What if the Palm Pre Bombs?

Palm has a lot of prestige and funds riding on the success of the Palm Pre smartphone. Advance buzz for the device has reached a fever pitch, but in the face of such enormous expectations, not to mention competition from the Apple iPhone and RIM BlackBerry mobile and wireless devices, the question remains: What if the Palm Pre fails in the market?

Palm plans on releasing its new smartphone, the Palm Pre, during the first half of 2009, and has managed to build considerable buzz for the device over the past few months.

The company is betting that a blockbuster project will not only boost its revenue, but pull it out of what Ed Colligan, CEO of Palm, called a "challenging transitional period" in a March 20 statement.

In one sign of how dire the situation has become, news reports on March 19 stated that Palm had remarketed 18.5 million common stock-shares, worth roughly $103 million, in a bid to raise more cash. Sales of Palm's older smartphones have been declining at a steady pace.

Palm sees the Pre as a potential rival for the Apple iPhone, with Roger McNamee, a partner in Palm investor Elevation Partners, boldly predicting on March 6 that current iPhone users would promptly switch smartphones upon the Pre's release: "Not one of those people will still be using an iPhone a month later."

McNamee's confidence at least partially stemmed from the Pre's much-glimpsed design, which includes a 3.1-inch multitouch screen and a real keyboard, Wi-Fi, USB, Bluetooth 2.1, GPS and a built-in 3-megapixel camera. Much of the Pre's "look" can likely be attributed to the influence of Jon Rubinstein, who left Apple in 2006 after contributing mightily to the development of the iMac and iPod.

Three days after McNamee's statements, on March 9, Palm filed an SEC document describing the investor's claims as "exaggerated."

Nonetheless, the company doubtlessly hopes that the device, for which no price has publicly been set, will succeed wildly, especially given Palm's financial difficulties. On March 4, Palm announced its sixth consecutive quarter of losses, with Palm revenues for third-quarter 2009 falling to around $90 million.

With all that at stake, what will it mean for Palm if the Pre only performs at an average level—or worse yet, bombs?

"If it tanks, that's a lot of R&D that's backfired," Ramon Llamas, an analyst at IDC, said in an interview. In between that ultimate negative prospect and blockbuster status, he added, is a middle ground with "a whole lot of gray."

However, Llamas reaffirmed that Palm needs the Pre in order to succeed. "The Palm OS as we knew it fulfilled what we needed it to do, but it was aging in the face of other technologies from Apple and RIM," he said. High sales will allow Palm to "re-establish itself as not an also-ran."

The Pre's degree of success is also something that will likely be clearer over the medium term, if history is any indication. "Let's not forget, when the Apple iPhone came out in its first and second generation, in the first weeks it was panned for bugs and glitches," Llamas said. "Those problems were addressed, and you don't hear about them anymore."

The implication is that, even if initial buzz about the device post-launch is less than ecstatic, Palm shouldn't be written off just yet. Another potential complication, however, is Sprint Nextel, which has exclusive U.S. rights to the Pre through the end of 2009.

Sprint has offered a variety of individual, family and business plans for the Pre, with pricing for the individual Everything Data 450, 900 and Unlimited plans starting at $69.99 per month, according to reports.

But, "Sprint is having its own challenges," Llamas suggested. If Palm wants to succeed in the broader market, then "the key with distribution is that you want to be in as many channels as you can; Sprint can't be the end-all-and-be-all."

If the smartphone doesn't succeed, things will look truly dire for Palm, said Charles King, an analyst with Pund-IT Research. "If it's not game over, it's down to the 2-minute warning with them needing to come up with two touchdowns from their own third-yard line," King said.

No matter how innovative the Pre, the device enters an economy in recession and a market crowded with other smartphones. "Palm needs the Pre to be a blockbuster to show they deserve a place at the table when other companies have been delivering truly innovative products," King said. "People think Apple and iPhone are the product to beat, but the dominant player in the business market remains RIM and BlackBerry."

But can the Palm succeed? According to King: "It's always possible."