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Ailing Palm faces the Crusher, denies quitting OS business

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Palm Inc saw a third wiped off its stock price at one stage in trading today after acknowledging that it was "more or less dramatically changing our business model." The company announced higher losses and lower sales than expected, and the company walked away from its proposed merger with Extended Systems, an enterprise integration software company.

Shares recovered to finish 28pc down on the previous day's close. But the figures chilled the market, with a knock-on effect for leading PalmOS licensee Handspring. Palm said Q4 revenue would be half of what was predicted just six weeks ago, in the $150-160m range, against the earlier prediction of $310-315. Pro forma operating loss for the quarter will be in the $170-190m region, up from the most recent prediction of $80-85m.

Palm blamed technical problems - "electro-static discharge testing and fine tuning", according to CEO Yankowski - now fixed, for the late volume ramp of its m500 and m505 Palms. The m500 series represents the biggest upgrade to the product line for three years, with much improved expansion, connectivity and PalmOS 4.0.

The Motorola/PalmOS smartphone was strangely absent from the roster of licensees and smartphone partnerships. Moto sources told us in April that the project has been put in the R&D deep-freeze, and is now regarded as extremely unlikely to appear on the market - but Palm has yet to acknowledge this publicly.

The company also said that it has put its new corporate HQ in San Jose on hold, and Yankowski acknowledged that the current inventory glut might be solved by "crushing" the unwanted devices. (Although dumping them into the education channel might be more socially useful he said).

Palm hopes to return to profitability in the year beginning June 2001. But with cash reserves dwindling - they'll be exhausted by November at current burn rates - executives are casting around at what kind of business Palm will be around then. Palm is currently an OS software licensee, a hardware manufacturer that competes with its OS customers, an ISP and a wireless portal.

"You've got to give up something," pressed one analyst at yesterday's conference call. Specifically questioned about whether Palm would quit the OS licensing business, Yankowski refused to comment, saying the current deliberations would be revealed in late June.

However the analysts see Palm's problem as deeper than just a product delivery hiccup. Picking up on a tune we've been humming for about 18 months here at the Reg, JP Morgan analyst Paul Coster told CNet"if you are just selling devices, you will be commoditized." That's the inevitable technology treadmill that sees yesterday's $400 PDA become tomorrow's $40 data bank. Palm is confident it can command a higher average selling price for its m500 series, but longer term needs to build functionality into the platform to support premium prices. Wireless connectivity or media playback are two areas it's tried to address.

Yankowski cited IBM CEO Lou Gerstner's recent prediction that the number of handheld devices would soon outnumber PCs. However, Gerstner's tally includes phones of course, and Nokia last year accounted for 32pc of the 405m phones worldwide.

In other words, Nokia ships as many devices each fortnight as Palm - the dominant PDA manufacturer - has managed in five years. And if the AWOL Motorola smartphone is a precedent, Palm appears to be losing phone partners as fast as it's acquiring them. ®

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