In the Palm of Whose Hand?

24 January 2002

By Ben Macklin

The global handheld device market is becoming increasingly competitive -- just ask Palm. In the first quarter of 2001, they had over 50% of the worldwide personal digital assistant (PDA) market. Two quarters later, its share had shrunk to less than 30%, according to Gartner Dataquest.

During that period, Palm was not the only one who lost market share; all the majors -- Handspring, Compaq and Casio -- suffered at the hands of new competitors.

In the year 2000, handheld devices were selling like hot cakes. According to NPD Intellect, handheld devices were the second-fastest selling consumer electronics appliance in the US. Only DVD players outpaced them. 2001, however, was "annus horribilus." Demand dried up, causing excess inventory. A price war erupted between appliance manufacturers, the technology and telecommunications sectors hit rock bottom, and the economy went into recession.

As can be seen from the ABN AMRO data, the revenue in 2001 for the global handheld market was only marginally better than in 2000.

2002 should be a much better year. ABN AMRO predicts revenue in the sector to grow by over 30% from 2001, and it will continue to grow in the proceeding years to a market worth over $7.4 billion in 2004.

One result of the inevitable shakeout in the handheld market is that market leader Palm has had to rethink its business strategy. The realization of this change in direction came earlier this week when they announced they had successfully spun off its Palm operating system (OS) subsidiary. Instead of having to fight two battles from the one trench, Palm is now able to muster its forces to compete against Microsoft and co. with one army and the device manufacturers with another. During the announcement of this corporate restructure, Palm also announced that the total number of Palm-powered devices sold had surpassed 20 million worldwide.

Yet in the battle ahead, it is likely that the success of the operating system will be the key. In order to maintain its dominance of the low-end consumer market as it chases the more lucrative business market, the operating system will need to be flexible enough to allow for entertainment and wireless web services, while at the same time providing business people with an invaluable tool that allows them to connect to the back office.

ABN AMRO, for one, predicts that Microsoft's PocketPC operating system may just hold the edge when it comes to the future market. They predict the Pocket PC OS will be shipped in more handheld devices than Palm for the first time in 2004.

Despite its shrinking market share, Palm isn't throwing in the towel just yet. eMarketer will keep you posted as new numbers are released.

Ben Macklin is a Senior Analyst for eMarketer and the author of the Telecommunications Spending Report, the North American Wireless Report and The Broadband Report. E-mail him with comments, suggestions and questions.

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