Handheld Prices Unlikely to Drop Further

Posted By: Ed Thursday, May 24, 2001 7:09:12 AM

Despite some people's hopes, there are strong indications from Palm that they don't intend to cut prices again soon. Though Palm finds itself with hundreds of millions of dollars in excess inventory, it has two possible ways of getting rid of it: it can sell it to customers or it can write it off and take a loss on it. Palm has already tried the former and is now going to do the latter.

If Palm intends to sell all the units, it will probably need to reduce prices further. Indeed, Palm has already announced several price drops on models that it has excess inventory for.

But so far this hasn't been enough so Palm has announced plans to use the other method. Last week, Palm said it would take a $300 million charge to write off unsalable inventory.

There are at least two possible reasons for taking this radical step. One is that Palm wants this whole mess behind them so it can start fresh. The other is the company doesn't want its customers getting accustomed to cheaper handhelds.

Dropping prices has long-term risks for the handheld manufacturers. If people get used to paying lower prices, they'll expect all future models to be just as low. This would cut into all future profit margins.

CIBC World Markets analyst Tom Sepenzis believes that prices won't drop much more. "What we're seeing now is cuts on lower-end devices that Palm has built up inventory on, and Handspring is reacting to keep up," he said. "They can't get much lower."

Last month, the Palm Vx was reduced by $50 to $300. The Palm IIIc dropped to $300. Also, the price of the m100 was cut by $20 to $130. Handspring responded by cutting the Visor Deluxe to $200 and introducing a $50 rebate on the Visor Platinum.

But there has been another round of price cuts for one group: Palm developers. For them, the m100 is now $84 and the m105 is $130. The IIIc is just $178 and the Vx just $179. The wireless VIIx is only $119.

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but...they still have to sell the backlog, right?

I.M. Anonymous @ 5/24/2001 9:08:35 AM #
I understand the logic of writing off excess inventory from a long-term profit margin standpoint, but what does Palm do with the older models once they've been written off? They still have to move those old Vx models, and when a consumer sees a Vx on the shelf for $299, next to an m500 for $399, he's likely to pick the spanking new m500, no? So, the Vx models continue to sit in inventory. Ultimately, there has to be a fire sale, right?

RE: but...they still have to sell the backlog, right?
Coyote67 @ 5/24/2001 9:20:21 AM #
not true. Not everyone is gonna go for the price difference. People said the Visor solo wouldn't sell if it was put next to the Visor Deluxe, but they sure did sell.e

OH my god...becky, look at her....Prism.
RE: but...they still have to sell the backlog, right?
Ed @ 5/24/2001 9:49:38 AM #
By writing off this inventory, Palm has come to the conclusion that they will never make any money off it. I'm not sure what is going to happen to the units but they will never appear for sale at any price. Maybe Palm will send them off to be recycled.

What they are trying _not_ to do is flood the market with cheap Palms. They don't want to sell everyone in the U.S. who is interested in buying a Palm a Vx for less than $200. If they did, they would be rid of much of their excess inventory but they also wouldn't sell any m500's for about a year.

So Palm would be in a situation where they had sold all their inventory at below the cost it takes to produce it and leave no one needing to buy their products at prices that do make them a profit. You can find that scenario in my upcoming book, "How to Go Out of Business in One Easy Lesson".

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Palm Infocenter

RE: but...they still have to sell the backlog, right?
I.M. Anonymous @ 5/24/2001 10:42:16 AM #
The mentioned book is a joke!?

RE: but...they still have to sell the backlog, right?
wilco @ 5/24/2001 11:58:12 AM #
Once the excess inventory is written off, which I believe are mostly parts specific to all older-model handhelds, Palm can try to sell them if below cost (unlikely for custom-made parts), or destroy them like what Cisco had done for its own inventory oversupply.
As to existing finished products, Palm probably will try to sell them over a period of time, and any excess if there's still any left after they become 'unsellable' will go to landfill and get destroyed. Still, I believe Palm should try to sell to the corporate sector at subsidized prices, this way, Palm gets extra cash, gain a foothold on that sector and the retail channel will not be affected by the price war.
As to the possible price war, I understand Palm standpoint, for any price war will carry a long-term effect on what a user will pay for a PDA. The product will get commoditized and the resulting profit margin get so slim like what the cellular phone makers are now experiencing. Furthermore, it will discourage present and future licensees from using the Palm OS as margin get squeezed and the sector become unprofitable.

RE: but...they still have to sell the backlog, right?
I.M. Anonymous @ 5/24/2001 12:15:40 PM #
Just an added point to indicated the complexity of inventory management: I believe that the Thor Power Tool case a few years back would suggest that if Palm writes the inventory off for tax purposes, then the inventory has to be gone from the premises - ie, destroyed. Otherwise no deduction. For financial reporting other rules apply and they could keep the stuff around - assuming they don't want the tax deduction.

RE: but...they still have to sell the backlog, right?
wilco @ 5/24/2001 12:31:24 PM #
Tax purposes, unlikely if Palm is to lose money this year. More likely for financial purposes, as the inventory overhang will no longer be reflected in future quarters, and Palm could presumably be back in the black next quarter. And any excess inventory that eventually get sold get credited to profit(the whole amount, not only the profit margin).
Note: I'm no accountant, so I am unsure about accounting rules and principles.

RE: but...they still have to sell the backlog, right?
atrizzah @ 5/24/2001 11:46:04 PM #
I figure Palm will give the units away to educational institutions. They already gave some VIIx's to the graduating class at Boston College, as reported at PalmStation, I believe. As long as they can't sell them, they might as well put them to good use, right? That would make them look so generous too. It would be such a waste to just throw them away or burn them or whatever.

Peace Out
Alan

Developer prices?

I.M. Anonymous @ 5/24/2001 12:26:00 PM #
So how do you get the developer prices mentioned?

RE: Developer prices?
I.M. Anonymous @ 5/24/2001 12:28:10 PM #
you have to be a member of the palm developer program. check out www.palmos.com

RE: Developer prices?
I.M. Anonymous @ 5/24/2001 5:45:00 PM #
i am a member and I cant figure out where to go on the site to make discount purchase

RE: Developer prices?
Ed @ 5/24/2001 6:25:17 PM #
Log on at the Resource Pavilion:
http://www.palmos.com/alliance/resources/

On the very next page you'll see a link to the hardware discount program if you are a U.S. developer.

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Palm Infocenter

RE: Developer prices?
CarlJ @ 5/24/2001 6:29:38 PM #
Log into the PalmOS Developers "Resource Pavilion" at http://www.palmos.com/alliance/resources/ and then click on "Hardware Discount Program".

RE: Developer prices?
I.M. Anonymous @ 5/24/2001 6:32:21 PM #
I am also signed up as a developer (free membership) but I am unable to locate the link you mention. I can't find any place that lets me order discounted hardware, even though the new discount program is mentioned on the site. Any ideas?

RE: Developer prices?
I.M. Anonymous @ 5/24/2001 6:34:10 PM #
there is no hardware discount link

RE: Developer prices?
I.M. Anonymous @ 5/24/2001 6:35:08 PM #
I logged on to the resource pavillion, but can't find the hardware link. The word "hardware" isn't even on the page after I log in. I just signed up today and still have a "temporary" membership until it is fully approved. Do you think that matters? (Yes, I am in the US)

RE: Developer prices?
I.M. Anonymous @ 5/24/2001 7:09:39 PM #
I just signed up today.. but I can't find the link

RE: Developer prices?
I.M. Anonymous @ 5/24/2001 7:16:31 PM #
Sounds to me like they are trying to prevent a lot of people from signing up to be developers who just want cheap Palms. You have to wait to be approved to get the deals.

RE: Developer prices?
EGarrido @ 5/25/2001 7:06:32 AM #
Yes, in order to recieve these prices, a Palm representative must review the paper work. Otherwise, you won't be able to access the page. When I signed up over a year ago, it took about two weeks to process my account.

Also, be aware that there are limits as to how many units you can buy. I think it's three a piece except forthe m505 and m500 which is 1 unit.


Eric Garrido

RE: Developer prices?
I.M. Anonymous @ 5/25/2001 12:34:17 PM #
My application was approved in under 24 hours. After I received my full membership, the harware links were active. I ordered a Palm Vx earlier today. Estimated ship date is 5/28.


Palm should try other kind of marketing...

wilco @ 5/24/2001 12:17:42 PM #
Marketing is more than price, while price is the prime mover of most products, there are other ways of stimulating sales... Opening new markets like what Palm is doing with its India sales is one (how about Korea, China, and South America).
Tapping new markets for handhelds like students, housewives, teenagers, and even the elderly is another (i.e. free recePalm Software for buyers at any foods website).
They can also stimulate demand by making it fashionable like the Nokia phones (they had done this to a certain extend tried this with their m10X series and removable faceplates).
And how about promotional tie-in with high profile products like Coke (collect Coke points for discount to PDA anyone?)
Palm should try to think of non-traditional methods of marketing if the product had reached saturation point (which I think it haven't, anyway).

ahem, schools?

SMS @ 5/24/2001 12:50:56 PM #
I'm not a marketing major so this comment may hold no significance but couldn't Palm offer DEEP disounts to schools or other non-profit organizations? Does Palm still incur ''losses'' if they sell the units at cost? Seems to me that the units would be better off
in the hands of our teachers & students, rather than the recycling bin.
RE: ahem, schools?
I.M. Anonymous @ 5/24/2001 12:58:09 PM #
I had a similar thought. If they sold them with really large discounts they could claim a charitable write-off, dispose of units without taking a total loss and create an expanded Palm user base.

How many people would stick with palm after using it, just so they didn't have to relearn a new product? Once schools get configured for a specific line, they will stay there. It's too big a hassle to replace all the corresponding software.

Once they have students using them in labs and for other projects, the line becomes entrenched. Apple did very well with this strategy with the Apple II. They still have some schools using that stuff. What apple didn't get was people changing to Macs. The economy of Intel based PCs did them in when upgrades occurred.

RE: ahem, schools?
wilco @ 5/24/2001 1:16:57 PM #
The educational sector is a large market and Palm should tap it. Palm should support more initiatives like those listed at http://www.palminfocenter.com/view_Story.asp?ID=1915
and with the Palm CEO giving away free VIIx to Boston College graduates, Palm may have realized this too.



RE: ahem, schools?
I.M. Anonymous @ 5/24/2001 4:08:46 PM #
Looks like Palm is ahead of us, here's another Education-sector initiative:
http://www.zdii.com/industry_list.asp?mode=news&doc_id=PR20010523SFW018A

RE: ahem, schools?
I.M. Anonymous @ 5/24/2001 7:58:31 PM #
My guess is that Palm is writing off components and not assembled units. If they are writing off units, we need to post a lookout near the closest landfill.

what would be nice

twizza @ 5/24/2001 2:22:42 PM #
now what would be nice is if they would offer some of this excess inventory to universities and high schools at the prices that they are quoting for the developers. at those prices palm could make an increased impact to the educational community and then more schools would be willing to try to make their campuses more mobile. this could then be a boon for palm in the long run: by having more students with palms you could see more computer science students developing programs for the os.

RE: what would be nice
Legible @ 5/24/2001 10:06:39 PM #
I'll second that!

How much does it cost to make a Palm?

I.M. Anonymous @ 5/24/2001 7:36:31 PM #
For $499 I can buy a whole computer 667mhz Celeron with monitor included. What exactly is in these palms that costs so much money? The processor is about 8 bucks, same for the os, so you're saying the screen and the memory cost $80? I don't think so. They need to streamline their manufacturing and look for profits there. If you had to build a machine to make 10 razor blades, each blade is going to cost a bunch, but when you sell millions of them, the cost is less.

David in Pflugerville, TX

RE: How much does it cost to make a Palm?
shogun @ 5/24/2001 8:03:44 PM #
I agree. If they are going to have prices so high, at least include more software or something.

RE: How much does it cost to make a Palm?
atrizzah @ 5/24/2001 11:55:37 PM #
I imagine that a unit doesn't really cost that much to produce, but when you factor in distribution, marketing, and corporate overhead, those costs add up. They still make a pretty sizeable profit though. The reason prices are so high is because this is a industry of monopolistic competition. If one company cuts its prices, they all have to. Then they all lose profit, so what was the point of cutting prices in the first place? For example, if you lower prices 20%, and only 10% more people buy the handheld at its new, lower price, you just lost some profit. This is why the prices are so high.

In contrast, in the PC market, this has already happened. In the past couple of years, the price of PC's collapsed causing huge havoc for PC companies, if you recall. They are still suffering. This is what would happen to the handheld market if Palm continued to cut its prices.

Peace Out
Alan

RE: How much does it cost to make a Palm?
I.M. Anonymous @ 5/25/2001 8:44:45 AM #
Actually, Alan, you're talking about an Oligopoly. Oligopoly is generally considered to be the classification given to markets that involve between 3-4 firms controlling at least 70-75% of the market. This allows for less flexibility in the industry when an individual business decides to cut prices. A monopolistically competitive market would feature lower prices, and when they do rise, it's usually because some feature(s) has(have) been added. It'd be preferable to the consumer if the PDA market _became_ monopolistically competitive.

As for the marginal cost of producing a handheld, I'd say the most expensive components would have to be the screen and the battery. Small, high-quality screens can cost some serious cash, even when buying in volume. This is why flat-panel monitors and televisions are so expensive.

RE: How much does it cost to make a Palm?
atrizzah @ 5/25/2001 8:45:35 PM #
Yeah, you're right, except that the handhelds are differentiated. But it is operating like an oligopoly. I think it is probably somewhere in the middle.

Actually, now that I think about it, I think it is more monopolistic competition. Prices are relatively low, except for the new models. Like you said, when new features are added, the prices can rise again. Well, the m505 and New Clie are pretty expensive.

Peace Out
Alan

No Fire Sale

MegaZone @ 5/25/2001 12:18:42 PM #
There isn't likely to be a fire sale. They'll recycle and/or destroy the units. I've worked for HW vendors in the past and we did this when writing off stock.

Some PDA's too expensive

Jonathan @ 5/26/2001 5:36:12 PM #
There are some handhelds, especially the new ones, that are very expensive. The Palm m505 is a great example. I realize that it is color and new, but $450 is too much for a Palm. I tried out this Palm, but the color screen doesn't please me. For $450 I expected the color quality from a Prism or IIIc. I like the slim look, but for $450, I expect more with color quality. Palm only reduces their products $50 each year. If Palm can't sell as much m500 series as they want, they better not throw them out. They better give an m505 to me :)
RE: Some PDA's too expensive
I.M. Anonymous @ 5/26/2001 6:17:38 PM #
palm m505 only costs $357.50 now at
http://store.yahoo.com/compusavers/palmm505.html
and clie 710 costs $422.28 at ecost.com
who told you to buy it at the retail prices. Please look around, could save you lots of money. enjoy

[ No Subject ]

Lim Meng Shi @ 5/26/2001 9:54:03 PM #
Palm can target new markets like India or China or South America by using these reduced price units to grab market share in those markets. Price it such that they're affordable there. This would appear to be a better option than destroying them.

Another avenue

Atul Chitnis @ 5/28/2001 10:21:56 AM #
Palm does have another route open to them, and they appear to be taking it - dump stocks into places like India where discounted prices will not affect the US markets. :-)

too bad, but might as well buy it now

I.M. Anonymous @ 5/28/2001 10:51:19 AM #
Its too bad, but I think prices are low enough. You can buy a handspring visor deluxe for $200, 8mb and usb hotsync. So why not go for that? If you want color buy the 3c, its not too expensive.
RE: too bad, but might as well buy it now
I.M. Anonymous @ 5/28/2001 11:29:52 AM #
my IIIc is on the way and was $180

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