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Maturing Palm Centro Again Signals Need for Innovation

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NEW YORK (Dow Jones) As Palm is learning, consumers are a fickle bunch.

Having ridden the success of the slimmer, cheaper Centro for nearly a year, President and Chief Executive Ed Colligan warned that the device was reaching maturation, suggesting slowing sales. It underscores the constant need to update existing products and the difficulties in keeping the attention of consumers, who now have more smartphone choices than ever. It also puts pressure on the company to get its new operating system out in a timely manner.

"It's clear they've been putting a lot of Centros into the channel that haven't sold," said Charles Wolf, an analyst at Needham & Co. "The competitive environment is getting very vicious."

As a result, Palm Chief Financial Officer Andy Brown told analysts during a conference call that he expects revenue to fall sequentially in the normally strong fiscal second quarter revenue. Shares, which were up more than a third this year before Friday, are down 8% Friday to $7.84.

Unlike business customers, who care less about aesthetics, consumers are very picky about the look and feel of their handsets. So while a company can get away with churning out minor updates to a familiar smartphone line for the work force, it would have far less success employing the same strategy for the average Joe. The same lack of innovation decimated Motorola Inc.'s (MOT) Razr brand and threatened to do so with Palm's own Treo. While fraught with peril, the consumer market is also the Palm's largest opportunity for growth.

The Centro, when it first launched last September with Sprint Nextel Corp. (S), represented the first major change to its smartphone portfolio. The smaller body and $99 price point caught the eye of casual users who wouldn't normally consider a smartphone. As the device was rolled out onto every carrier, Palm saw a surprising boost in revenue in the subsequent quarters.

Still, the compact frame masked an aging operating system and didn't truly change the way its smartphones worked.

"Palm really hasn't come up with anything that's as good as what's in the market," said Shahid Khan, senior partner at media and telecom consultancy IBB Consulting Group.

Without a major update to the phone, the company - which pioneered the smartphone category - risks getting left behind again as consumers turn their eye to rival products in the next several months. UBS analyst Maynard Um called the speed in which the product matured surprising.

The Centro numerous competitors, many of which have introduced new devices at lower prices. Apple released a high-speed version of its iPhone roughly a year after the launch of the original for $199. Google and T-Mobile USA plans to sell its Android phone for the same price. Research in Motion's line of BlackBerry devices sell for less than $99, and is expected to release several new products this year.

Colligan said Palm is taking steps to keep the Centro sales rolling.

"We have plans to make sure that we refresh those products and are bringing that out, and we'll do that in both promotional ways and other ways," Colligan told analysts during a conference call on Thursday.

Makeover Needed

Reaction to the warning about revenue declining has been muted, and many analysts say things could be worse. Most remain upbeat because they are waiting for the release of Palm's next-generation operating system.

Colligan said that the company is on track to wrap up the development of the platform by the end of the year, with smartphones carrying the new software in the first half of 2009. It was a popular topic during Thursday's conference call.

The hiring of former Apple executive Jon Rubinstein and the success of the Centro have done much to quell critics who claim that Palm had lost its creative touch. Wall Street is looking to the man who helped usher in the iPod to work his magic for Palm.

Colligan wouldn't provide details on the new platform but said it would incorporate social networking and improved integration with the Web.

Palm will need to introduce a phone with a completely different experience, and will need better entertainment and networking features, Khan said, adding the software will also need to be opened up to allow for third-party developers. Apple allowed outside programmers to write applications for the iPhone with much success.

While most are giving Palm the benefit of the doubt, others remain skeptical. Wolf said the product will really have to break some ground if it wants slow the momentum of RIM or Apple.

"It's entirely possible that Jon Rubinstein can walk on water," Wolf said. "But he is going to have to come up with something that's stunning to rejuvenate the Palm portfolio."

The analyst said he gave it less than a 50% chance that Palm will succeed.

In the meantime, Palm introduced a new version of its Palm Treo. More notably, it recently released the Treo Pro, a sleeker redesign of the standard Treo form factor. It retails for $550 but will likely go down in price as the company finds a U.S. carrier partner to provide subsidies for the device.

Most analysts, however, aren't convinced the Treo Pro will significantly add to the Palm faithful. The company will likely get most of its sales from existing users upgrading their devices. Um said that while the Treo could help pick up the revenue slack, it remains a question mark.

-By Roger Cheng, Dow Jones Newswires; 201-938-2020; roger.cheng@dowjones.com

(END) Dow Jones Newswires

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