"Handspring Redux"
by Pat Dorsey | 11-03-2000 | E-mail Article to a Friend
I'll kick off today's column with a sample e-mail from the dozens I
received from ardent Handspring HAND supporters in response to
last week's column on the eponymous handheld developer: "I found
your article totally irresponsible. I am drafting a letter to your
employer demanding your termination. Not only that, I am also
drafting a letter to the SEC demanding a [sic] investigation."
Well, I'm still here, so I guess either the letters never got sent or my
boss hasn't opened his mail yet. So, let's move on to a few of the
less-bombastic missives in my inbox.
The Handheld-PC Comparison
One reader writes: "My theory is that the PDA [personal digital
assistant] market of today is equivalent to the PC market of the early
1980s. I think there's almost limitless opportunities for anyone with a
good, well thought out product."
This is in some ways an excellent point, in that the market for handheld
devices is certainly in a young, hyper-growth stage--much like the PC
industry in the 1980s. There is, however a darker side to the analogy,
which is that since strong demand attracts intense competition, profits
tend to get squeezed and some companies tend to fail in early-stage
industries. For example, who's ever heard of Eagle Computer,
Columbia Data Systems, or Corona? All three were some of the
earliest manufacturers of IBM clones, and all three have long since
faded into business history.
Sure, Compaq CPQ and Dell DELL have prospered where Eagle,
Columbia, and Corona failed, but there were a dozen Columbias for
every Compaq. Every emerging industry, from automobiles to
PCs, creates a ton of companies--only a few of which wind up
surviving. The bottom line is that it's pretty tough to know which
companies will be Eagles and which will be Dells this early in the
handheld game. And given the price investors are currently paying for
Handspring shares, there isn't much margin of safety in the stock. It's
priced as if the company's future leadership is a virtual certainty. (On
the competition front, check out the prototype for a cellphone with a
built-in Palm-powered PDA from Kyocera. Should be available early
next year.)
Follow the Money
The question you need to ask yourself when investing in any infant
industry is, "Who captures the value stream?" Another e-mail I
received, from someone who has "been doing PDA research since
1992," took a stab at this: "Handspring does have the products and
momentum they need. Don't worry about the profit margins. The
whole idea is to get your products in the hands of consumers and
become a household name. After that you can start asking more and
more for your products (just look at Microsoft MFST). It's my belief
that Handspring will become the Microsoft of the PDA world."
Well, unfortunately I am going to worry about the profit margins,
because they're a heck of a lot higher in software (Microsoft) than
hardware (Handspring). This is why Palm PALM is in a much better
business position than Handspring--it owns the operating system, so it
can collect licensing fees that are 90% profit. (Palm's valuation is still
incredibly high, but that's another story.) Handspring does not
currently have the promise of a high-margin revenue stream from
software licensing fees--which would make it more attractive from
both a profitability standpoint and in terms of competitive advantage,
since it's a lot harder to build a new operating system than a new piece
of hardware device.
On the mea culpa front, I do have to plead guilty to overstating my
case in one respect, which was my comment that "nobody makes
much money in consumer electronics." One reader pointed out, "As a
quick glance at a three-year chart of Nokia NOK would show you,
I've increased my net worth rather nicely by holding this
electronic-gizmo manufacturer, with its high margins and great market
share."
Fair enough. Nokia is succeeding where many--Motorola MOT and
Ericsson ERICY--are having a lot of trouble, and handsets are indeed
"consumer electronics." However, betting that Handspring will be the
next Nokia could lose you a lot of money just as easily as it could
make you a lot of money. Three or four years ago, Nokia was in a
dogfight with the other two handset makers. It wasn't at all clear that it
would emerge as the leader, and attain the premium stock valuation
that comes with leadership. Handspring, on the other hand, already
has leadership priced into its stock.
Which, no matter what you think of the company’s products, the
stratospheric valuation makes investing in the stock a speculative
proposition at best, and a downright dangerous idea at worst.
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