PDA Wars: Round 2

By Anita Hamilton

These are not numbers that warm the CEOs hearts--their stock prices at all-time lows, minuscule earnings and only a smidgen of the population as customers. So why are executives at handheld-computer makers Palm and Handspring smiling? Because even though profits stink and "high tech" is practically a disease on Wall Street, sales are booming at both companies. Someday, they hope, their profits will be too.

As PC sales wither and dotcoms disappear, handheld-computer makers are enjoying a rather solitary spring fling. Just look at the flurry of new-product announcements in the past few weeks. From Handspring's razor-thin Visor Edge to a new memory-packed Compaq iPaq, a major upgrade has been trumpeted by nearly every PDA maker. Here's why: last year nearly 10 million PDAs were sold worldwide, almost double the number for 1999, according to research firm Gartner Dataquest. By 2004, the firm anticipates that everyone from executives to hairdressers will buy some 33 million PDAs, generating nearly $8 billion in revenue.

Even tech-battered Wall Street analysts are bullish on handhelds. No matter that Palm, Handspring and the Canadian firm Research in Motion are trading at 52-week lows. "These stocks have gotten unnecessarily beaten down," argues Thomas Sepenzis, mobile-Internet analyst at investment bank CIBC. "When people stop panicking, they'll go, 'Oh, gee, what should I buy?' and these stocks will be some of the first to go back up." Within a year, he expects Palm shares to as much as quadruple from last week's new low of $12.

Once clunky, overpriced gadgets that did little more than store phone numbers and addresses, handhelds are being reincarnated as sleek wireless accessories that let you do anything from find the nearest Lebanese restaurant to edit an Excel spreadsheet--all while standing in an elevator or waiting at a bus stop. PDAs are on their way to becoming the next must-have gadgets, like cell phones, showing up in the hands of everyone from Puffy to Rosie. Michael Jordan is reportedly planning his own signature Palm. Someday your PDA may even become your cell phone, electronic wallet and personal entertainment system rolled into one.

While spectacular growth for the handheld market seems certain, no one is quite sure who will be the biggest winner. A year ago, the obvious answer was Palm, which has sold more than 11 million PDAs to date and now claims some 60% of the retail market, according to tracking firm NPD Intelect. But Palm is paying for its decision, made a few years back, to license its operating system to other hardware makers. The idea was to achieve a critical mass of PDAs that would make the entire market viable and attract ever more software developers to create applications for the Palm operating system. "Palm is getting the first strong competition that it's ever really had. We're going to see its market share decreasing rapidly," predicts Alex Slawsby, analyst at the research firm IDC.

Palm licensee Handspring has captured nearly 30% of U.S. retail PDA sales in the 12 months since its Visor line hit the shelves. The colorful, inexpensive devices were the first with expansion slots that allow users to add anything from a digital camera to an MP3 player--in effect to customize their PDAs. Co-founders Donna Dubinsky and Jeff Hawkins created the original PalmPilot before leaving Palm to start Handspring in 1998.

In the long run, though, Palm's biggest threat may come from Microsoft, which makes the Pocket PC software platform for PDAs sold by Compaq, Casio and Hewlett-Packard. "Microsoft has tremendously deep pockets, and it seems to stick to things until it gets them right," says Palm CEO Carl Yankowski.

So, why has the software giant got everything wrong so far? Its Windows CE operating system, which has been around since the mid-1990s and powers Pocket PCs, claims just 10% of the handheld market. "Our initial attempts with these devices weren't that great," concedes Ed Suwanjindar, product manager for Microsoft's mobile division. Unlike the Palms, which won devotees for their elegant simplicity, Pocket PCs have been criticized for trying to cram in too many features. Such luxuries as a built-in MP3 player and high-resolution color screens have resulted in heavier, pricier offerings that start at $350--vs. $150 for an entry-level Palm.

There are a few wild cards in the PDA market as well. Research in Motion has sold more than 700,000 of its BlackBerry wireless e-mail devices directly to corporations such as Goldman Sachs, Merrill Lynch and NBC. Jack Welch, Michael Dell and Al Gore are fans. This summer Sony's Palm-based Clie will get a snappy new upgrade, complete with a sharp color display and support for a new, secure digital music format. By leveraging resources from its music, gaming and audio-video divisions, Sony may be able to create the ultimate portable gadget. And now the first PDA phones are on sale from Kyocera and Ericsson, with more on the way from Microsoft, Motorola, Nokia and others.

Handspring's Dubinsky remains unfazed. "We're used to people saying, 'Oh, Sony's entering the market. It's over, pack your bags,'" she says. "But that hasn't happened." It's likely the market will become more segmented, with Microsoft and Research in Motion homing in on corporate users, Sony targeting upscale consumers, and Handspring and Palm attacking from all angles. But Palm still has the most to lose. "The onus is on Palm to continue to innovate in its design and operating system," says IDC's Slawsby. Let the hand-to-hand combat begin.