Palm's Pre: a star is born?

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Tue Jun 2, 2009 3:12pm EDT
By Sinead Carew

NEW YORK - It's no iPhone-killer, but the launch this weekend of Palm Inc's "Pre" could well become the brightest event this year for a gloomy industry.

Palm Inc's smartphone may not attract lines around the block like past Apple Inc iPhone launches. But its launch will be seen as a badly needed shot of adrenaline for Palm and exclusive provider Sprint Nextel Corp.

Plenty could go wrong. Executives have warned of shortages. Scathing reviews could smother not just Palm's hopes, but also Sprint's. And investors might have to wait a long time for the device to boost Palm's financials.

But the hope is Pre -- with touchscreen control, a slide- out keyboard and an operating system designed for trendy Web services such as social networks -- wows consumers enough to stem Palm's loss of market share and customer defections at Sprint.

Since the Pre made its debut at the Consumer Electronics show in January, excitement over the device has intensified. Even arch rivals Verizon Wireless and AT&T Inc both say they want to sell it after Sprint's exclusivity runs out at the year's end.

If it takes off, Palm may even be an acquisition target.

"If you're buying (Palm shares) now, definitely what you're looking at is that they're going to have the most valuable asset in the industry. At some point, somebody will want to pay a premium for that," Pacific Crest's James Faucette said. "From a products perspective, the impact on the market is probably as important as iPhone."

Sprint and Palm are David to Apple and AT&T's Goliath,

with some casting Pre as the first credible iPhone rival.

Some analysts had fretted about the timing of Pre's June 6 launch, days before Apple is expected to unveil a new iPhone. But several now see Apple announcing an iPhone that is not radically different from previous models.

About 623,000 Pres are expected to move in Palm's fiscal first quarter ending August, five analysts polled by Reuters said. Estimates ranged from 500,000 to 865,000 phones.

That would be a fraction of Apple's launch-quarter sales of 6.89 million for the iPhone that started selling around the world last July. But it's still an ambitious estimate for one phone at Palm, which had third-quarter phone sales of 482,000.

"My sense is that there will good pent-up demand," said Avian Securities analyst Matthew Thornton. "(Palm) is a company that's really gearing up for a complete product refresh."

SUPPLY SHORTAGES

There could be complications. Top Sprint and Palm executives warned last week they may not meet initial demand.

That sparked some concern about manufacturing problems or difficulties getting display parts amid the current craze for touchscreens across the smartphone market.

"Palm doesn't have a lot of negotiating power" if supply is tight, said Global Crown Research analyst Tero Kuittinen.

Device shortages may pique desire for the device, but analysts worry Palm could miss out on sales if it is unable to ramp up supply quickly in the months following the launch.

"For a lot of these models, demand can fade quickly and people move on to the next big thing," Kuittinen said. "It's always dangerous to launch with a thin volume because you really run the risk of leaving money on the table."

Palm shares rose 9 percent last Thursday after the surprise news that U.S. wireless service leader Verizon Wireless, a venture of Verizon Communications Inc and Vodafone Group Plc, plans to carry Pre. That came a day after No. 2 U.S. mobile service AT&T said it wanted the device.

"I look at this as Verizon and AT&T trying to kick sand in Sprint's face," said Macquarie Research analyst Phil Cusick.

The eventual consumer response will depend heavily on the tone of newspaper reviews, according to Cusick.

A lot also rides on Palm's new webOS operating system. Faucette sees webOS trumping iPhone in multi-tasking -- the use several applications at the same time.

"What'll be important when we see the reviews is not only what the device looks like, but how it works on the Sprint network," Cusick said, because a bad review could be a setback.

While reviewers raved about the iPhone, they were critical of AT&T's network. The stakes are even higher for Sprint, whose Chief Executive, Dan Hesse, has been working over the past year to dispel a lingering reputation for poor network quality.

Even if Pre is well received, investors should not see Pre as a catapult back to profits for Palm, which is expected to double its quarterly loss to $93.08 million for its fiscal first quarter ended May, according Reuters Estimates.

"Profits are still quite a way away," Cusick said. "If they can make the handset and the operating system a big success, people will feel good" about an improvement in operating margins.

Analysts expect most of the first Pre customers to be existing, loyal Sprint customers rather than consumers moving from rival services, especially now that Verizon Wireless said it hopes to have the phone in about six months.

"A six-month wait is something most people will be able to tolerate. Only the absolute gadget freak will have to have it immediately," Global Crown's Kuittinen added.