Almost On Palms And Knees

Nimble rivals have the Treo maker struggling

By Cliff Edwards

In the fiercely competitive business of smartphones, you're only as good as your last innovation. For Palm (PALM ), which practically invented the category, that's bad news. Deep-pocketed rivals such as BlackBerry maker Research In Motion (RIMM ), Nokia (NOK ), Motorola (MOT ), and now Apple (AAPL ) keep rolling out glitzy new products, while Palm has done little to update the bulky Treo since 2003.

It has reached the point where a company once regarded as one of the most innovative in the field is regularly dismissed by competitors. The latest example came on Sept. 5, when Motorola Inc. acting Chief Financial Officer Thomas J. Meredith praised Apple Inc.'s touchscreen iPhone as a great innovation worth copying. Too bad the Treo introduced users to the touchscreen more than five years ago. Likewise, few remember that in 2003, the Treo 600 delivered many of the same bells and whistles as Apple's recent entry: a built-in camera, music and video player, and the ability to fetch e-mails and dial directly from a contact list.

Today, even the most ardent Treo fans seem ready to give up. Palm Inc. has used the same operating software, with minor updates, for five years. It is struggling to get a major new version out this year. In the meantime, rivals have delivered new software that's far more multimedia-friendly. No wonder Palm's net income in the most recent quarter plunged 43%, to $15.4 million.

Now that the entire industry is focusing on tech-savvy consumers--Treo's core audience--analysts are growing increasingly concerned that Palm will be squeezed to death between RIM and Apple, which just slashed iPhone prices by a third. Palm sales have been sluggish at AT&T Inc. (T ) outlets. While AT&T stores try to whip up excitement with iPhone kiosks, Treos have been shunted off to less visible sections.

Palm's problems date to the late 1990s. After clashing with new owner 3Com Corp. (COMS ), founders Jeff Hawkins and Donna Dubinsky quit in 1998. Palm was later spun out of 3Com, and new management separated hardware and software development. Unsuccessful in getting other companies to buy its software, that unit floundered. It was sold in 2005 to mobile-software maker Access of Japan, which created an operating system that even Palm didn't consider good enough to adopt. In June of this year, private equity firm Elevation Partners agreed to buy 25% of Palm for $325 million.

In early September, Palm suffered an embarrassing setback when it pulled the plug on the Foleo, a mobile-computing companion to the Treo. The Foleo had a splashy debut in the spring, but critics scratched their heads over its limited business utility. Palm will take a $10 million charge.

Palm executives say new devices are on the way that will expand the company's reach. The Treo 500v, introduced on Sept. 12 by Vodafone Group PLC (VOD ) in Europe, uses Windows Mobile software and is thinner than earlier Treos. In the U.S., Sprint Nextel Corp. (S ) later this year plans to release the Centro, a thin smartphone that should sell for a quarter of the iPhone's $399. But until it delivers on broader promises of new software and a more contemporary lineup, Palm seems likely to continue its long slide.

Edwards is a correspondent in BusinessWeek

's Silicon Valley bureau

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