Microsoft Proves Tough Competition For Palm Leader
Dow Jones News Service ~ March 28, 2001 ~ 5:15 pm EST
By Simon Burns in Taipei
PALM, THE DOMINANT developer of hand-held computers, will see its market share wither if it doesn't give more companies permission to make the devices, say manufacturers and industry observers. Apart from the potential loss of revenue, such a drop would also mean less exposure for its operating-system software that some see as the company's lifeline.
"Palm is definitely making a big mistake. They will fade from the market," says Simon Huang, chairman of Eten, a Taipei-based electronics manufacturer. Huang would like to use Palm's design as a base for next-generation financial- information pagers, but says he has no hope of receiving a licence from the United States company.
Palm leads the $5 billion global market for hand-held computing devices. However, while the market continues to grow, Palm's share has fallen over the past year, particularly in Europe. Palm has lost out to devices using software from rival Microsoft-Windows CE.
Microsoft's cause has been helped, some say, by its more liberal licensing policy. "Microsoft discovered a long time ago what you might call the razor and razor-blade model," says Tim Scannell, an industry analyst with U.S.-based consultancy Mobile Insights. "They make the OS [operating system] widely available. That quickly builds up a developer community and user base, and Microsoft can sell into it."
Microsoft says it already has given hundreds of companies permission to build products that support Windows CE, among them Compaq, Hewlett-Packard, Samsung and many other manufacturers in Asia. Palm has only licensed its technology to eight companies, five of which have actually released products, among them Handspring and Sony. Handspring's Visor is the only Palm clone to win significant market share, though Sony's new Clie also is expected to do well.
Palm makes more than 95% of its revenue -- over $500 million in the three months to September 2000 -- from sales of its hand-helds, and observers say the company is reluctant to let cost-cutting Asian manufacturers drive prices down. Although Palm gets an undisclosed royalty for each unit sold by its licensees, this contributes relatively little to its revenue.
Unlike Palm, Microsoft doesn't make or sell a hand-held device itself, only collecting a per-unit royalty. So Microsoft has little to lose by giving more manufacturers permission to use its software.
Microsoft also has responded to complaints that Windows CE royalties are too high, bringing the royalty fee per unit down from around $30 to as little as $ 10, attracting more manufacturers and helping them cut prices further -- increasing the pressure on Palm.
Founded in 1992, U.S.-based Palm single-handedly created the market for hand- held computers in the mid-1990s. Its Palm organizer was the first such device to gain mass-market acceptance.
Researchers estimate around 10 million hand-helds were sold worldwide in 2000, and see the market expanding to about 30 million units by 2004. Most models sell for between $300 and $600. The devices allow users to write notes, play games and manage contacts and expenses. Third-party software and hardware can add a wide range of additional functions. With a wireless connection, they can send e- mail or surf the Web. Microsoft began trying to break into the market in 1996, but its Windows CE operating system was slow and difficult to use in comparison to Palm's OS. Early licensees of Microsoft's technology suffered very poor sales.
Despite these problems Microsoft continued to improve Windows CE, and relaunched its technology under the Pocket PC banner last year. The Pocket PC concept really took off with the tremendous success of Compaq's i-Paq, launched in mid-2000.
Retailers reported that demand was far outstripping supply. By February this year, the i-Paq had claimed 4% of the hand-held market.
Microsoft has been able to build on the ubiquity of its Windows software, says Mobile Insights' Scannell. Software developers, hardware developers and users are all familiar with Windows. Palm prides itself on the simplicity of its products, and criticizes Microsoft for trying to cram all the functions of a PC into too small a package.
But there is no doubt that many buyers are attracted by the promise, even if the reality proves unwieldy. The multimedia razzmatazz of the Pocket PC -- bright colour screens and CD-quality sound -- also has helped sales. Meanwhile, Palm has only recently introduced a colour screen.
Mary Starman, product manager of Microsoft's mobile-devices business unit, mocks Palm's cautious approach: "It took them about five years to figure out that they should get other people to manufacture their product."
U.S. market figures for February show devices based on the Palm OS with 89% of the operating-system software market, while Windows CE products -- including Pocket PC devices -- claim 9%, according to research firm PC Data. Scannell predicts dramatic sales growth for the Pocket PC. "A year to a year and a half down the road, I think you'll see Pocket PC with 30%-40% of the market, and Palm down to a similar, or perhaps 10% larger, share."
Palm finds itself at a crossroads. An advertising campaign last year emphasized the Palm OS far more than Palm's own hardware. This was a sign, analysts said, that the company was ready to bite the bullet, abandon hardware as its main source of revenue and begin to rely more on licensing fees. Last December, Palm announced a new licensee, Samsung of Korea, and has discussed licences with several companies in Taiwan.
In a written response to questions from the REVIEW, Palm confirmed that it's committed to its licensing programme. "We believe that licensing our technology is strategic to Palm's core business and enables Palm and its partners to work together to establish hand-held computing in a way that is mutually beneficial," said Christy Wyatt, the company's director of strategic alliances and market development.
However, Scannell of Mobile Insights believes that in the current economic climate, Palm is unlikely to let go of its hardware lifebelt. "Down the road, they have to decide, and then they may well become an OS provider," he says.
"If Palm wants to license its platform . . . a lot of Taiwanese companies would want it," says Geraldine Shih, a product manager at major Taiwanese electronics maker Mitac. Shih won't comment on her company's negotiations with Palm, but says Mitac now has no plans to use the Palm OS and will use Windows CE in two hand-helds it's developing. Other sources say Palm won't grant Mitac a licence. Palm didn't reply to questions on this issue.
Meanwhile, negotiations with Acer and other Taiwanese companies continue. But in Taiwan, Palm has developed a reputation for stubbornness. Some manufacturers, like Eten, believe they have no hope of being granted a licence unless Palm makes a fundamental change in policy.
"Palm has to decide if it's a software vendor or a hardware vendor," says Huang of Eten. Huang and others in Taiwan suggest Palm could suffer the same fate as Apple, maker of the Macintosh computer, which slid from a potentially dominant position in the personal-computer market to its current niche.
Apple, which like Palm is both a software and hardware company, tried licensing in the mid-1990s, in an attempt to rebuild its dwindling market share. But licensees, most notably Umax of Taiwan, undercut Apple's prices and ate into its share of the hardware market. In a panic, Apple ended or bought back the licences after two years. At the time it was cancelled, Apple's two-year licensing experiment showed little sign of success. Observers believe Apple began the strategy years too late and ended it too early.
Since then Apple's fortunes could best be described as mixed: The company has never regained its prominence. Apple's small user base, compared with that of Windows, leads to problems beyond lower revenue. Microsoft's market dominance allows it a level of control that Apple doesn't have. With more people familiar with Microsoft software, it has been far easier for the company to expand into other markets -- including, ironically, hand-held computers.
Palm is feeling similar pressure from one of its licensees. Handspring, which was founded by former Palm executives, now holds about 28% of the hand-held market, with Palm reduced to 59%. Palm at least has the consolation of knowing Handspring is using its software. By doing so, it maintains a healthy user base of Palm products, encouraging third-party developers to produce software that works on Palm hand-helds.
With upstart licensees like Handspring and rapacious competitors like Microsoft, it would seem Palm already has enough to worry about. But there's yet another concern. Some companies, among them Eten and Mitac, have developed hand- helds that bypass both Palm and Microsoft by using free software like Linux and Java. Low-cost hardware from accomplished cost-cutters like these, combined with free software, could really give Palm -- and Microsoft -- a run for their money.
(END) DOW JONES NEWS 03-28-01
05:15 PM |
