Revenue Growth for Hand-Held Organizers Is Expected to Slow
The surging market for hand-held computers, touted as a bright spot amid dismal expectations for PCs and cell phones, is beginning to show a few warning signs.
Worldwide shipments of Palm machines and competing organizers doubled last year to about 10 million units, but even optimistic industry analysts say the growth rate will slow to 50% or less in 2001.
And executives say they’re concerned that the slowing business environment might dent sales further.
“So far, things are good,” said Jeff Hawkins, co-founder of Handspring Inc., the top rival to Palm Inc. “But we’re worried about the economy. People who are losing their jobs are less likely to go out and buy one of these things.”
Palm and Handspring, both based in Mountain View, dominate with a combined 81% of the market. But they and rivals such as Casio Inc. are now offering rebates on some models, and price competition is intense. A further problem is that the less profitable products in the $150 to $300 range, without Internet access, are outselling the fancier varieties.
Most ominous for investors, stock prices for Palm and Handspring, both off 80% from their highs, are still wildly expensive by conventional measures. Palm is trading at more than 100 times trailing earnings (or earnings for the most recently completed fiscal year)--four times the Standard & Poor’s average--and Handspring has no earnings at all.
The shift to low-end products is hurting Palm. Although Palm’s revenue more than doubled to $522 million in its quarter ended Dec. 1, that still missed the company’s most optimistic sales projections. One reason was the average Palm retail price dropped from $240 to $212.
Of course, even a conservative 20% growth rate this year for hand-held devices is far better than the prospects for makers of desktop computers. PC unit sales for December plunged 24% from a year earlier, and revenue fell even more. Since then, Dell, Compaq and Gateway have all announced layoffs.
Cellular phone sales, which had been growing faster than computers, have likewise slumped. No. 2 phone maker Motorola Inc. said this week it will cut 7,000 jobs as industrywide global sales projections for the year slipped to 450 million phones, just 10% higher than in 2000.
Makers of hand-held organizers say that though they aren’t immune to a slowdown, they are in a better position because they have captured so little of the market.
The devices “so far have benefited less than 5% of PC users,” said Chief Marketing Officer Satjiv Chahil of Palm. “It’s a very early stage of people realizing the value.”
Lehman Bros. analyst Joseph To agreed. “It’s a nascent market. I don’t expect it to turn off like a faucet.”
How much of the growth will translate into profit is another issue.
The Palm V model, which doesn’t allow Web-surfing or e-mail without a costly attachment, is outselling the top-of-the-line Palm VII, retailers say.
And Palm recently introduced a $100 rebate on the Palm VII to lure new users who promise to pay monthly Internet connection fees. “You need to offer something to entice the customers to try a new way of using these devices,” Chahil said.
The price competition is also hard-fought.
“Every time one of them cuts its price, the others match it,” said a salesman at a CompUSA store in San Francisco. “One of these guys is going to go out of business.”
Palm’s line is getting a big challenge by upstart Handspring, which introduced its first Visor products 18 months ago.
Handspring uses the same basic software as Palm and has steadily gained market share. In January, Palm had 63% of the industry’s U.S. revenue, while Handspring had 18%, according to market researcher NPD Intelect. After that come Hewlett-Packard, Compaq and Casio.
All compete on functions, look and, increasingly, price.
Chahil calls it “seeding the market”: The companies need to get their products into as many hands as possible.
Next week, Palm will introduce a new line of products with slots that will allow new kinds of add-ons for digital photographs, navigation tools and other products. And Palm hopes broader adoption will motivate software developers and the introduction of more desirable gadgets.
“What they’re creating is users and evangelists,” said Gartner Group research director Chris Le Tocq.
Still, the road ahead is looking rougher, Hawkins said.
If the price battles weren’t enough to contend with, a weakening economy will push profit down even more.
Last month, a Gartner research report said that though North American hand-held computer shipments are still expected to climb from 5.6 million units to 8.2 million this year, a recession could cut that to 7.9 million.
But the big fight will be for corporate sales, where spending cutbacks are mounting. There, Palm has a decided edge. Palm sells about 30% of its products to businesses, more than triple Handspring’s proportion, estimates analyst Vik Mehta of Goldman Sachs.
With 80% of Palm users connecting the devices to their office computers, the company and analysts argue that employers will want better control of their information.
But even though many companies find that the devices increase productivity for far less cost than laptop computers, cutbacks make mass purchases of new gadgetry harder to defend.
Chief information officers surveyed recently by Morgan Stanley Dean Witter said that if they cut back spending, wireless products would be among the first to go.
Gartner’s recent report drew a similar conclusion, noting that “we can expect to see slower corporate hand-held sales in the first two quarters.”
If so, the race to get consumers to adopt the Palm and Palm-like gizmos might be taking a prolonged breather.
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Palm Battle
U.S. sales of hand-held computers soared to a record 3.5 million units last year and were expected to make major inroads this year in sales to businesses. But the slowing economy and fierce price competition are cutting into profits.
Quarterly hand-held computer sales in U.S. by units, in thousands:
Source: NPD Intelect
