Palm Cuts Pre Price, Unveils Pixi

Amid intensifying competition in the smartphone market, Palm is trying to prove it's fleet enough to keep pace with bigger competitors including Apple, Google, and BlackBerry maker Research in Motion.

Palm (PALM) is cutting the price of its Pre device by $50, to $150, and on Sept. 9 announced it will release a new scaled-down smartphone, called the Pixi, in time for the holiday selling season. The Sunnyvale (Calif.)-based company didn't disclose the Pixi's price, but said it would be more "affordable" than the Pre and aim for a younger audience.

The iconic Silicon Valley maker of handheld PCs, which is trying to undo the damage from years of decline, wants to broaden its products' appeal three months after it released the Pre. While the Pre has garnered positive reviews, it has sold a fraction of the number of smartphones sold by rivals, according to analysts.

"It's going to be a very competitive holiday season" in the smartphone market, says Palm Chief Executive Jon Rubinstein, sitting in front of a fireplace in a wood-paneled conference room in San Francisco's financial district. "We want to goose sales because we want a larger installed base" for the company's WebOS software, he says. Palm is developing additional devices that run the software, which can pull contact information and other data from popular Web sites including Google (GOOG), Yahoo (YHOO), and Facebook to enhance its own capabilities. "We're on Web time," Rubinstein says. "We're not working at the traditional embedded device pace." The announcement comes the same day Apple (AAPL) is due to announce new products, likely related to its iPod touch, a music player that lets users communicate via Wi-Fi connections.

Palm had better innovate fast. It had a loss of $91.5 million on sales of $86.8 million during its fourth quarter, which ended May 31. The company will likely hold just 3.6% of the worldwide smartphone market in 2010, Credit Suisse (CS) analyst Kulbinder Garcha, who has an outperform rating on Palm shares, said in an Aug. 31 report. But Garcha, who expects the company to sell 2.7 million phones this year, said Palm is positioned to pick up share with new products that run WebOS, and he expects its average selling price and profit margin to rise in 2010 as well.

Rubinstein, the former Apple executive who led development of the iMac and iPod, joined Palm in 2007 and became CEO in January. His unveiling that month of Pre at the annual Consumer Electronics Show in Las Vegas lent a dose of excitement to the struggling company. Shares of Palm have nearly quadrupled this year, to about 15.

Risk of Cannibalization? Palm's decision to announce another product three months after the Pre went on sale is giving some analysts pause, however. "The thing you worry about most when you introduce a new product is cannibalization" of the older one, says Shaw Wu, an analyst at Kaufman Bros., who has a hold rating on Palm shares. Announcing the Pixi "shows their innovation engine is still going," he says. But "perhaps sales of the first product are not as strong as they thought."

Guessing Pre's sales has become something of a Wall Street parlor game, absent hard data from Palm or Sprint Nextel (S), the wireless carrier that sells the Pre in the U.S. Some analysts say Palm has sold more than 450,000 Pres since the product went on sale June 6, and Palm will likely disclose actual sales on Sept. 17 when it reports results for its fiscal first quarter ended Aug. 31. By contrast, analysts are predicting Apple will sell 7 million iPhones in the quarter ending in September. "Everyone wants interim data," Rubinstein says. "The problem is if you do that, you've got to keep doing it."

Palm's newest smartphone, the Pixi, is meant to be less expensive and more "fun" than the Pre, the company says. Rubinstein says it will compete with Apple's $99 iPhone 3G. Instead of a drop-down keyboard like the Pre's, the slimmer Pixi is shaped in a "candy bar" format with a keyboard that's always exposed. It will include 8 gigabytes of storage space (like the Pre) and a 2-megapixel camera (the Pre's has 3 megapixels), and be sold through Sprint. Users will have the ability to purchase additional backs festooned with vivid graphics from California artists.

Meanwhile, Palm is cutting the Pre's effective price from $199.99 to $149.99 by increasing the value of an instant rebate that consumers redeem when they buy the phone from Sprint. The announcement was preempted by a brief Sprint promotion on Sept. 8 that offered consumers switching from other carriers $100 off the Pre's price. But Sprint began and then discontinued the offer on the same day. A Sprint spokeswoman couldn't be reached for comment. "After all the dust settles … it's going to be $149," Rubinstein says.

In addition to broadening its product line and lowering its prices, Palm is working to bring more developers into its camp in order to create applications that can enhance the appeal of the Pre and Pixi. Apple's iPhone application store has been a rousing success, boasting some 65,000 titles, and Google's Android Market for phones based on its operating system has 8,000 programs available, a Google spokeswoman says. Palm's App Catalog for the Pre is still in beta, and the company won't have a full complement of add-on software available until the fall. Palm is taking its time to make sure users have a seamless experience downloading the software, says Rubinstein. "This isn't a game of how many apps you have—it's the quality of the apps," he says.

Palm is moving quickly to reach more consumers in the growing smartphone market. But as Apple and Research in Motion (RIMM) keep improving their products, and Google lands Android on more phones—including Sprint's—Rubinstein and his colleagues have their work cut out.

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