No Cartwheels for Handspring

Rich rivals race to erase the company's handheld edge

Jeffrey C. Hawkins points to the only clutter in his otherwise tidy office: a dozen or so handheld computers piled on a shelf like wrecked cars in a junk yard. Hawkins, inventor of the wildly successful PalmPilot organizer and now visionary-in-chief at upstart Handspring Inc. (HAND ), could be dubbed the Alexander Graham Bell of mobile computing. But he's not resting on such accolades, and keeps the heap of handhelds as a reminder of the tough market he's in. "There's a hell of a lot of competition here, and there's going to be a lot more," he says. "We have to prepare ourselves for people targeting us, copying us, and trying to kill us."

Paranoid? Sure. But with good reason. The handheld market has become one of the fastest-growing corners of techdom. Researcher IDC expects sales of the gizmos to soar 52% annually until 2004, to $10.7 billion from $2 billion in 2000, far outstripping PC growth. And Handspring is becoming a player to beat. In the past 18 months, the company has sold more than 1 million of its Visor computers, giving it 28% of the handheld market in February, up from zilch a year earlier, says researcher PC Data Inc. "Little Handspring appeared suddenly and has given the big, established players a run for their money," says IDC analyst Kevin Burden.

Now, Handspring has to deliver a convincing second act--something it's attempting with its new Visor Edge, introduced Mar. 12. Problem is, the company may be losing its innovation lead. Handhelds are outgrowing their roots as electronic organizers and mutating into Net appliances and wireless communication tools. That could tip the advantage to players using Microsoft's PocketPC operating system, a slim variant of Windows that makes the Palm operating system Handspring uses look long in the tooth. Sure, the Palm operating system is simpler for keeping addresses, but Microsoft's (MSFT ) software works more easily with programs such as Word and has multimedia capabilities far beyond anything Palm's software can handle.

To keep its edge, Palm Inc. has introduced a new version of its operating software that offers better colors and beefed-up e-mail security. While Palm's new system needs less memory and battery power than PocketPC, analysts say it still isn't a match. What's more, insiders say Hawkins may be impatient with Palm's pokey progress--although he's sticking with Palm for now. The Palm OS "is a major selling feature" for Handspring, he says.

Visor's biggest asset--its easy-to-use expansion slot, called the Springboard--could be turning into an albatross, too. The slot holds cartridges that turn Visor organizers into electronic devices such as digital music players and phones. But at two inches long and half an inch deep, the slot eats up so much space that Handspring left it out of the $399 thin-and-light Visor Edge. The rub is that Edge users need an extra attachment for Springboard add-ons. "People are going to wake up and say, `Hey, wait! Why am I carrying a bag full of Springboard stuff around?"' says Elan Amir, chief technology officer at OmniSky Corp., which sells wireless modems and services for both Handsprings and Palms.

CLASH. Then there's the changing business climate. Handspring hit it big with consumers, but now it needs to break into the corporate market. Why? Gross margins for handhelds could sag from 30% today to as little as 5% within a few years, says brokerage Wit SoundView Inc. To make up the difference, Handspring has to grab corporate buyers who might also purchase lucrative support services from Handspring. Going corporate will be tough. Palm already has 200 salespeople knocking on company doors, while Handspring is just starting to assemble a direct-sales team.

Handspring could be further hamstrung by limited resources: With an eye toward turning a profit by the end of this fiscal year, ending June 1, Handspring spent only 5% of revenues--about $10 million--on research and development in the last six months. The larger Palm spent more than $70 million, or 8% of sales, in the same period. The austerity has paid off in results: In the quarter ended Dec. 1, Handspring logged sales of $116 million, 12% above analyst expectations, and lost $7 million, one-third the consensus estimate. Analysts figure sales will more than quadruple, to $440 million, in fiscal 2001 and top $735 million the following year.

These numbers have helped stoke Handspring's stock price. True, as the market has dropped Handspring shares have fallen from an October, 2000, high of $99.31 to below its offering price of $20. Yet Handspring is still valued at more than $2.1 billion, about five times its estimated 2001 revenues. By comparison, profitable Palm has a price-to-sales ratio of four. "Handspring's management has a record of innovation that's unmatched," says Buckingham Research analyst Peter Labe.

That confidence is easy to understand. Hawkins, CEO and co-founder Donna L. Dubinsky, and marketing chief Edward T. Colligan virtually invented the handheld computing market. In 1996, they launched the original PalmPilot, which lit a rocket under the handheld business with its dead-simple design and ability to swap data effortlessly with PCs. After 3Com Corp. (COMS ) acquired Palm (PALM ) in 1997, the entrepreneurs clashed with new management over marketing and production plans. The independent-minded Dubinsky resigned in July, 1998--and told the bosses Hawkins was quitting, too. Hawkins was taken aback, but wasn't completely furious. The two had discussed bailing out for a while, and, a few weeks later, they founded Handspring. Colligan joined soon after.

Lightning struck twice with Visor's innovative design. The Springboard slot transforms the device into a game console, cellular phone, or global-positioning system. Some 40 Springboard plug-ins are available. The flexibility--coupled with prices that undercut Palm's by up to a third--was a hit. Only Palm, now spun back out of 3Com, sells more units, with a 59% share in February.

WISECRACKS. The defiantly individualistic founders also infused Handspring with a scrappy, familial culture. Dubinsky used a Visor to write her wedding vows last summer--and then got a jolt when groom Len Shustek whipped out his own Visor during the ceremony to read his response. Hawkins, the dreamer, lights up when talking about his creations and warns prospective employees: "If you're not enjoying yourself, you shouldn't be here." Colligan, an inveterate jokester, makes frequent wisecracks to lighten the tone during meetings. Once, when Hawkins shot down negative comments from a focus group, Colligan quipped that next time, Handspring should test only people sure to agree with the company. Hawkins got the message--and backed down.

Competitors aren't laughing, though. Palm is fighting back with new low-end models targeted at Handspring's core consumer markets. On Mar. 19, Palm introduced revamped high-end models aimed at heading off Handspring's foray into the corporate sphere. Palm also is betting it can build a better mousetrap with a smaller expansion slot and a postage stamp-size memory card. Compaq (CPQ ), meanwhile, is doubling the memory built into its sought-after iPaq Pocket PC. And Research In Motion (RIMM ), the Canadian maker of the popular Blackberry wireless e-mail device, is adding instant-messaging software to gain additional share in the corporate market.

Hawkins now faces the challenge of proving Handspring's mission statement, which promises to "innovate, innovate, innovate." He's hard at work on a handheld with built-in wireless communications--a device he thinks will help Handspring capture even more market share. Hawkins concedes that in a young business that has sold only 15 million units, the "killer" device that could sell in the hundreds of millions still hasn't been created. He's as likely as anyone to build it. If he doesn't, though, the Visor could wind up in someone else's junk pile.

By Cliff Edwards in Mountain View, Calif.

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