Palmy Days For 3 Com?

It has cool new palmtops--but hungry rivals are homing in

The Palm Pilot organizer isn't just a sales success. It's reaching cult status. At the Feb. 18 meeting of President Clinton's high-tech Advisory Committee in Santa Clara, Calif., 15 of the 22 members whipped out the Palm to schedule future meetings. Howard Stern, Robin Williams, and Federal Communications Commission member Michael K. Powell are die-hard Palmites. All told, more than a million people have snapped up the six-ounce wonder in the past 18 months. And the Palm is not just for keeping track of appointments or phone numbers anymore: There's also software such as AstroPilot to view astrological charts and the Dianameter to keep track of the days since the death of Princess Diana.

Can it get much better than this? Maybe. On Mar. 9, 3Com Corp. will roll out a version called the Palm III that's more powerful and even slimmer than its predecessor--just half an inch thick at its base, vs. 7/10 of an inch before. More important, the Palm III will be able to swap data with other Palms wirelessly via infrared beams. That's sure to keep it from hitting the has-been heap like so many other handheld gizmos--from Sony Corp.'s Magic Link in 1996 to Apple Computer's Newton, which died on Feb. 27. "They're a shining star in a graveyard of miserable failures," says J. Gerry Purdy, president of market researcher Mobile Insights. The Palm III will sell for $400--older models will fall as low as $200.

LOGO BILLBOARD. But will Palm's star continue to shine? This year, the Palm faces its toughest challenge yet as Microsoft Corp. comes gunning with its latest stripped-down version of Windows for handheld PCs. Starting in April, several palm-size PCs that use Microsoft's new Windows CE 2.0 operating system will hit the shelves from consumer-electronics giants such as Casio Computer Co. and Philips Electronics. Windows CE has come on strong in the past year, and analysts say the latest version--which can support color screens and Web surfing--gives the company its best chance ever. "This is the year the marketing people at 3Com have to earn their pay," says analyst Mike McGuire of market researcher Dataquest Inc.

At stake is not just the future of the Palm but the success of 3Com Chief Executive Eric A. Benhamou's growth strategy. He's banking on the Palm to help boost sales of other products at the $6 billion company, particularly its growing stable of consumer networking gear, and lift its sagging stock price of $37--down 38% since August.

Benhamou says the popularity of the Palm, which accounts for $300 million in revenues, will get customers addicted to instant information. That in turn should drive demand for 3Com's bread-and-butter networking equipment, which hooks people into the data highway. The frosting on the cake: Palm helps polish 3Com's brand-name recognition, since most of the company's products are buried inside PCs or in corporate wiring closets. "The logo appears in your face every day," says Benhamou.

A recognized brand is critical to Benhamou's plan. He wants 3Com to dominate the market for consumer networking products--in contrast to rival Cisco Systems Inc., the market leader in equipment for corporate networks and the Internet. 3Com is already the No.1 supplier of network interface cards, which connect PCs to networks. Last year, it bought the top modem maker, U.S. Robotics Corp. Now, Benhamou wants 3Com to dominate emerging markets for high-speed cable and digital subscriber line (DSL) modems, network chips, and, particularly, home networking--a sector sprouting in the sights of Intel, Bay Networks, and Cisco.

He'll have to protect the Palm from Microsoft first. In just more than a year, products with the older Windows CE have grabbed 23% of the market for handhelds, and now CE is moving into the palm-size market--where 3Com's device commands a 70% share. Microsoft's advantage is the ubiquity of Windows: Even though Windows CE palmtops can't run desktop PC programs, Microsoft argues that people will be drawn to the devices because the software looks and feels like the PC version. And, like the Palm, they can swap data with PCs. "We're giving people a familiar environment," argues Roger Gulrajani, Microsoft's group manager for consumer-appliances marketing.

Even more important than Windows' popularity is Microsoft's clout. The software giant has spent as much as $250 million developing Windows CE, and it's been able to recruit dozens of developers to write new programs. Even if the latest version doesn't fly, Microsoft isn't likely to give up: It has introduced six pint-size versions of Windows in the past eight years.

PC'S LITTLE HELPER. But this is one market where Microsoft may wind up the underdog. Despite deep pockets and marketing punch, Windows CE has a handicap: It is so stuffed with features that it takes more steps to handle some key tasks than the 3Com device. That's one reason most experts are betting the Palm will continue to dominate the small-device market for years to come. "Microsoft can't duplicate [the Palm]," says Gartner Group analyst Ken Dulaney. "If anything, the gap between 3Com and Microsoft is widening." Dulaney thinks Microsoft won't snatch more than 15% of the palm-size device market.

The Palm's formula for success? It was designed for just a few functions so that it's a companion to PCs--not a replacement. That meant giving it the ability to swap new phone numbers or update schedules with a desktop computer at the touch of a button. "Our mantra was simplicity," says Donna Dubinsky, the general manager of 3Com's Palm division. That has earned it a loyal following. "There's nothing cooler than pulling it out in a meeting," says Barbara Mollenex, an architect with Oldham+Partners in Washington, who uses her Palm for meetings and to track her kids' piano and ballet lessons.

Several strategic alliances will help the Palm expand beyond the digital avant-garde. IBM, which has been hawking the device to corporate customers for the past five months, is about to land some big contracts, including an order for 10,000 units from New York Life, say insiders. Holtsville (N.Y.)-based Symbol Technologies Inc., the leading supplier of handhelds into industry segments, will sell the Palm in June for tracking cargo and meter reading. And wireless-phone maker Qualcomm Inc. will use Palm technology in a new line of portable phones expected late this year--Palm's first foray into the promising wireless phone market.

Look for more firepower ahead. Execs are mum on details, but Janice Roberts, senior marketing vice-president, hints that by this summer customers will be able to access the Net wirelessly from a Palm computer.

And this month, 3Com will back up the Palm with a marketing campaign to build 3Com's visibility with consumers. The multimillion-dollar program will use TV and print ads, Web sites, packaging design, and sales promotions to hammer home the theme "3Com: More Connected." Says Roberts: "We intend to make 3Com a household name."

Benhamou has worked hard at that. In 1995, 3Com bought the right to rename San Francisco's Candlestick Park 3Com Park--a move that brought catcalls from locals but gave 3Com loads of publicity. "It's hard for pure networking companies to build any kind of brand," explains Benhamou. To do it, he'll have to protect the Palm, his Trojan horse into the home, from a much better-known brand name called Windows.

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