Psion has lost its grip on the handheld computer market. Palm is in trouble, and may have to use millions of unsold machines as landfill. Handspring is only expecting to sell half as many of its Palm-compatibles as it was in May. But only three months ago, this was a booming market. What went wrong?
Psion, the small British company that invented the electronic organiser, shocked supporters last week when it announced it was bowing out of the consumer market for personal digital assistants (PDAs).
However, the company had been heading for trouble for some time. It had failed to keep up with the rapid pace of the market, and failed to become a global player, its machines being almost unknown in the US and Japan. It had also failed to secure a substantial backer for its next-generation device, codenamed Odin. It did have a deal with Motorola, the US telephone and chip giant, but Motorola had its own problems and pulled out.
Another factor helped trigger the decision. David Potter, Psion's founder and chairman, said the PDA market was "grossly oversupplied". Peter Bancroft, Psion's spokesman, put it more bluntly: "We reckon there are between 5m and 6m unsold Palms out there."
Palm, the market leader, has evidently bungled a product transition in a big way. The company recently admitted it had 10 weeks' worth of unsold stock. Falling prices meant its revenues slumped by 52% to $165m in its last financial quarter, and after write-offs, it made a loss of $392m.
Psion's figures reveal a similar downturn. Things do not look bad on the surface: Psion Group revenues for the first half of the year grew 5% to £99m. However, revenues from Psion Digital, which includes the PDA products, slumped from £77m to£36m, while revenues from Psion's Teklogix division - based on a Canadian company Psion bought in September - increased from £17m to £63m.
Has the "electronic Filofax" gone out of fashion, just like its paper-based forebear? Has the whole product category failed to cross the chasm between being a niche item for yuppies, hobbyist PC users and programmers to a genuine mass consumer market?
Brian Gammage, principal analyst with Gartner Group in the UK, thinks not. He says there is still an enormous market as business applications are developed to exploit wireless handheld devices.
"We may have had a blip in the second quarter, but there have been short-term conditions affecting the retail market. We're talking about postponed purchasing decisions rather than abandoned decisions."
Blip or not, Gammage believes Compaq could have sold between four and 10 times as many iPaq PocketPC palmtops as it was able to deliver.
Part of Psion's problem is that when Microsoft raised the bar with its PocketPC software, the third version of Windows CE, it failed to respond. It is still selling machines that do not provide very good synchronisation with Microsoft's Outlook information manager, that don't let users synchronise and back up their data to web-based services, that don't communicate with PCs via high-speed USB cables, and so on. "We didn't acquit ourselves as well as we might have," concedes Bancroft.
The expectation was that Psion would have new products on offer, with Bluetooth wireless for short-range communications (personal area networking), and the ability to exploit broader wireless communications networks. That is what Symbian, the software house spun out of Psion in June 1998, has been working on. But Psion has decided not to replace its ageing Series 5 and Revo lines.
David Lewin, Psion's chief executive, says that with the commoditisation of the market, "at some time we were going to have to call time on new developments. We're calling time now."
Psion's view is that standalone PDAs are going to be replaced by converged devices that are also mobile phones. "We could have leapfrogged into that market with Odin," says Bancroft, "but we'd have been launching a new product in an unproven market with a channel that's relatively unknown, and where our brand is relatively unknown."
Palm has a different view. Martin Worth, who handles Palm's accounts with retailers such as Dixon's, says: "We don't believe this story of oversupply worldwide, and in the UK, we are not sitting on a lot of stock." As for the convergence of mobile phones and PDAs, it hasn't happened yet.
"I still see a great deal of life in the two-piece solution," says Worth, "especially with Bluetooth. If a phone has all the functionality of a Palm, it is not going to be small: we're back to housebrick-style products. The two-piece solution gives users the flexibility to take whichever device they need, and lets them choose the coolest devices!
"The consumer is going to decide, but it is the desirability factor that drives the market," Worth says.
People want "the latest and greatest" devices, but this year it has been Compaq's iPaq, a PocketPC design, rather than a Palm. Worth does not agree: "When Compaq launched, our sales went up as well. It attracted attention to the whole category. It's a great product, but the 500 series has put the attention back on us."
Perhaps. But market researchers say iPaq sales have boomed. Canalys, a specialist IT research company based in Reading, says sales of Compaq palmtops in western Europe grew by 1,018% in the year's first quarter, compared with a 61% growth for Palm and a 5% decline for Psion. Canalys puts market shares at 51% for Palm, 21% PocketPC and 13.5% Symbian/Psion in a segment that also includes smart phones from Nokia and Ericsson (www.canalys.com/pr/r2001051.htm).
Last month, Tod Kort, a principal analyst with the Gartner Group in the US, even predicted that Compaq would overtake Palm by the value of its palmtop sales, if not by volume. Kort expected the average price of Palm machines to fall to $209, earning about $135m, while iPaqs selling at about $500 would earn Compaq around $200-$250m.
The US retail market is still dominated by Palm-compatibles including Handspring Visors and Sony Cliees. However, the iPaq has become the system of choice for corporations, who need the extra power to run applications, and who value its ability to synchronise data with Microsoft Outlook and other Office software.
Palm's position could well get worse before it gets better. Motorola, which supplies the antique Dragonball processor used in Palm handhelds, is adding the UK-developed ARM core chip used in the iPaq, but Gartner analysts do not expect Palm handhelds to use it until late next year. By that time, the PocketPC will have gone through another revision, which Microsoft plans to preview on August 22.
To save cash, Palm has also cancelled a deal to take over Extended Systems, which supplies server and comms software needed to integrate handhelds into business systems. Chris Le Tocq, principal analyst with Guernsey Research in Los Altos, California, says this leaves Palm dangerously exposed. He thinks it will get squeezed in the consumer market, by Sony and other consumer electronics manufacturers, and squeezed out of the business market by the arrival of Microsoft's .Net.
At Microsoft, "they see CE devices such as PocketPCs as full .Net clients," says Le Tocq. Web-based services are coming, you will expect all your devices to work with them, "and devices that don't work with [.Net] are going to be off your list.
"Microsoft would be very happy to have .Net applications run on Palm, but Palm is not a participant," Le Tocq adds. "They could be if they wanted to be, but I'm not sure that they have the will. There are echoes of Apple, and some of the arrogance thereof. My advice is: 'You may not like it, but you've got to get with it.' "
Microsoft .Net is aimed at mobile phones as well as PCs and PDAs, so Symbian faces the same problem, says Le Tocq. Symbian thought it had a huge market lead but it will not be long before PocketPC software appears in mobile phones such as the Sendo 100 and Siemens SX-45.
PocketPC palmtops with built-in telephony are now appearing. Sagem, a French manufacturer, has just launched the WA 3050 monochrome device that works with standard GSM mobile networks including Orange and Vodafone (£699 in PC World) and BT Cellnet has unveiled the similar Trium Mondo system using GPRS.
Gammage, from Gartner's UK office, says: "This is a phoney market right now because it's a gadget market. We are still waiting for the infrastructure to roll out, and the devices themselves are not yet standardised."
That is what Microsoft wants to do. It has yet to win the battle but it is defining the war.
• Comments to online.feedback@theguardian.com
