of his last device, a Palm Tx: he could use a portable infrared keyboard, the Documents to Go application from DataViz, put the Tx in landscape mode, and type Microsoft Word-compatible documents on the tray table of a jet. “Apple still can’t do that even today with the iPhone,” he says.

Frost & Sullivan Vice President Gerry Purdy thinks Palm will be able to successfully leverage the Pre’s multi-tasking capability to create a new value for mobile users. “The whole Palm organization is known for its [emphasis on] ease of use,” he says. “In the past, you couldn’t do two things at the same time, running a background operation or another app while were on a phone call or receive e-mail. With multitasking, you can.”

Purdy’s point is that multitasking allows a degree of integration and interaction among applications and data sources that either can’t be done today or can only be done with great difficulty. “Take a simple example: you’re looking at your calendar, and the system can add [automatically] a weather update based on your GPS location. Instead of treating things as ‘silos,’ you’re treating them as ‘mobile mashups’ to create an experience that makes sense for a specific mobile user in a specific location.”

The creation of such experiences hinges on software and software developers. Palm has given a sense of the possibilities with its Palm Synergy application, which links up Outlook, Google, Facebook and other calendars to one location. Similarly, the Pre’s Universal Search feature lets users work with a single search bar to hunt for information across Pre-based and Web applications, contacts, dialing information and so on.

“It’s the ability of the system for developers to integrate multiple pieces of information into a given user experience,” says Purdy.

Disabato is not optimistic that PalmOS developers will embrace webOS. He points out that Palm cut the ground out from under these developers, without input from or warning to them, by shifting to a new OS platform. IDC’s Llamas says Palm has been courting this group, and working to give them the tools and resources they need to be successful with the new OS.

Purdy says it will be vital for Palm to launch the Pre with the most popular and useful applications ready to download, install, and run, to maximize what users can do with the phone.

“The key success factors are: execution, execution, execution,” says Winthrop, of Strategy Analytics. “Make sure the device is solid, the OS is snappy and stable – no nasty bugs! – and that [3G] reception is strong.”

Sprint has been trying to stem the flood of subscriber defections for at least a year. It’s clearly hoping that the Pre will start bringing new customers into the fold. Again, Disabato is pessimistic. “It’s on a CDMA network: it’s a very small niche market, compared to GSM, and it’s with the smallest mobile operator,” he says.

But others point out that Palm has given strong indications that it’s talking about launching the Pre on European GSM networks soon after it launches with Sprint. And they think Palm’s exclusive deal with Sprint in the U.S. may be much more short-lived than Apple’s deal with AT&T for the iPhone, which, two years after being introduced is still tied to only that carrier in the U.S. “I don’t think it will hurt them,” says Purdy. “It’s a factor in limiting your risks in the launch, and it makes sense.”

“The device has got to work seamlessly on the network,” says IDC’s Llamas. He notes that both the original iPhone and iPhone 3G were hurt by some connectivity issues. “Sprint has a rigorous testing process, and the two companies have a good relationship working together in the past,” he says.

If Pre is successful, it could set up Palm as a takeover target, says Frost & Sullivan’s Purdy, possibly by Dell or Nokia. The Finnish handset maker has not been as successful in the U.S. as it has been globally. If the Pre becomes a hit, Nokia might want to exploit it, Purdy says.

But there’s the other side of that coin. “If you’re rooting for Palm to succeed, and they don’t deliver, it will be hard for them,” he says.

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