Palm's Life Line

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Instead of inflicting mortal damage on Handspring, Palm's premature announcement may have killed demand for its existing line. Kort believes that people stopped buying existing Palm products in anticipation of the new models. Then Palm didn’t ship the new devices to retailers until late in the year, making the second and third quarters “disastrous for Palm,” Kort says.

Handspring also succeeded because it learned how to attack Palm's leadership position in handhelds, according to Ed Colligan, who left Palm for Handspring in 1998, and is now back with Palm as president and CEO. Handspring licensed the Palm OS and developed the Visor handheld and upgrade modules that turned the device into a mobile phone and music player. By outfoxing Palm with more flexible hardware, "we almost instantly got a 20-percent market share," says Colligan.

Another new rival, Research in Motion, was also making inroads with business buyers by offering wireless access to corporate e-mail. RIM's BlackBerry device offered a miniature keyboard and gave professionals a secure connection for receiving messages from corporate e-mail servers -- features not available from Palm.

Then there was Microsoft, which was putting heat on Palm's software business with its release of the Windows Mobile operating system, which competed with the Palm OS as a platform for handheld manufacturers. PocketPC handhelds (using Windows Mobile) integrated well with Microsoft's desktop applications and Exchange e-mail server and continued to grow in popularity.

The presence of viable threats in hardware as well as Microsoft’s alternative OS meant that Palm would give ground between 2001 and 2002 to the Visor, BlackBerry, Compaq’s iPaq, and Sony’s Clié, dropping from a 55.9 percent to a 50.0 percent market share, according to Gartner.

Of course this drop had an impact on the bottom line. During fiscal 2001, Palm lost more than a half billion dollars -- after having shown a profit of $45 million in 2000. And Palm would continue to lose money for another three years. The continuing U.S. economic downturn in 2002 and 2003 contributed to a slowly decreasing market for handhelds, which shrunk from a high of 13.1 million units in 2001 to 11.5 million in 2003, according to Gartner. Palm’s revenues were also dropping: by one-third in 2002, and another 16 percent, to $837 million, in 2003.

2003: Enter Smartphones; Exit Operating Systems

Further cutting into the demand for handheld organizers was the emergence of smartphones, which combine wireless voice and data access with the PDA functions of a handheld.

Handspring released the Treo smartphone in early 2002 and by the end of the year was selling more than 50,000 units per quarter. In 2003 Palm shelved development of a Treo competitor, according to Palm's Wirt, and instead purchased Handspring. Palm introduced the first Treo under the Palm brand in November 2003, and its smartphone business is now growing faster than its handheld unit. According to analyst firm IDC, Palm sold 430,000 smartphones during the second quarter of 2005, an increase of 218 percent over the previous year. During the same period, Palm sold 638,000 of its Zire and Tungsten handhelds.