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RIM vs. Palm: The Battle for the Smartphone

The two big stories grabbing headlines in the handheld arena focus on Research in Motion and Palm , and for two decidedly different reasons.

I want to begin with Research in Motion since this just goes to show you that the more money you make, the more "Teflon-coated" you tend to be.

When RIM announced in September that it had launched an internal stock options backdating probe, experts on the Street feared the worst: A massive restatement of earnings going back ten years to the tune of $250 million to $500 million. So when RIM announced that the restatement would lead to $25 million to $45 million in earnings restatements, there was a collective sigh of relief. Then, a month later, RIM updated analysts that the number woud see a "substantial increase." And now here we are: a $250 million restatement, with Jim Balsillie relinquishing his role as chairman (he stays on as CEO) now that he's been directly implicated in personally choosing favorable dates for back-dated options. CFO Dennis Kavelman, also implicated, will be transferred out of that role and into his new position as Chief Operating Officer.

If there is a surprise, it's that shareholders aren't reacting more negatively to the news. RIM shares have more than doubled since last summer, and are only fractionally off their 52 week high. So you'd think that with a scandal like this brewing that investors would take a lot more money off the table. Yet RIM shares are only off a percent or two. Why?

"To be honest, it's surprising and a little disconcerting that they didn't have a better handle on this initially and give us a better heads up, but in the overall scheme of things, we ended up about where we started," says Pacific Crest Securities' James Faucette. In other words, we expected $250 million to $500 million in restatements; thought it would be substantially less; then it became substantially more. But even that "more" is still at the low-end of the original scenario. And that's good news.

The news gets even better when you consider that RIM will earn $750 million to $1 billion in profits this year, and the company's Blackberry pipeline is more stuffed today with cool products than ever before. That kind of performance, with the promise of even more success, means investors can turn their heads and look the other way. The non-cash restatement becomes a blip on the screen and smaller and smaller as investors choose to look through the financial windshield, rather than staring at the rear-view mirror.

To Palm now: is the company up for sale or not? Rumors have been circulating for months. They gained steam recently with several websites reporting a sale was imminent. First the suitor was Motorola . Then Nokia . Now there's a fair amount of interest in Korean handset makers like Samsung and LG . But I think the smart money is on Motorola if the company can figure out a way to get through its multiple distractions. Hey Ed! Nothing makes the Street forget your problems quicker than a bold stroke that gets everyone focused on the "new," rather than the "old." Plus, on a technological basis, Palm makes a lot of sense for Motorola. Palm and its operating system are really the only ones that have come up with a way to bring Microsoft's mobile software effectively to the smart handset. Motorola's "Q," with so much promise, really hasn't performed.

Nokia could make sense. So could the Koreans. But I get the sense that Palm will want to stay American and I can't imagine Palm CEO Ed Colligan selling the company to an offshore interest. Stranger things have happened, sure. But I say the odds-on favorite is Motorola. Street analysts put a price on Palm of $2 billion, or about $20 a share. Several sites say Morgan Stanley will broker the deal.

No matter who buys Palm, it's a shame the company couldn't make a better go of it. The Treo 750 featured a compelling a design and nice functionality. But it just can't get out from under Blackberry's shadow, no matter how optimistic Colligan is about the sector. He told me in January: "What we think will happen is that people that are buying standard handsets will see the capability of these and see that there's no compromise anymore of form factor and kinda useability from a phone perspective and they're gonna why wouldn't I want the web and MP3 on my phone?" Makes sense. But Palm, which did about 600,000 units last quarter, doesn't even register in an industry that'll sell a billion handsets globally this year.

The consumer is certainly moving toward embracing the "smart" handset model. It's just that the embrace isn't happening nearly as fast as Palm needed it to.

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