A popular finance blogger asked me yesterday where Palm went wrong. Though I was a leading developer of Palm games and graphics software, I hadn’t considered this in a while. The specific question might be:
Why does the iPhone earn a third of all smartphone segment profits on just 8% share (by revenue), while Palm, despite an 11-year lead in mobile devices, is on life support, with negative lifetime profits, its shares down a split-adjusted 99.26% since the IPO? What happened?
The answer is prosaic: profit requires a sustainable competitive advantage. Palm never found one. Apple did.
One could kvetch all day (all week) about operational errors at Palm, but the central problem was strategic. They never raised barriers to entry. The carriers, retailers, distributors and PC vendors always held the power. Palm remained just a tool — though a very good one — for replicating other vendors’ PC data in the field.
Many bought the iPhone because they already own a pile of music purchased through iTunes — music that can only be played through an iPod. You don’t want to carry a separate phone and iPod, so you pay a premium for an iPhone. In short, the switching costs and network effects of iTunes are a big reason iPhone is so profitable.
Also when you buy an iPhone, likely as not you buy it directly from Apple. There is no 3rd-party distributor or retailer to eat up margin.
Yes, iPhone is a great product, but that is not what sustains the margins. The switching costs and distribution control sustain the margins.
Palm never grasped this. They still don’t. They are narrowly focused on product. Their original design was fantastic, and opened a whole product category. The Pre is also great, by all indications. But good design is merely a necessary, not a sufficient, condition for consistent profitability.
Lacking any defenses, Palm still must fight every day for retail shelf space and wholesale pricing; Apple need not. Palm cannot cross-sell from desktop computers; Apple can. Palm controls no meaningful content format; Apple does. There is a long list like this, and it accounts for Palm’s travails as much as, or more than, any operational limitation.
For a time, perhaps 1996 to 2003, Palm had a big tactical advantage. Their original design was so far out in front that competition was fragmented and poorly orchestrated. That time could have been spent developing defenses.
For example, Palm could have used the PalmPilot sync software as a beachhead to wrest control of PC contact management software from ACT. Palm could then have mainted those contacts in a closed data format, creating switching costs. As long as their software was truly excellent, industry beating, then customers would be happy, despite a premium price. Instead, Palm abdicated, treated contact management software as an afterthought for 10 years, while third parties developed sync tools.
The tactical advantage is now long lost. Game over, it seems.