Palm's True Loss: Cisco as a Client (PALM, CSCO, RIMM, AAPL, HPQ)

An interesting thing is going on in PDA-land and Phoneland this week.  Palm Inc. (NASDAQ:PALM) already disclosed that it is canning its Foleo offering.  But another key development that has received little to no coverage is that after two-years Cisco Systems (NASDAQ:CSCO) is dumping the Palm Treo(R) for its sales and support staff.

Cisco sales and support staff have other needs that the Treo just can’t handle, and contacts have openly complained about call drops, poor bandwidth for data, and a lack of needed functionality for where Cisco is going.  These devices are being changed out as this is being written, but it is likely that Palm knew about being dropped when it gave its last guidance since this would not have been an overnight development. 

Getting the one-two heave-ho from the networking behemoth is bad enough, but with the highest visibility possible in Cisco this could spill over to Cisco clients as well. PDA-phones are often conversational pieces, and having the world’s number one networker bash a PDA-phone in favor of a new replacement is not a good thing.  You could easily see other companies take the attitude "If it’s good enough for Cisco, then it should be good enough for me." in fact, a contact has noted at least one specific instance at a global law firm.

Upon first learning of this as a possibility, the first thought was that perhaps Research-in-Motion (NASDAQ:RIMM) was going to be leaping for joy to secure the Cisco account since there are already some crossovers. The numbers disclosed by R-I-M and Palm after the last earnings showed a clear R-I-M advantage that was only widening.  But the BlackBerry and BlackBerry Pearl(R) phones are apparently not in the replacement choices.  The reason for this is unknown, but contacts have not disclosed any rifts developing.  These are the phones that contacts have said are the new choices, although it is possible these could have also changed over the last couple of weeks:

• Motorola’s Q phone
• Samsung’s BlackJack phone
• Nokia’s E61 dual-mode phone

This isn’t just a Palm bashing article, and there is at least some balance that can be offered. Shares are actually up this week at two-week highs.  Personally, I use a Palm Treo as well.  My first one was riddled with problems, but the replacement has been more than adequate for now.  The bandwidth and download speeds for web pages is not as good as at least the BlackBerry phones as I have run the two side by side for comparison.  But it isn’t so bad that I have decided to make the change.  Not yet, at any rate.  My organization is also not an enterprise class operation with thousands of employees and millions of emails.

Hewlett-Packard (NYSE:HPQ) has also just announced that it is entering the business class phone space.  Apple (NASDAQ:AAPL) has also just slashed the price for its base-model iPhone.  Palm’s shares are actually up since announcing it was dumping the Foleo, or now the Faux-leo.  For a while this one looked cheap on its relative multiples, but with all the problems it is getting harder and harder to endorse this one as trend changes often take a matter of quarters or longer to change.  Palm has been the topic of takeover rumors even before and after the recent private equity group investment (which may also be in trouble since recent leverage is again frowned upon and harder to sell to financiers) and recapitalization.

If the company has any unknown or decent deal lurking in the wings, it may want to consider it before any further real PDA-phone wars start.

Jon C. Ogg
September 6, 2007

Jon Ogg can be reached at [email protected]; he produces the 24/7 Wall St. SPECIAL SITUATION INVESTING NEWSLETTER and he does not own securities in the companies he covers.