Palm's new phone and operating system ignite shares

LAS VEGAS Thu Jan 8, 2009 8:25pm EST

1 of 2. The Palm website is seen on the Palm Pre smartphone at the annual Consumer Electronics Show (CES) in Las Vegas, Nevada January 8, 2009. Palm Inc took the wraps off its overhauled mobile operating system and introduced the Pre touch-screen phone, hoping the move can help it win back customers from rivals like Nokia and Apple. Shares of Palm jumped more than 15 percent to $3.80 on the news.

Credit: Reuters/Rick Wilking

LAS VEGAS (Reuters) - Palm Inc PALM.O overhauled its mobile operating system and introduced a new touch-screen phone, sending its shares soaring 35 percent as investors hoped the moves can help win back customers from rivals such as Apple Inc (AAPL.O).

The new products, which impressed analysts at the Consumer Electronics Show in Las Vegas on Thursday, were developed under the watch of former Apple executive Jon Rubenstein, who helped create the iPod and who was brought to Palm by its private equity shareholder, Elevation Partners.

Palm has staked its future on the Palm Web OS operating system and the new phone, which it has been developing since 2007. The pioneer of touch-screen phones like the Treo had been steadily losing market share to Apple's iPhone, Research in Motion Ltd's RIM.TO BlackBerry and other devices.

"This is sort of a rebirth of our company," Brodie Keast, Palm's senior vice president of marketing, told Reuters. "It means a lot to us."

Palm's new Pre smartphone has GPS location technology, Wi-Fi wireless connectivity and a slide out full keyboard. It will be available exclusively on the network of Sprint Nextel Corp (S.N) in the first half of 2009. Palm would not disclose a price.

In a demonstration at CES, Palm executives showed how the Pre phone easily consolidates multiple communication services such as instant messaging, text messaging and social networks such as Facebook, and multiple email systems.

"Everything about it looks competitive. The device's specifications tick all the right boxes. What we've seen of the software and user experience in demonstrations appears innovative and unique," said CCS Insight analyst John Jackson.

Palm shares closed up $1.15, or 34.85 percent, at $4.45 on the long-awaited announcements, and JPMorgan analyst Paul Coster speculated that the new operating system may make Palm an attractive takeover target. Palm itself got into the smartphone business by buying rival Handspring Inc.

"I liked the operating system a lot," said Coster. "If they don't execute, somebody's going to buy them."

He added that a buyer would save the years of work it would have to spend developing such a system, saying, "Anybody (in the cell phone market) who's not developing an operating system has to be interested."

In June 2007, Elevation Partners bought a 25 percent stake in Palm for $325 million and brought in Rubenstein. Since then, investors had been waiting for Palm to put the finishing touches on the new mobile platform.

Palm came in third behind RIM and Apple in the North American smartphone market in the third quarter, according to Gartner analyst Hugues de la Vergne.

"Palm bet the company on this so they had to come through and they did," said JPMorgan analyst Ehud Gelblum.

He added, however, that the exclusivity deal with Sprint could limit sales. The No. 3 U.S. mobile phone carrier has been struggling to stem subscriber losses, trailing behind Verizon Wireless Inc (VZ.N) (VOD.L) and AT&T Inc (T.N).

"The only drawback is how long is it going to be on sale only with Sprint? It's a smaller addressable market than they otherwise would have had," said Gelblum.

Sprint Chief Executive Dan Hesse told Reuters after the launch that the Pre is "very important for Sprint" but he declined to give sales estimates or more details.

Sprint shares rose over 8 percent, helped by the Palm contract and Hesse's comments that the economic downturn had a limited impact on the company in the fourth quarter.

At CES, Palm -- which also sells the Centro, a relatively low-end smartphone -- also showed the Touchstone, a small round cosmetics jar-sized inductive charging dock that powers the Pre phone simply by placing the handheld on the dock.