Can Pre Save Palm? Some Critics Rave, But Field Crowded

Palm plans to begin selling its highly anticipated Pre cell phone nationwide June 6, a product launch many see as a make-or-break milestone for the struggling handset maker.

Cellular carrier Sprint Nextel (S) will be the exclusive carrier and sell the phone at company stores for $299 with a two-year contract. Counting a $100 mail-in rebate from Sprint, the final price comes to $199, the same price as Apple's (AAPL) iPhone with AT&T (T) service.

The Palm Pre will also be sold at Best Buy (BBY), RadioShack (RSH) and some Wal-Mart (WMT) stores.

Palm (PALM) pioneered and once dominated the smart phone market. But it has lost ground to devices such as the iPhone, Research In Motion's (RIMM) BlackBerry and handsets running Microsoft's (MSFT) Windows Mobile operating system. In a sign of its fading clout, Palm began selling phones running Windows Mobile in 1995.

Palm is counting on the Pre to reverse that slide. The device uses new Palm-owned operating system called WebOS that promises a Web browser more advanced than the iPhone's, a slick touch-screen interface and easy access to Internet-based services.

Palm badly needs a hit. The Pre will go on sale two days before Apple unveils the newest version of the iPhone.

Palm also must contend with the Google (GOOG) G1 by T-Mobile, which uses Google's Android operating system. Samsung and Motorola (MOT) plan to introduce Android-based phones this year. Nokia (NOK), the No. 1 leader in smart phone sales worldwide, is getting more aggressive in the segment as well.

"If the Palm Pre and its WebOS end up being a flop — because the launch or branding isn't right and if other carriers don't pick it up — Palm could go away," said Matthew Thornton, an analyst at Aviation Securities. "Palm would have to raise more capital or hope to be acquired."

The Palm Pre is seen as a solid contender. Like other phones in its price range it has a touch-screen color display, 8 gigabytes of storage, Wi-Fi wireless networking, global positioning system and will run on Sprint's 3G network. A key feature to the operating system is its Synergy program, which makes it easy to see information from different sources — such as personal and professional calendars, contacts and e-mail — in a unified way.

And unlike the iPhone, the Pre features a slide-out keyboard for heavy users of e-mail, texting and Web services such as Twitter.

"Synergy is very unique and pushes the state of the art in smart phones," said Sascha Cohen, who reviews mobile devices for PCMag.com.

But will it be enough to save Palm?

In its third quarter, which ended in Feb. 27, the company lost 86 cents per share as sales fell 71% from a year ago to $90.6 million. Smart phone sales fell 72% to $77.5 million.

"I do think the Palm Pre will become a top-selling smart phone," Thornton said. "It's a very competitive platform that will help reinvigorate the Palm brand, which has fallen by the wayside."

Avian Securities has a neutral rating on Palm shares and questions whether the Palm Pre will be good enough to revive the company.

While the Pre shows promise, Palm is too far weakened to survive a product failure, Thornton says.

He doubts many iPhone users will bolt from AT&T to sign on with Sprint to get Pre. The same goes for BlackBerry users aligned with Verizon, he added.

In a recent report on smart phones, International Strategy & Investment analyst Bill Whyman said he doubts that Palm, along with Motorola and Sony Ericsson, can be more than niche players.

"They have an uphill battle," he wrote.

Ian Fogg, an analyst with Forrester Research, in a report on smart phones issued this week, said Palm needs a large partner if it's ever going to be more than a niche player. Palm would be a good fit with Taiwan's HTC, LG, Samsung or Sony Ericsson, he says.

"Even if the company fails, the Palm brand and technology should be picked up, assuming the price is appropriate," he said.

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