Economy Takes the Wind from Handheld Sales

The slowing U.S. economy will bring the worldwide sales of handheld devices to a screeching halt, according to International Data Corp. (IDC), but that doesn’t mean the market is dead, it’s just taking a breather.

According to IDC, worldwide shipments increased 88 percent to 13.6 million in 2000, but the increase in 2001 will be less than half of last year’s at 43 percent, but that’s still enough to warrant optimism in the market.

“Just six months ago, handheld devices were the bright spot amid dismal expectations for other types of personal technologies such as PCs and mobile handsets. However, handheld devices have proved they are not immune to the economic slowdown,” said Kevin Burden, manager of IDC’s Smart Handheld Devices research program. “Still, no one is saying the handheld industry is circling the drain. In fact, we are quite optimistic about the future of the market.”

In fact, IDC estimates worldwide shipments will increase at a compound annual growth rate of 39 percent from 13.6 million in 2000 to 70.9 million by 2005. Despite the lackluster economy, the U.S. market still represents the largest opportunity for handheld device vendors, accounting for nearly half (49 percent) of worldwide shipments in 2000. However, as has happened in other technology markets that matured in the United States first, U.S. shipments will grow slower than the overall market. By 2005, the U.S. share will decline to 38 percent. Shipments in Asia-Pacific will increase the fastest, earning a 2000 to 2005 compound annual growth rate of 60 percent.

As for the devices, personal companions are the most popular. IDC estimates they will represent 83 percent of worldwide shipments in 2001.

“Increased diversity of personal companion models across price bands and feature sets, new applications, and new uses are creating appeal for these devices in new market segments,” said Alex Slawsby, analyst for IDC’s Smart Handheld Devices research program. “The evolution of technology in the entire smart handheld market is beginning to enable devices to bend to the usage, needs and wishes of their users instead of the traditional paradigm of the user bending to the interface and device requirements, and this is increasing acceptance among users.”

Palm has been the handheld industry leader both in revenue and shipments, but Gartner’s Dataquest unit is expecting the company to lose its revenue leadership position as early as the second quarter of 2001. While Palm will still have a strong lead based on units shipped, Dataquest analysts expect it to lose its lead, based on revenue, to Compaq.

Palm is projected to have hardware revenue of $130 million to $135 million for its fiscal fourth quarter (ending June 1). Handspring recently announced that its fiscal fourth quarter (ending June 30) revenue will be in the $60 million to $65 million range. Compaq is expected to sell fewer iPAQ handheld PCs in the second quarter, but Compaq has a much higher average selling price than Palm or Handspring, and appears poised to assume the second quarter 2001 (ending June 30) PDA worldwide market lead on a revenue basis, with revenue exceeding $200 million.

“A growing portion of new users and users who are upgrading want better messaging capabilities, such as access to corporate email, short message services (SMS), wireless LAN (WLAN) or integration of a PDA with a mobile phone. This is especially true of corporate users,” said Todd Kort, principal analyst of Gartner Dataquest’s Computing Platform Worldwide group. “As better wireless messaging capabilities have become available, many enterprises are considering large volume purchases of PDAs. Palm has little to offer such companies. Palm is well behind the competition in implementing each of these wireless technologies, and this lack of innovation is a big contributor to its declining fortunes.”

According to Gartner analysts, there has been little improved functionality of the Palm OS software since splitting from 3Com in the second quarter of 2000, and this has enabled Microsoft to catch up with Windows CE 3.0. Microsoft’s next version of Windows CE, code named “Talisker,” is looming at the end of 2001, and Microsoft may then have the necessary pieces of the puzzle to make a much stronger play for the corporate market.

“Compaq and Sony are gaining ground in the high end of the consumer market. Meanwhile, the corporate market is slowly swinging toward devices running Microsoft’s Windows CE operating system, because of its smoother functioning with Outlook and Office applications,” said Ken Dulaney, vice president and research director for Gartner’s Mobile Business Strategies program. “Palm remains a solid choice for enterprise use. However, users should not commit to any vendor beyond two years, at which time they should evaluate Palm devices against competing offerings.”

For Palm to achieve the level of profitability it enjoyed in the past, Gartner analysts said it must offer a machine with a new operating system, which is expected by the fourth quarter of 2002, and it must offer a Palm VIIx replacement, which is scheduled for the second half of 2001. But the changes may have to run deeper than just improving Palm’s product offerings.

“Palm needs to offer a credible high-end device with features that compare to those offered by Compaq’s iPAQ,” Dulaney said. “The company should be restructured to at least split hardware and software. Both Microsoft and Symbian are software-only ventures with software growth expectations. Palm is a software company with hardware growth expectations. A split company would permit stockholders to benefit from each entity acting in its own best interests.”

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