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Compaq to overtake Palm
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June 18, 2001: 2:46 p.m. ET
Compaq to surpass Palm in handheld PC revenue, research firm reports
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NEW YORK (CNNfn) - Shares of Palm Inc. fell more than 7 percent Monday after a report said the world's leading supplier of handheld computers will lose the top ranking to Compaq Computer.
Research firm Gartner Dataquest said Palm will lose its top spot in terms of revenue to Compaq Computer (CPQ: Research, Estimates) in the second calendar quarter.
Palm (PALM: Research, Estimates) will ship about 700,000 units worldwide, taking in $130 million to $135 million in hardware-related revenue for its fiscal quarter ended June 1. That's a dramatic drop from the record $507 million it took in two quarters ago. Palm is due to announce results for the quarter the week of June 25.
By comparison, Houston-based Compaq, whose current quarter ends June 30, is expected to ship as many as 500,000 units, resulting in revenue of more than $200 million. Gartner Dataquest did not have historical revenue comparisons for Compaq, but said the company shipped 250,000 units two quarters ago.
Handspring (HAND: Research, Estimates), which uses the Palm operating system in its handheld Visors, comes in third, with a projected $62 million in sales and 330,000 units for its fiscal quarter ending June 30.
Palm's loss of revenue leadership -- its first since the Palm debuted in 1996 -- stems partly from the fact that the average price of Compaq's rival iPAQ devices is about $500, or twice that of Palm products, according to analysts.
But it also underscores an erosion of Palm's once high-flying dominance in the young and fast-growing industry of personal digital assistants.
"A growing portion of new users and users who are upgrading want better messaging capabilities, such as access to corporate e-mail, short message services, wireless LAN, or integration of a PDA with a mobile phone," said Todd Kort, principal analyst of Gartner Dataquest's Computing Platform Worldwide group.
Palm currently is struggling with an inventory glut and a sales slowdown, both economy-driven and somewhat self-imposed because of a transition to a new product line.
Microsoft's (MSFT: Research, Estimates) competing Pocket PC operating system, which is used in the iPAQ, is gaining ground as a result, though it remains a distant second to Palm's overall market share of handheld devices.
Ken Dulaney, Gartner research director, thinks Palm will be able to regain its revenue crown from Compaq in perhaps one or two quarters, after it sifts through its troubles. But, he said, the company "must make some changes" to "achieve the level of profitability it enjoyed in the past."
Gartner analysts said Palm must offer a machine with a new operating system and a Palm VIIx replacement, but those changes alone won't be enough.
Dulaney said the company should be restructured to "at least split hardware and software." 
-- from staff and wire reports
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