A Pall Over Palm's Pre

Expectations for Palm's newest smartphone proved too high to meet. In the days after the Pre went on sale on June 6, shoppers complained of shortages. Investors fretted that sales may suffer unless Palm (PALM) does a better job of supplying handsets amid a fierce rivalry with Apple (AAPL), which on June 8 cut the price of its iPhone.

Jen Resnick, a 44-year-old acupuncturist from Brooklyn, N.Y., embodies those concerns. By the time she stopped at a Sprint Nextel (S) store in Manhattan on June 8, the Pre had been sold out for two days. "It makes me [want to] consider the iPhone instead," Resnick says.

Would-be Pre owners across the U.S. faced similar disappointment as they visited stores owned by Sprint, expected to be the exclusive Pre carrier through yearend. The Pre is also being sold through Radio Shack (RSH) and Best Buy (BBY) stores. In Portland, Ore., one Sprint store sold its initial shipment of 30 phones in the first 20 minutes. The supply hadn't been replenished as of June 8.

New phones may not arrive in major metropolitan areas until June 15, says UBS (UBS) analyst Maynard Um. "I'd been waiting for a long time," said Elizabeth Wisker, a 23-year-old student in New York. Like many other disappointed customers, Wisker added her name to a waiting list for the Pre. As of June 8, 10,000 to 15,000 people joined such lists nationwide, analysts estimate. Auction site eBay (EBAY) listed nearly 100 Palm Pre devices for sale, going for $455 to $700, often without a Sprint contract. Sprint offers the Pre for $200 after a mail-in rebate and with a two-year contract. The wireless carrier sells the device for $550 without a contract.

Analysts estimate that 45,000 to 55,000 Pre units were sold the first weekend. Sprint says the Pre beat all of its earlier records for a first day and first weekend. Still, the device came nowhere near first-weekend sales for the iPhone, to which it is often compared. "While [the sales] are good, they are not iPhone good," says James Moorman, an analyst at Standard & Poor's, which, like BusinessWeek, is a division of The McGraw-Hill Companies (MHP). The first version of the iPhone, introduced in 2007, sold 500,000 units in its first weekend, analysts estimate. Apple has said the second iteration, iPhone 3G, sold 1 million units in its first weekend.

An iPhone for Half the Price

But now the iPhone will cost as little as $99—and new iPhone models will hit stores on June 19, likely stealing some of the Pre's thunder. "I am waiting for the new iPhone before I make any decision," says Chris Craig, a 43-year-old marketing executive from New York, who says he's deliberating whether to switch from AT&T, the exclusive U.S. iPhone provider. "This [shortage] is obviously either a scarcity strategy or a terrible manufacturing strategy. It makes you think they don't have their act together."

Palm says it's revving up production. "We are constantly working to get the product out there," says Palm spokeswoman Lynn Fox. "We are very, very happy with how things went this weekend." Palm wouldn't release early sales figures, but it said new users of the Palm Pre downloaded more than 150,000 applications on the day the device went on sale. "You are calling this a shortage, we are calling it high demand," Fox says. In a June 8 note, RBC Capital Markets analyst Mike Abramsky predicted that sales of the device will reach 470,000 in its first quarter of availability.

In the past half-year, Palm's shares have surged almost threefold on optimism that the Pre would be in high demand and revive growth for Palm, which has been pummeled in recent years by competitors Apple and Research In Motion. Sprint CEO Dan Hesse tried to temper expectations, recently warning analysts to expect shortages at first. "We know that Palm Pre is the most anticipated consumer device of the year, so we expected demand to exceed inventory early on," says Sprint spokesman Mark Elliott.

On June 8, Palm shares dropped 6.5%, to 12.16. Sprint's fell 2.9%, to 4.96.

On Deck: New BlackBerry, Android Phones

Apple won't be the only source of competition for the Pre in the coming months. Research In Motion (RIMM) is expected to release its BlackBerry Storm 2 this summer. In a matter of days, HTC is set to start selling a follow-up to the popular T-Mobile G-1 phone, based on the Android operating system created by a team of developers led by Google (GOOG). "With other phones coming out, you want more stock sooner rather than later," Moorman says. Abramsky said he expects "inventories to be constrained and likely to remain tight through summer."

Sprint has added reason to hope Palm boosts its supply. Verizon Wireless, which is larger and has a better reputation for customer service and network reliability, plans to start carrying the Pre early next year. And even robust sales may not stem Sprint's recent subscriber losses. Um expects the Pre to help Sprint attract 330,000 subscribers by the end of 2009. But the company is still losing customers on a net basis, according to other analysts.

No company has more to gain or lose from the performance of the Pre than Palm, however. "If you disappoint too many people, it can backfire," says Neil Strother, an analyst at consultant JupiterResearch. "You are probably wise to meet the demand or undershoot it only a little bit."

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