Palm Has a PREcarious Channel Issue
Yesterday morning, our teammate and partner, David Eller downgraded Palm (PALM) stock to Unfavorable from Neutral. Simultaneously, I published a report examining how this problem will likely disappear inside of Sprint (S). We maintain our favorable opinion on Sprint.
Context & Ripple Effects
Palm's 2009 has been a bet-the-company relaunch built on a single pipe: after capital worries sank the stock in late 2008, the February Pre deal sent Sprint shares up 20% on the promise of an exclusive flagship, and June's launch was greeted by analysts as a success with inventory replenishment eyed. The gloss cracked by midsummer, when a report tied Pre defects to earnings risk even as another outlet argued the Pre hadn't actually flopped.
The September setup sharpened that tension: Palm, under Jon Rubinstein, committed to webOS-only hardware and dropped Windows Mobile, claimed Apple was hampering competition by blocking Pre iTunes syncing, and saw a reported January Verizon launch shelved — leaving the Pre a confirmed Sprint exclusive for the year. Against that, David Eller's downgrade to Unfavorable lands as a call on distribution, not product, while the same shop keeps a favorable rating on Sprint on the thesis that the channel problem resolves within the carrier.
First-order effects
- Eller's move to Unfavorable re-rates Palm on its distribution rather than its hardware: with Verizon's January slot shelved and the Pre locked to Sprint through year-end, every unit Palm ships depends on one carrier's shelf space and marketing spend.
- Sprint keeps the upside of exclusivity without the downgrade — the same report that cut Palm maintains a favorable Sprint opinion on the argument that the channel problem is contained inside Sprint's own economics.
Second-order effects
- Sprint is already diversifying away from total dependence on Palm: days before the downgrade it opened its developer network to Android, building a second smartphone franchise on its own network.
- Apple's continued blocking of Pre iTunes syncing raises the switching cost for iPhone owners who might otherwise defect, tightening the funnel into Palm's already narrow single-carrier channel.
Third-order effects
- If the pattern holds — a webOS-only vendor whose flagship lives or dies on one carrier — investors will start pricing handset makers on the health and commitment of their carrier partners rather than on device reviews, making distribution deals, not launches, the swing factor in the stock.
- Carriers gain leverage from that dependence: exclusivity contracts like the February Pre deal become the mechanism through which operators capture the value of a hit device, and vendors without a multi-carrier path compete for the remaining shelf slots.
The trend: Smartphone competition is consolidating around carrier distribution, where a single exclusivity deal can simultaneously make a handset maker's quarter and cap its addressable market.