Palm, RIM to Battle New Rivals with Smarter Devices

Palm and Research In Motion may be heading in different directions of late, but they both face a new breed of tough competition in the rapidly evolving smartphone market.

The smartphone is quickly becoming a mainstream device, with industry newcomers such as Apple and High Tech Computer focusing on consumer-friendly features and design. But if their new devices and products in development are any measure, both Palm and RIM seem prepared to do battle.

Palm Palm's Treo Pro is earning praise for its design, though for now it still depends on a Microsoft mobile operating system that some criticize as being non-intuitive.

A Shifting Landscape

This much is clear: Smartphones aren’t just for businesspeople any more. Market research firm Gartner expects smartphone unit sales to jump 52 percent this year to 190 million units, accounting for 15 percent of the total handset market. By 2012, smartphones will account for 65 percent of sales.

“I think that within a year, there won’t be a smartphone market. There will only be a handset market,” says Tavis McCourt, senior analyst at Morgan Keegan. “We’re seeing the types of e-mail and connectivity applications typically associated with smartphones across the handset market. Ultimately, we expect traditional handset players getting better at implementing higher-end features.”

Take Nokia , for example. Primarily known in the United States as a traditional cell phone manufacturer, the Finnish company is the world smartphone leader, holding a 45 percent market share, according to Gartner.

Nokia just announced two new "N Series" smartphones with Wi-Fi, 3G connectivity, and advanced camera and multimedia functions. The phones should be available in Europe in October and in the US in November.

Upstart Taiwan-based manufacturer High Tech Computer has gained attention with its sleek, consumer-friendly HTC Touch series, whose unique selling point is its iPhone-like touchscreen interface. Others, such as LG Electronics and Samsung, have launched products this year that they hope will help them ride the iPhone wave.

Blaine Carroll, analyst at FTN Midwest Securities, says Apple’s emphasis on an easy-to-understand user interface opened up the broader consumer audience to the smartphone.

Carroll says that’s why Nokia is looking to acquire the 52 percent of mobile software specialist Symbian it doesn't already own. “You need to get products out there on time with better user interfaces," Carroll says. "That’s the reason RIM is spending so much on R&D.”

Palm’s Challenge

Palm was an early smartphone innovator. While business travelers used the BlackBerry for corporate e-mail, just about all the other users of smartphones had a Treo.

In the last two years, as a slew of competitors have rolled out slicker and more advanced products, Palm has suffered from what many consider drab hardware design, as well as a dated operating system that hasn’t had a major upgrade since 2002.

Having seen both its market share and stock price shrink, Palm is hoping to fix both of those shortcomings with a major turnaround effort spearheaded by Executive Chairman Jon Rubinstein, who led the development teams behind the iMac and the iPod when he was an executive at Apple .

“Palm needs to develop much more compelling products,” says Morgan Keegan's McCourt. “We’re seeing signs that they’re doing that."

Palm recently introduced the Treo Pro, which is earning praise for its more attractive design, But the company has yet to offer the device through any network providers—who typically subsidize the purchase price—so it remains an expensive proposition for potential customers. Palm would not comment for this article.

For now, however, the Treo Pro runs on Microsoft’s Windows Mobile operating system, which is considered less intuitive than BlackBerry OS or iPhone OS. Palm is expected to debut its revamped operating system in the first half of 2009.

“For Palm, it’s all about the new OS,” says Michael Walkley, senior analyst at Piper Jaffray. “It comes down to how many developers they can line up for the new system. And they need to get it to launch on time."

RIM’s Challenge

Unlike Palm, RIM is working from a position of strength, as the No. 1 player in the U.S. smartphone market with a 42 percent share, according to Gartner.

But with Apple's quick ascent to the No. 2  spot (and a 20 percent share), RIM can ill afford to let the BlackBerry platform get stale, analysts say.

“Because RIM has been more successful, they need to play both offense and defense,” says McCourt, who has a market perform rating on RIM shares. “With the likes of Nokia, the iPhone, and Windows Mobile devices taking incremental share of the enterprise space, they need to maintain their position in the enterprise while trying to reach a mass market.”

RIM declined to comment for this article, citing the “quiet period” ahead of its fiscal 2009 second-quarter earnings announcement later this month. Nevertheless, the industry has been anticipating the release later this year of the BlackBerry Thunder, which reportedly features a touchscreen interface.

RIM is currently rolling out its new BlackBerry Bold in select countries, with a U.S. release scheduled for the coming weeks. Early reviews have commented favorably on the Bold’s design, interface and connectivity features.

In addition, RIM is reportedly preparing to launch the Javelin—a lower-cost alternative to the Bold—and a product called Kickstart, which would be the first BlackBerry to feature a clamshell design.

“RIM has to continue to build a family of smartphone products,” Walkley says. “They’ve done well in the U.S. market with the four major carriers. But it gets more competitive outside the U.S. where e-mail is not as pervasive. The iPhone is doing better outside the U.S. as a multimedia device.”

Risk and Reward

Analysts see upside to the shares of both companies. For RIM, the key is continued subscriber growth and strong carrier partnerships.

“When AT&T launches the Bold, there will be a trading call in front of that,” says Carroll, who has a buy rating on RIM shares. “The valuation on that stock going forward is very compelling.”

Based on analysts' current consensus estimate of $3.81 a share for fiscal 2009, Carroll notes that a $150 price target is attainable at a price-to-earnings ratio of 40 (RIM’s current P/E ratio is 43).

Walkley recently lowered his price target on RIM to $125 from $146, while maintaining a neutral rating on the shares.

Palm shares have gained more than 30 percent this year, adding 6 percent alone since the announcement of the Treo Pro on Aug. 20. Where things go from here depends largely on the success of Palm's turnaround plan—and there could be a lot at stake.

“Palm’s turnaround will either work or it won’t,” says McCourt, who holds an outperform rating on the stock. “If they don’t come out with compelling hardware and software, it's not clear the company will be around in five years."

Disclosures: 

Neither Walkey nor any member of his family own shares in the companies he commented on for this story, but Piper Jaffray makes a market in the securities of Nokia, Palm and Research In Motion, among others in the wireless sector.

Neither Carroll nor any family member of own shares in the companies mentioned in this story and they are not investment banking clients of FTN Midwest Securities.

McCourt and his family members do not hold shares in these companies, but Morgan Keegan & Co. makes a market in Apple, Palm and Research In Motion.)

© 2009 CNBC.com