The Pre season at Sprint

Analysts have high hopes for handset and what it can do for Palm, Sprint

Sprint Nextel Corp. is looking for a hero and it may well find one that fits in the palm of your hand — pun intended.

In this case, Sprint Nextel is banking on the exclusive, hero handset from Palm Inc. dubbed the Pre. And the Pre’s launch is even more important to Palm, analysts said.

This drama is widely expected to unfold in the May-June timeframe when Sprint Nextel and Palm hope to dominate, however briefly, the American consumers’ thoughts about wireless devices and services with the Pre launch. Neither company has announced an official launch date beyond “the first half of the year.”

“The challenge for Sprint is to stem churn, and the Pre can do that,” said financial analyst Tavis McCourt at Morgan Keegan. “Attracting new subscribers will be more difficult. They’ve got to build buzz and, so far, they’ve done a pretty good job at that. Now they’ve got to execute.”

McCourt has forecast that the operator and its longtime handset partner need to sell about 500,000 units per quarter for several quarters to declare success, and temporary relief for Palm. McCourt based that “expectation” on AT&T Mobility’s approximately sales of 2 million Apple Inc. iPhone 3Gs per quarter for two quarters running, but discounting for Sprint Nextel’s and Palm’s lower brand value and awareness.

“It’s unrealistic to equate the two situations, so my expectations are somewhat lower (for the upcoming launch),” McCourt said. “If they achieve those numbers, that’ll put Sprint on a path to positive subscriber growth and Palm gets closer to profitability.”

Hurdles

Three major variables remain unresolved.

First, the Pre’s retail pricing must meet or best the new consumer expectation of $200. The Sprint Nextel-Palm partnership has made no public statements on the matter. Second, Apple has rattled its saber regarding Palm’s touchscreen innovations and promised — without naming names — to defend its own intellectual property if it believes it sees infringement. (Palm has insisted the Pre runs entirely on its own IP.) Third, Palm must grow its application developer base to deliver the applications that Apple’s AppStore has set the bar on.

Despite the macro-economic downturn and dismal forecasts for the general handset market, however, it appears from many sources that the Pre will launch into a relatively healthy market for smartphones.

McCourt has forecast “better than high single digit” growth for smartphones in the United States this year and finds it “astounding” how quickly carriers’ portfolios — if not their subscribers — have shifted. Currently, smartphones comprise some 35% to 40% of the handset portfolios at AT&T Mobility and Verizon Wireless, though smartphone users account for only about 20% of those carriers’ subscriber base, according to the analyst.

Some optimism

“I expect this campaign to be successful for both parties,” said financial analyst Matt Thornton at Avian Securities L.L.C. “It’s a step in the right direction. I don’t know about attracting subscribers, but the Pre should slow the churn. And Sprint must stem the exodus.”

Sprint Nextel has historically accounted for about 40% to 45% of Palm’s business, which is more than 80% U.S.-based, Thornton said. So the partnership is making the most of their mutual need to succeed. That said, “Sprint has a perception problem concerning its customer service and the Pre doesn’t solve that,” Thornton added.

Still, Sprint Nextel’s $100 unlimited service plan reflected that the carrier is doing all in its power to lower barriers to data uptake, according to Thornton.

From ‘thin’ to ‘smart’

The Sprint Nextel/Pre high-wire act has precedents, of course.

Analysts point to Motorola Inc.’s Razr, which launched as a very expensive exclusive at Cingular Wireless L.L.C. when “thin was in.” Now, “smart” is the operable draw. And the iPhone launch by a company morphing from an identity as Cingular into AT&T Mobility helped quicken and cement that new identity in early 2007. Now the well-subsidized, heavily marketed hero handset as lure to retain subscribers, win new ones and sell data plans is well-established. And AT&T Mobility’s success with the iPhone is worthy of emulation.

“Recent history has shown that people are willing to switch carriers and devices are the draw,” said analyst Avi Greengart.

Subsidizing hero smartphones to lure subscribers to stay or churn from a rival and sign up for a data plan fits the current operator business model well and won’t change soon, Greengart said. (iPhone users have an average $95per month usage, about $30 higher than the overall average, Greengart pointed out.)

Yet the iPhone 3G launch at AT&T Mobility and the Research In Motion Ltd. BlackBerry Storm launch at Verizon Wireless revealed the PR cost of high-profile glitches and Sprint Nextel’s marketing for Samsung Electronic Co. Ltd.’s Instinct — Greengart characterized them as direct and ineffective comparisons to the iPhone — show that the hero phone exclusive is “not a finely honed art.”

Not only is the hero-phone exclusive a work-in-progress, it is under intense fire by legal challenges from regional carriers that say it only dampens competition.

Talent on the high-wire

The history of “exclusives” underscores the high-wire act of the coming Pre launch, in Greengart’s view.

“The short-term future of Palm is tied to Sprint and they need strong sales right out of the gate,” Greengart said. “It’s a bet-the-company move for Palm. There’s no way to overstate the importance of this launch for Palm. Yet this product can do it.”

According to Greengart, who had hands-on experience with the device at the Consumer Electronics Show in Las Vegas in January, the Pre is “wonderfully innovative” on social networking and messaging.

But Palm cannot escape the mandate for exciting applications now expected by consumers.

“Consumers are looking at these devices as an investment that they can add value to over time,” Greengart said.

What comes next

“The Pre will not be a one-hit wonder,” said McCourt.

Palm will need to get more carriers onboard once the Sprint Nextel exclusive expires — speculation has focused on a six-month exclusive, but the two companies have made no public statements on the length of their agreement. An iteration of the Pre is expected at Verizon Wireless and a UMTS version is destined for Europe, according to McCourt. A deal with Vodafone Group plc would be “a substantial win,” according to Thornton.

Meanwhile, when the Pre launches it will likely soon be joined by a bevy of competitors, including possible new models of iPhone, BlackBerrys and Android-powered handsets in a test of these heroes’ ability to attract consumers.

Palm's Pre