Retail Downturn May Thwart Palm's Last Stand

At the Consumer Electronics Show in Las Vegas, Palm finally pulled back the curtains on the Palm Pre--the first device based on the long-awaited, oft-delayed WebOS mobile operating system, previously known as "Nova." Although early demonstrations indicate the platform is well designed and very slick, I think Palm's latest release

At the Consumer Electronics Show in Las Vegas, Palm finally pulled back the curtains on the Palm Pre--the first device based on the long-awaited, oft-delayed WebOS mobile operating system, previously known as "Nova."

Although early demonstrations indicate the platform is well designed and very slick, I think Palm's latest release may be too little, too late to save the company because of the interplay between the economy and Palm's tarnished reputation.

Over the last 20 months, Palm has surely looked on in envy as Apple and Google enjoyed tremendous early success with brand-new devices running highly anticipated mobile OSes, with thousands of people lining up (or pre-ordering) so they could be the first to have an iPhone or Android phone. Palm would love similar fanfare and quick adoption of WebOS and the Pre.

Both the iPhone and the Android phone came with built-in core audiences to drive initial sales--Apple's Mac aficionados and Android's open-source advocates and developers. Palm once had a strong consumer and business following, but the former dried up after suffering through years of quirky device behavior and stagnation of both the underlying platform and the developer community. Meanwhile, Palm consigned the latter to devices running Windows Mobile.

In December 2008, Palm representatives told BusinessWeek that the new OS is designed to reach the "fat middle of the market"--somewhere between the iPhone and the more business-oriented RIM BlackBerrys or Palm's Windows Mobile Treos. The hope--and design intent--is for WebOS to appeal to consumers who will then bring in into the office and use it for work as much as possible.

To win these customers, Palm will need to overcome its recent reputation for producing uninspiring and under-featured devices. Palm of course will need scores of positive reviews in blogs and the mainstream press, but what it really needs is to get the device into the hands of those who once knew, loved and trusted their Treos or PDAs, in hopes of winning those people over once again. Once in hand, the Pre has a few minutes to quickly prove that it can compete with the state-of-the-art alternatives--on native features, usability, the promise of future growth, utility and customization--before the customer says, "Screw it, I'm getting a BlackBerry."

This is a tall order, but WebOS does look compelling enough to succeed if given a chance.

Unfortunately, Palm will release WebOS devices into a terrible economy that will likely preclude any chance for the new platform to succeed, not only due to the massive slowdown in spending by consumers, but through a decrease in the number of places potentially interested customers can turn to give Palm this one last chance. Following a historically bad holiday shopping season, many financial analysts predict 2009 will continue the downturn for retail establishments. Potentially, hundreds of thousands of U.S.-based stores (and thousands of malls) could be forced to close this year, reducing the number of places consumers can get hands-on with the Palm Pre. Sprint, the exclusive carrier for the Pre when it launches in the first half of 2009, has already shuttered many of its existing outlets and reemphasized its online store presence--an example I expect other carriers to follow as the recession progresses.

Were these potential showcase outlets to disappear--to go along with the in-progress demise of electronics retailer Circuit City--Palm will suddenly have many fewer locations where it can let curious but cautious users sample the new wares.

To reach the fat middle, Palm will definitely need to expand its presence in remaining retail alternatives that cater to this particular audience and are sources of cell phones and smartphones. Wal-Mart springs immediately to mind, as Palm already has some presence there with its low-end, low-margin Centro, and customers know that higher-end devices like the iPhone can be bought there. Other options such as office supply stores would also make sense, although the economy will surely take a toll on that retail sector as well in 2009.

If the Pre does not move as hoped out of the gate, Palm may need to massively discount the device and look to generate income primarily through application sales via the Palm online store. But Palm would need to convince developers to focus their efforts on a late-arriving operating system with no existing customer base. This is a tough proposition, although at least Palm had the foresight to base development upon standards, as applications can be developed quickly with known entities like CSS, HTML and JavaScript.