The Pre Looks to Go Post

Nine months ago, Palm introduced its new Pre smart-phone. On the occasion of that introduction, we wrote a blog (See Blog Here) predicting that the Pre would have a difficult time competing in this fast-growing market. It’s problem? Lack of apps. At the time, Apple had 35,000 apps. That number has now grown to well over 100,000. Other competitors today have as many as 20,000 or more apps available. The Pre has relatively few. Its shortage of apps has shown up in its market share. Recently it had 5% of the smart-phone market, a long way behind Apple’s 18% and Blackberry’s 43%.

In response to its failure to generate excitement in the market, the Palm plans to increase its advertising and add 200 company trainers to help Verizon’s sales representatives sell the phones. This won’t work either.

Returning again to the Customer Buying Hierarchy that we use to analyze a market, we recall that customers buy Function, Reliability, Convenience and Price. They buy in that order as well. Customers keep moving through the Hierarchy until they have found a single competitor who can offer them something important to them and that no other competitor can offer. (See “Audio Tip #70: Several Rounds in Evaluation Failures” on StrategyStreet.com.)

Function innovations dominate very fast-growing markets. The smart-phone market has been a very fast-growing market. Function innovations in the form of applications are today’s name of the Function game. If you don’t have apps, you can forget about the other Function innovations in your phone. Today’s competition can copy virtually any Function innovation that resides in the phone itself. Apps are something else again. (See “Audio Tip #97: How Do We Know if an Innovation will Remain Unique?” on StrategyStreet.com.) They require a large installed base, strengths of Research In Motion’s Blackberry and Apple’s iPhone. Application developers have little incentive to design new applications for the Palm operating system when at least three other phone providers, Research In Motion, Apple and Google, stand in front of the Pre and its smaller sibling, the Pixi.

Unless all three of these companies, with far more apps than the Palm phones, fail, the Palm phones don’t have much of a future. No amount of advertising, nor increased sales training, can make up today for a lack of applications. If it is determined to spend its money in what looks like a losing cause, Palm would be far better off buying applications rather than spending money on marketing and sales. Today’s smart-phone is sold by one user showing another all the cool things that the smart-phone can do. That is a much bigger sales force than Palm or even Verizon can afford.

New Product in a Fast Growing Industry: The Pre

The mobile phone hand set industry is fast growing, especially the segment known as smart phones, which combine the functionality of a limited PC or a good PDA with the normal telephone hand set functions. The new Palm Pre is entering this market. Let’s use the Customer Buying Hierarchy to evaluate the prospect for the Pre’s success.

The Customer Buying Hierarchy (see “Video 27: Full Description of How the Customer Buying Hierarchy Works” on StrategyStreet.com) holds that customers buy a product using four categories of evaluation: Function, Reliability, Convenience and Price. Function (see “Video 13: Definition of Function” on StrategyStreet.com) refers to the features of the product that affect how it is used. Reliability (see “Video 14: Definition of Reliability” on StrategyStreet.com) refers to the benefits of the product that assure the customer that it works and will continue to work. Convenience (see “Video 15: Definition of Convenience” on StrategyStreet.com) refers to the ease with which the customer may find and purchase the product. Price is the cash cost the customer pays for the product.

In Function, the Pre performs well. In a high-growth industry such as smart phones, product innovation, especially in Function, is the name of the game. The Pre does not disappoint here. It offers a number of Function innovations, some of them unique to the Palm Pre, to entice customers.

The Reliability and Convenience nods go to Pre’s competitors. Research In Motion’s BlackBerry dominates the corporate market while Apple’s iPhone controls the consumer market in smart phones.

Price appears not to be a competitive issue in this market. Apple learned with its experience with the original Apple computers, and then with the Mac, that it can not charge high prices and hope to be the largest competitor in the market. Apple became a shrewd maket-pricer with the iPod. It continues its smart ways with the iPhone. The key price point for smart phones today is $200 and the major competitors all seem to offer a strong product at that price point. Any price reduction at this price point is likely to elicit an immediate response from the other competitors. In addition, any new, lower, price point for the smart phone is also likely to be matched by the other competitors in the marketplace. (See our Blog on the $99 iPhone.)

Can the Pre win on its Function advantages? The key Function innovations in this market will save customers time. Styling may bring some early customers, but differences in style are likely to be minimal in customer decisions. New applications, though, are critical. These really do save customers time and, therefore, costs. Here the current advantage clearly rests with Research In Motion and Apple, both of which have a large number of third party applications available for their phones. Apple has more than 35,000 apps available for its current phone. Even Google’s Android operating system has nearly 5,000 apps available. The Pre has a long way to climb to match the Function advantages that third party apps confer on the incumbent competitors..

While this is a very fast-growing market, the Pre is coming late to the game. Palm has to hope that their major competitors will not copy the Functions that are unique to the Pre. Then they have to hope that app developers will fall in love with the Pre and its operating system and write many new programs for the new phone. These are possible, but not probable developments. Since smart phone pricing is unlikely to be potential point of advantage for any of the current competitors, the outlook for the Pre is not strong. It may attract a relatively small segment of the market, but it is unlikely to become the industry leader in smart phones. (See the Perspective, “The Dangers of Competing on Features” on StrategyStreet.com.)