Is Palm in the Wrong Hands?

Palm Inc. will step into the PC Expo spotlight this week in the worst shape in its history.

Palm Inc. will step into the PC Expo spotlight this week in the worst shape in its history. Dogged by plummeting stock value, burgeoning inventory, layoffs and even the sale of land once planned as the site of the companys new home, the longtime leading handheld developer desperately needs to shake off numerous setbacks and prove it can focus its enterprise efforts. That daunting task, however, has many customers and industry experts questioning whether Palm has the right leader for the job.

Palm CEO Carl Yankowski is expected to use the PC Expo forum in New York to focus on handhelds in business. But he will need to be specific to quiet the tremors shaking his company, which stem in large part from a lack of direction.

"This has got to be some kind of record," said one handheld industry executive who has worked closely with Yankowski. "Its the worst case of mismanagement Ive ever seen."

Palm officials said Yankowski was unable to comment on this story due to the company being in a quiet period.

In the enterprise space, analysts said they blame Palm for not doing enough with its business partners, specifically IBM.

"They should have gotten IBM to do more," said Ken Dulaney, an analyst at Gartner Inc., in San Jose, Calif. "What the heck is IBM doing? Why isnt Notes-Palm as formidable as Outlook-Pocket PC? They are letting Microsoft [Corp.] get away unscathed."

Microsoft, Palms most obvious competitor, certainly has its own trouble in the mobile space. But Microsofts Pocket PC platform remains a formidable threat. Gartner Dataquest, also of San Jose, estimates that this quarter Compaq Computer Corp. will displace Palm as the sales leader for handhelds in terms of dollars. And Toshiba America Inc., of Irvine, Calif., later this year is expected to release a device based on Pocket PC.

Recognizing the need to better focus, Yankowski split Palm into strategic business units earlier this year, including one to concentrate on the enterprise. But that group remains without a leader.

In addition to the mixed messages in the enterprise, Palm—and Yankowski in particular—is being hit for early product announcements. In an effort to compete against Handspring Inc.s Visor Edge, Palm preannounced the m500 and m505 handhelds, which dried up sales of existing products.

"Yankowski shot his mouth off about new products too soon," said a former Palm executive. "And then its one of those whoops, Ive got a bunch of inventory things. ... Its not unusual to miss the boat sometimes in this industry, but the degree to which things have been missed in this case seems odd."

Yankowski admitted last month that Palm will have to take a $300 million write-off because of its bloated inventory.

And the company may be too late with its next wireless personal digital assistant. Due later this year, the m700, code-named Skywalker, is supposed to be an always-on device with push e-mail functionality that will compete with the popular Research In Motion Ltd. BlackBerry e-mail device. But a report this month from The Bear Stearns Companies Inc., of New York, expressed concern that Palm may have legal trouble releasing the product because RIM recently secured a broad patent for single-mailbox integration.

The missteps, coupled with the companys tough times, have fueled questions about Yankowskis competence for the top spot at Palm.

Of course, all the blame for Palms troubles cannot lie entirely with Yankowski.

"I would first say that the biggest mistake was Eric Benhamou of 3Com [Corp.] letting Jeff Hawkins and Donna Dubinsky [leave]," Gartners Dulaney said, referring to the two founders of Palm, which was ultimately purchased by 3Com. The duo left 3Com in 1998 to form Handspring Inc. "All they wanted was to spin off the division, which [3Com Chairman and CEO Benhamou] wound up doing a year later. ... They havent upgraded their software. They have been preoccupied with spinning off and other things."

Benhamou, also Palms chairman, said, " ... Let me say for the record, Carl definitely has the complete support of the board."

When Yankowski took the post in 1999, he was billed as having the right mix of marketing savvy and technical know-how, coming off stints at Reebok International Ltd., Sony Corp. of America, Memorex Corp., General Electric Co. and Pepsi-Cola Co. He also sported an electrical engineering degree from the Massachusetts Institute of Technology. But since coming to Palm, Yankowski, insiders said, has spent little time in the companys Santa Clara, Calif., headquarters. He doesnt live on the West Coast most of the time, and he has little to do with day-to-day operations, they said.

Many who have worked with him say his scattered résumé is a sign of habitual ineffectiveness.

One former Reebok executive said the shoe company under Yankowski "was going nowhere fast. He knew nothing about the footwear industry. ... He got a great exit package because they wanted to get rid of him. The Peter Principle in action if I have ever seen it."

In speculating about Yankowskis keynote at PC Expo this week, "The only thing I can say is that I hope he is positive about the future for Palm, doesnt call the Palm VII a lump of coal, as hes done in the past," said Nathanial Freitas, chief technology officer of ThinAirApps Inc., a New York company that provides wireless access from the Palm VII to myriad office applications.

In addition to releasing the new wireless Palm and a new version of the Palm operating system by the end of the year, Yankowski has hinted about how he might turn Palm around. On the top of the list is splitting its hardware and software divisions into two companies, but he has not said when that might happen.