How Can Pre Save Palm?

Posted on June 28th, 2009 by admin in How to Invest

Dr.Ruth Fisher has just published a really important book on how businesses need to think about a common, tricky problem: how to develop and position new products that require hardware from one firm and software or “content” from another. For example, new HDTVs require sufficiently available HD TV shows and DVDs, but the content providers won’t make them until enough people have bought  new HDTVs.

In the process of solving this chicken/egg problem, Ruth developed some important insights into the value chain aspects of this process, and found some ways for hardware and software providers to win. Her book is a blueprint for strategic marketing managers facing this situation…and for firms who care about wining the game.

In this post, she analyzes Palm’s situation with their new smartphone, the Pre, within her new framework.

You can get her book at Amazon:

Winning the Hardware Software Game

Her web site is:

Winning the Smartphone Game

By Ruth Fisher

The smartphone game is really beginning to heat up and players are coming out of the woodwork. The latest entrant is the Palm Pre. Now that the Pre has been released, the clock has started ticking for Palm. If new smartphone adopters see that users have been choosing the iPhone and Blackberry over the Pre, the Pre could quickly lose momentum and die, taking Palm down with it. So the big question is: Can the Pre hold its own against the iPhone and Blackberry?

Description of the Smartphone Game

The battle between smartphone manufacturers, product developers, and users falls into the realm of game theory, since the benefits ultimately enjoyed by each player depend upon the actions taken by the other players.

The first group of game players includes the smartphone manufacturers, most notably Apple, RIM, and Palm, but also including Google, Nokia, and Samsung. Manufacturers will earn greater profits when more developers provide applications and accessories for their handsets, and when more users adopt their technology systems and at higher prices. Smartphone manufacturers must therefore choose which features their handsets will offer and the price to set for their handsets each period to attract as many applications developers and users to their system as possible.

The second group of players includes third party providers of applications and accessories for the manufacturers’ handsets; this group has been expanding rapidly as more and more independent developers try to make it rich by developing must-have apps. Third-party developers will earn greater profits when more users buy their platform-specific applications. Developers must therefore choose the system for which to develop applications and the type of applications to develop that they think will ultimately earn them the highest profits.

And the third group of players comprises the smartphone users. Users will enjoy the greatest benefits from their systems when they adopt systems for which handsets have the best features and lowest prices for them, and for which product developers have provided the best selection of applications for them. Users must therefore choose the system and timing of adoption so as to optimize the benefits they ultimately enjoy from the system.

Competition Is Taking Place Simultansously in Four Arenas

The game is being played simultaneously on four different battlefields. The first arena, the “tech” arena, covers the technology features and capabilities of the handsets themselves. More significant features include handset size, ease of use (touchscreen, keyboard), battery life, camera/video capabilities, Internet capabilities, and the ability to migrate from and synch with PCs and other gadgets.

The second arena, the “direct network” arena, entails the value to users of having a larger network of other users. Traditionally, the direct network value accrues to system when they can only communicate with other users of the technology system. However, since smartphone users can generally communicate with users of other technology systems (other brands of smartphones, cell phones, landline phones, PCs, etc.) this arena of battle does not really apply to the smartphone market. However, there is another aspect of direct network effects in the smartphone arena that does apply: the validation value associated with larger networks of users. In this case, smartphone manufacturers are duking it out in the direct network arena, where a larger installed base of users signals greater desirability and staying power of the associated system.

The third arena, “the “indirect network” arena, covers applications and accessories that enhance the value of smartphones to users. More traditional accessories include hands-free headsets, carrying cases, and adapters. More innovative applications include the exploding availability of downloadable music, games, and other applications for personal and business use.

The fourth and final arena, the “price” arena, covers the price of smartphone systems (handsets and connection services), together with the costs to users of switching from their current communications systems (cell phones and smartphones) to their smartphone system of choice.

Apple and RIM Have a Head Start

Since the introduction of the iPhone, Apple and RIM have been at the front of the battle.

Over the past few years, Apple has rapidly increased its base of users by providing increasingly attractive features in the tech, price, and indirect network arenas. More specifically, Apple has rapidly followed its 2G digital cellular version with the 3G version broadband cellular, which has major new capabilities and a significantly lower price than those of the previous generation. At the same time, the explosion of easily accessible applications available to users through the App Store has proven to be such a strong attractor of users to the iPhone that the other manufacturers have tried to duplicate the phenomenon by recently opening their own stores: BlackBerry App World, Palm App Catalog, Nokia Ovi App Store, and Google Apps Premier Edition.

Nonetheless, the strong tech features and direct network effects of the Blackberry have enabled RIM to maintain a strong base of users in the corporate world. Its newly opened App World should help strengthen its user base, especially since it provides unique applications targeted to corporate users, such as the ability to manipulate text and data and the ability to conference users. RIM’s market is also significantly expanding to include users who enjoy its power and simplicity both for email and for synchronization capabilities with calendar and contact information on their PCs.

What Can Palm Do to Attract New Users?

So how does the Palm Pre fit into all this?

The Palm Pre has a couple of notable strengths. First, Palm has a loyal following among prior user of Palm Pilots. Undoubtedly it was these loyalists who comprised a major portion of users who bought out the Pre upon its recent market introduction. Second, the Pre has garnered a lot of advertising exposure and positive media reviews and feedback. A third strength of the Pre is its ability to run multiple apps simultaneously, which the iPhone and Blackberries cannot do. Fourth is Synergy, the Palm Pre OS’s unique contact/calendar management system. Fifth are a couple of key handset features, including a slide out keyboard and an easily swappable battery. And last is the fact that the Pre’s OS is a web-based system, meaning web developers should be able to port their web applications relatively easily over for use on the Pre.

But is this enough? How should Palm leverage these and other strengths to induce new users to choose the Pre over the iPhone or Blackberry?

In the tech arena, first and foremost, users will be looking for smartphones that will seamlessly connect and synch with their PCs and other gadgets. Being able to migrate data from old phones to new smartphones is also a major aspect of decreasing switching costs, and thus increasing adoption rates, for new users. Seamless migration and synchronization will tend to lead Mac users to go with the iPhone, PC users to go with RIM or Palm (or Nokia or Samsung), and Blackberry users will to stick with RIM. Notably, Palm does offer services to help users migrate from other systems and synch with the Pre.

Also in the tech arena is service coverage. Currently, Pre users only have the option of using Sprint for as their services provider. This lack of choice will put Palm at a disadvantage to both Apple (more recently) and RIM (historically), both of which enable users to choice from a wider variety of service providers.

Battery life is an important issue for many users. As such, Palm should highlight the easily swappable batteries for the Pre, which the iPhone does not have, and perhaps offer a pricing promotion on purchases of spare batteries by new Pre adopters.

In the direct network arena, as mentioned above, what’s important here is the validation (i.e., signal of desirability and staying power) that comes with having a large installed base of smartphone users for a particular system. Since Palm’s very survival is at issue, it is critical that Palm build up a large base of Pre users as quickly as possible to ensure its continued existence. Furthermore, what would be particularly detrimental to Palm’s chances of success would be to have adoption of the Pre significantly lag adoption of other smartphones, because this would signal to users that the Pre is not as desirable as its competitors, thereby repelling further adoption. It is therefore imperative that Palm pull out all the stops to get adoption momentum going.

To attract new users to the Pre as quickly as possible, Palm should persist with its advertising campaign, continuing to tout the positive feedback and reviews it’s been getting. Additionally, Palm can attract new users by offering special promotions for early adopters. More specifically, to attract owners of other Palm devices to the Pre and encourage their loyalty, Palm could offer historical Palm users special promotions or discounts, such as trade-ins or trade-ups from other Palm devices, discounts on early purchases of Pre apps and accessories, or discounts on migrations of apps and accessories from older devices to the Pre. To attract users who are new to Palm, Palm could offer such promotions or discounts as trade-ins on non-Palm devices, guarantees of product satisfaction, or discounts on early purchases of Pre apps and accessories. Finally, Palm should also consider offering an inexpensive, low-end version of its smartphone, like Apple has done with its $99 iPhone.

As for indirect networks, generating large ecosystems of accessories, applications, and services offerings surrounding the various platforms will also become pivotal for the Pre’s success. Moreover, accessories, applications, and services are platform specific, and since it is costly for developers to switch from one platform to another, it is important that Palm get third party suppliers to commit to its Pre webOS platform before they commit to developing apps for Apple or Blackberry. Palm is currently working to help developers port their apps for the old Palm OS onto the new system. Additionally, Palm should consider establishing special programs or partnerships with developers, say of business apps to attract new (business) users. Palm could also offer special profit sharing offers for other developers, for example to those who get apps up and running within the next few months. The fact that most web developers should be able to easily generate apps for the Pre means that with aggressive promotions early on, Palm could quickly generate a very large repertoire of apps for the Pre, which would go a long way toward establishing staying power and attracting new users.

In short, Palm’s survival depends on its rapidly attracting new users and app developers away from rival (Apple and RIM) platforms and toward the Pre to establish a sufficiently large base of users and developers to ensure the fortitude of the Pre ecosystem. The quickest and easiest way to do this is (1) to reward the loyalty of past Palm users through aggressive pricing promotions; (2) to draw in new users through aggressive pricing promotions; and (3) to attract app developers with aggressive profit-sharing promotions. However, since Palm has not yet released its SDK, it better get moving!

Ruth Fisher, PhD, Founder and Principal of QuantAA, is author of Winning the Hardware Software Game.

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