Who’s Winning the Handheld Battle These Days?

What the heck is going on at Palm, Inc. (NASDAQ/PALM)? The stock crashed 18% last Friday after reporting a decline in earnings and a weak Q2 forecast. If you follow or own the stock, you will know that it has been nothing but a struggle for PALM in the highly competitive PDA market, with such players as Dell, Inc. (NASDAQ/DELL), Hewlett-Packard Company (NYSE/HPQ), and Sony Corporation (NYSE/SNE) as competition. In the Q1, PALM saw its PDA sales fall 22% year-over-year.

 The strategy behind PALM appears muddled at this time. In order to focus on higher margin products, PALM said it would try to drive up sales of its “Treo” smartphones, a sector that saw a 163% surge in the Q1. PALM clearly recognizes that PDAs that offer mobility solutions such as real-time e-mail and phone capabilities are a better solution, because of the recurring monthly subscription revenues.

 A company that PALM has been trying to emulate is Canadian- based Research In Motion Limited (NASDAQ/RIMM), which has had incredible success and growth with its “BlackBerry” PDA. The BlackBerry has become an icon in the corporate world, with millions of subscribers willing to dish out a monthly fee. This is what PALM wants, but RIMM will not be easy to overthrow.

 First, PALM must deal with deciding what it wants to do. The situation looks confusing. Take, for instance, when PALM announced that its new Treo smartphone would drop the PALM OS system for Microsoft Corporation’s (NASDAQ/MSFT) “Windows Mobile 5.0” operating system, which will operate within Verizon Communications, Inc.’s (NYSE/VZ) new high- speed wireless service. Clearly, the move tells us what PALM thinks of its own in-house developed PALM OS, which was distributed by PalmSource, recently sold for $324 million to a Japanese software company.

 Whether this new Palm Treo will be enough to grab market share from RIMM is anyone’s guess. PALM faces a tough uphill battle, even with its alliance with Microsoft. It wants a piece of RIMM’s market; but don’t count on RIMM to sit idly by. The reality is that RIMM has an advantage; it produces its own hardware and software, whereas PALM does not.

 I currently use a Palm, but I can tell you that the BlackBerry looks more enticing these days. PALM is desperate for growth and will bet on the Treo. I, on the other hand, will stick with the BlackBerry.