August 8, 2000
Palm Puts Up Its Fists as Microsoft
Attacks the Handheld PC Market
By PUI-WING TAM
Staff Reporter of THE WALL STREET JOURNAL
SANTA CLARA, Calif. -- Just what does it take to hold Microsoft Corp.
at bay?
Ask Michael Mace, Chief Competitive Officer at Palm Inc., maker of the
popular handheld organizer. As Microsoft prepared to hit the market with
its own handheld device in April this year, Mr. Mace spent 14 months
planning and executing a strategy to help Palm outflank the mammoth
software company and maintain an upper hand in this rapidly changing and
lucrative market.
If the battle were strictly over revenue, the stakes
would have been high enough. Handheld devices,
now well beyond fad status, accounted for retail
sales of $460 million in 1999 and almost matched
that amount in the first six months of this year. The
pocket-size computers are growing more
sophisticated by the day and are being touted for
widespread use everywhere from classrooms to
hospitals to Navy ships.
More broadly, Palm's story offers a rare playbook
for the toughest game in the technology business:
competing against Microsoft. Its early success
shows that when high-tech upstarts pour as much time and energy into
defending their products as they do in creating them, they can stay a step
ahead of the Redmond, Wash., giant.
The Palm was a surprise hit. Jeff Hawkins and Donna Dubinsky launched
the company in 1992 and began selling their handheld device in 1996.
Since then, the gadgets have built a world-wide following of seven million
users and a 75% market share. Palm was snapped up by U.S. Robotics in
1995, which in turn was bought by 3Com Corp. in 1997. Though Mr.
Hawkins and Ms. Dubinksy left Palm in 1998 to form a new company,
Handspring Inc., Palm continued to cement its market share by releasing
new and better gadgets.
But in January 1999, Palm executives learned that Microsoft, after two
failed efforts, was gearing up another attempt to conquer the handheld
market. Early reports suggested that the Microsoft product bore a striking
resemblance to the Palm. Images of Netscape Communications Inc., the
once-popular browser wiped out by a Microsoft attack, flashed
forebodingly in the minds of Palm's executives.
They believed that Microsoft, with its unlimited marketing budget and its
unrivaled system of networks, could squash its competition even with an
inferior product. To avoid becoming another victim, Palm decided it
needed to shake up a corporate culture that had lost some of its edge.
In February 1999, newly appointed Palm President Robin Abrams, a
former Apple Computer Inc. and Hewlett-Packard Co. executive, asked
Palm Vice President Mark Bercow to lunch. "The company is getting too
complacent and too comfortable," Mr. Bercow said to Ms. Abrams, as
they dined on cafeteria food. "We've got to remember with Microsoft, they
don't have to get it right -- they just have to get it right enough."
To scope out the potential threat, the pair decided to hire a consultant, Mr.
Mace, another former Apple executive. The 39-year-old California native,
a disheveled former journalist, began by purchasing competing handheld
gadgets, including the Compaq Aero 2100, which runs on Windows CE,
the Microsoft operating system for handheld devices.
For several hours a day in March and April, Mr. Mace tested and
evaluated the rival devices. He concluded that the machines were rife with
glitches and overstuffed with faulty features. "This stuff is a freaking
nightmare," Mr. Mace thought to himself.
Unbeknownst to him, Microsoft was working fast to correct many of the
flaws in Windows CE. After the failure of its second handheld device,
Microsoft vowed to spare no expense in making its third edition, called
Pocket PC, a winner, says Phil Holden, director of marketing for
Microsoft's mobile-device group. The number of employees assigned to
the project grew from 100 to 300. The team decided to streamline
Windows CE and hired an industrial-design firm to work on hardware
design with manufacturers. "We totally [rebuilt] the whole user experience,"
says Mr. Holden.
Palm, in response, expanded Mr. Mace's mission. In mid-April, the
company asked the consultant to fly to San Diego to attend a
computer-industry conference. There, in a hotel bar, Mr. Mace met with
Mr. Bercow, the vice president, who asked him to join Palm as its first
chief competitive officer, an unusual title even in Silicon Valley. "We have
to change the way we think about how competitors affect our business,"
Mr. Bercow told the consultant. Mr. Mace, already consumed with the
competitive project, accepted.
At Palm, where so much was riding on the ability to defend its market
share, there was elation over the creation of the new post. At meetings
across the Palm campus, Mr. Mace was asked to "create palpable fear
about Microsoft." Many Palm employees had formerly been at Apple and
bitterly recalled how the computer company had been trounced by
Microsoft in the early 1990s.
Mr. Mace kicked off his first anti-Microsoft project in mid-June. At the
plush Garden Court Hotel in Palo Alto, Calif., Mr. Mace met with a half
dozen of Palm's marketing executives, wielding a thick report titled "The
Zen of Kicking Microsoft's Butt." One of the first slides featured Microsoft
Chairman Bill Gates's head superimposed on a statue of a Buddha.
"We've got real competitors now," Mr. Mace warned at the start of the
talk. "Our advantages aren't as strong as we think." He went on to outline
the themes that would become the bywords of Palm's literature and
advertising: simplicity and portability.
Despite impressing the troops with his fervor, Mr. Mace's 45-minute
presentation didn't generate much momentum. In late June 1999, Palm was
hit by unexpected management changes. Ms. Abrams, Palm's president,
resigned after less than five months on the job to join a biotechnology firm.
To fill the gap, 3Com, Palm's parent, sent in Alan Kessler, a longtime
executive, to temporarily take up the top spot.
The switch left many of Palm's 1,000 employees shaken. "We didn't have
the management team then to help bring a competitive campaign together,"
says Liz Brooking, a marketing executive.
Meanwhile, in April, Microsoft began conducting a series of tests with
consumers and analysts, gathering their feedback on the demo versions of
the Pocket PC. In August, Microsoft polled 500 handheld-device users
about what new features they wanted and began incorporating those ideas
into its gadget. They eventually included an MP3 player, a color screen, a
Pac-Man program, advanced note-taking capabilities and spreadsheet
functions. A particularly important feature let users read their Microsoft
Outlook e-mail messages.
Back at Palm, Mr. Mace was frenetically trying to rev up the company's
competitive engines. By July and August, he was scouring Web sites and
chat rooms, and probing software developers for information on what
Microsoft was up to. He heard about the MP3 player and the e-mail, and
he fired off memos to Mr. Kessler, the interim chief. The memos had the
desired effect.
Mr. Kessler quickly began talking to top executives at parent 3Com about
increasing Palm's advertising budget. The company also moved to seal
several licensing deals for Palm's operating system -- an important way to
spread the Palm platform. This, after all, was Microsoft's own well-honed
strategy: seize control of an important technological standard by making
your operating system available on every imaginable device.
In September, Palm announced an agreement with Nokia Corp., the
Swedish mobile-phone maker, followed by another licensing deal in
October with Japanese consumer-electronics giant Sony Corp. The deal
provided Palm's new partners with Palm technology for their phones and
other handheld gadgets.
The two high-profile deals had a domino effect on software developers.
Suddenly realizing how serious large consumer-electronics firms were
about the handheld-device market, the developers began flocking to Palm
in late 1999, asking to create applications for the gadget. "Those licensing
deals made it clear to us that Palm was a company with legs," says Jason
Devitt, chief executive of Vindigo, a New York firm that has since created
a local restaurant- and event-finder for the Palm. Thousands of other
software developers flocked to Palm, including Pocket Sensei, which
makes user interface software, and Actioneer Inc., which makes a
notes-reminder program.
But even with those important developments, which had the potential to
solidify Palm's long-term standing, the anti-Microsoft movement began to
flounder again. As the calendar turned from 1999 to 2000, 3Com
announced its decision to spin off Palm as a separate company. Palm
began the slow transition from a unit into its own entity and embarked on a
hiring spree. "It was chaotic, messy, and there were a lot of problems,"
recalls Mr. Mace.
Only by late February 2000 -- just weeks before Palm's initial public
offering -- were many of the seats in Palm's executive suite filled. Carl
Yankowski, a former Reebok International Ltd. and Sony Corp.
executive, was hired as chief executive. Satjiv Chahil, another former
Apple and Sony executive, came in to head up marketing. And Bill Maggs,
a former Inktomi Corp. technologist, came on board as Palm's chief
technology officer.
Barely had the new executive team arrived when they became convinced
that Microsoft was more interested in the handheld market than they had
previously thought. At a meeting with a hardware maker in early March,
Mr. Kessler and Palm sales executive Greg Rhine heard a rumor that
Microsoft's Mr. Gates had recently visited an electronics store on New
York's Long Island to ask about Palms. Mr. Gates, so the story went, had
spent half an hour talking to a sales clerk.
Mr. Kessler and Mr. Rhine looked at each other. "I guess we're in the big
time now," Mr. Rhine said. A Microsoft spokeswoman says Mr. Gates
didn't make the store visit.
Nevertheless, after hearing the tale about Mr. Gates, Palm executives
redoubled their efforts. Mr. Yankowski assembled a small group --
including Mr. Mace, Mr. Maggs, Mr. Kessler and Mr. Chahil -- in a
conference room. "We need to put together a special team," Mr.
Yankowski told the gathering. "Whatever it takes, let's make sure
[Microsoft] doesn't outgun us. We're in a war right now."
The meeting, at last, put all the pieces of the battle plan in place. By
mid-March, Mr. Chahil, the chief marketing officer, and Mr. Mace had
recruited a group of about 20 Palm employees to join a special "Tiger
Team" task force. Team members named their mission "Operation Rock 'n'
Roll." The ultimate goal, they decided, was to make the Pocket PC go
down in history as a modern Edsel, the Ford Motor Co. car that flopped
so famously in the 1950s.
They quickly drew up an aggressive new marketing campaign. Mr. Chahil
prepared a print ad that focused on Palm's swelling developer community.
Television ads were aimed directly at the mainstream. One showed a
young woman beaming her phone number via Palm to a young man on a
passing train.
The Tiger Team got even more aggressive at Spring Comdex, the giant
technology conference held in April this year in Chicago, where Microsoft
gave a preliminary demonstration of the Pocket PC. Palm plastered ads on
billboards at O'Hare International Airport and along roads leading to the
convention center, boasting about the developers it had attracted. "It was
guerrilla warfare," says Ms. Brooking, the Palm marketing executive.
Mr. Mace, meanwhile, noticed while surfing the Internet that Microsoft
was demonstrating its Pocket PC to small groups of enthusiasts. Palm sent
an employee to one such Microsoft meeting in Fort Lauderdale, Fla., in
April to gather data. The spy picked up more detail on Microsoft's
spreadsheet functions and e-mail, and heard for the first time about the
Pocket PC's advanced note-taking capability. "He sent this beautiful e-mail
back to us listing every single claim that Microsoft was making about
Pocket PC," says Mr. Mace. "It was great."
The covert e-mail allowed Mr. Mace to prepare talking points to respond
to Microsoft's claims that its Pocket PC could do more than the Palm. The
talking points were sent to key Palm developers and partners, including
Handspring's chief executive, Ms. Dubinsky. "I was impressed with how
organized Palm was," she says.
Palm and Microsoft finally met head-to-head the week of April 17, when
Microsoft officially unveiled the Pocket PC at a splashy Grand Central
Station event. That week, Palm sent a crew of nearly 25 employees to
retail electronics outlets all over Manhattan. At each store, the Palm team
whipped up elaborate demonstrations of its devices to attract new
consumers and divert attention from the Pocket PC.
The reviews followed quickly: Pocket PC, said John Endahl, general
manager of a CompUSA Inc. store in San Francisco, seemed like a
"toned-down version of Windows." It had more functions than the Palm,
and its color screen was smart. Palm, still mostly gray for now, remained a
simpler and more elegant device, he said.
Within a week of the Grand Central Station event, sales figures compiled
from several New York retailers for Palm showed that Microsoft had sold
several hundred Pocket PCs in the competitive New York marketplace,
but that nearly 30% of them had been returned to vendors within a few
days. Microsoft claims there were no returns.
"Palm outsold Pocket PC overwhelmingly," says Abe Brown, a
spokesman for J&R Electronics Inc., a Manhattan electronics store. He
says he didn't see a high rate of returns for either product.
In May and June, the first two full months of sales for Microsoft's Pocket
PC, Palm dominated, capturing about nine sales for every one Pocket PC
sold, according to PC Data, a research house in Reston, Va. Analysts had
expected a quicker start for Microsoft.
Building on the confidence that came with having withstood the first attack,
the Tiger Team arranged for Palm's top executives to go on a world-wide
road show, during which Palm's chief executive, Mr. Yankowski,
announced that all Palm devices would be wireless by the end of the year.
The company also ramped up its advertising and showcased its products at
the flashy Cannes Film Festival. At PC Expo, an industry confab in late
June, Palm capped its campaign with a record earnings announcement, for
the fiscal fourth quarter.
Microsoft executives say the competition has just begun. "Microsoft and its
partners can't manufacture enough of the Pocket PC devices right now,"
boasts Ben Waldman, vice president of Microsoft's mobile-devices
division. The software company recently launched an ad campaign that
fires directly at Palm. Microsoft's ubiquitous print ads focus on embedded
Pocket PC features such as e-mail and spreadsheet functions and asks
"Can your Palm do that?"
"The world has changed and people's needs have changed" since Palm first
came out, says Mr. Waldman. "If we stay focused on the customer, that's
what will make us the leader."
Palm disbanded its Tiger Team at the end of June, but Mr. Mace says he
remains professionally paranoid. Last week, he made another round of
calls to his best industry sources, trying to figure out Microsoft's next
move. |
