Palm-To-Palm Combat

It seems so obvious now that it’s amazing no one thought of it sooner: a computer that keeps track of thousands of phone numbers, addresses and calendar appointments, a to-do list and memos, yet is small enough to fit in your shirt pocket. When Palm Computing first introduced its tiny Pilot two years ago, the gizmo did all that and more–and hit the jackpot. Sales zoomed to a million, and everyone from Al Gore to Robin Williams was packing one. At $299, the device was cheap (for a computer), hip and elegant. But the real secret to its success? Simplicity. The Pilot was as easy to use as a calendar.

This week Palm will introduce a third-generation device, the Palm III. It will offer more memory, an improved screen and a built-in infrared beam that owners can use to wirelessly squirt their business cards at each other. But the one feature it could really use is an anti-Microsoft heat shield, because the Redmond, Wash., software giant is turning up the temperature on Palm.

Anytime a small company like Palm proves that a market exists for a product, it is rewarded with big sales–and big trouble, in the form of hungry rivals. Microsoft’s master plan is to control–or at least put Windows inside–every access point to information and entertainment, whether it’s a desktop computer, telephone, TV or handheld device. That kind of thinking has put the company under intense scrutiny by the Department of Justice (see TECHNOLOGY).

In targeting Palm’s turf, Microsoft has introduced a new version of its condensed Windows CE operating system and enlisted a phalanx of manufacturing partners that plan to launch WinCE-based challengers against the Pilot in the coming months. “This is when the marketing battle begins,” says Dataquest analyst Mike McGuire, who sees handhelds growing into a $2.7 billion business by 2001.

Palm grabbed an early lead because the power junkies in Silicon Valley couldn’t believe users would want a computer with less, not more. President and co-founder Donna Dubinsky spent 18 fruitless months trying to convince venture capitalists and potential manufacturers that the key to selling handheld computers was simplifying them, not adding features. “Time after time, I’d go into meetings, and they’d say, ‘You can’t do a device like this without a PC card slot or a spreadsheet or whatever,'” she recalls. “But where was the evidence? It’s very, very hard to go against the crowd.”

Fortunately, she had Jeff Hawkins to back her up. Hawkins, 40, Palm’s chief technologist and Pilot’s creator, designed one of the first handheld computers, the GRiDPad, a decade ago. It was an engineering marvel but a market failure because, he says, it was still too big. Determined not to make the same mistake twice, he had a ready answer when his colleagues asked him how small their new device should be: “Let’s try the shirt pocket.”

Retreating to his garage, he cut a block of wood to fit his shirt pocket. Then he carried it around for months, pretending it was a computer. Was he free for lunch on Wednesday? Hawkins would haul out the block and tap on it as if he were checking his schedule. If he needed a phone number, he would pretend to look it up on the wood. Occasionally he would try out different design faces with various button configurations, using paper printouts glued to the block.

Palm also conducted more conventional research with focus groups, but Hawkins’ original vision turned out to be uncannily close to the final product. Its internal functions were designed with the same practicality. He invented his own simple shorthand system, called Graffiti, because handwriting-recognition software was too unreliable. (Since everyone writes letters differently, he reduced some of the most troublesome letters to basic elements: an A looks like an upside-down V, and an F resembles an upside-down L.) He powered the Pilot with AAA batteries, available everywhere. And he settled on four function buttons–for calendar, addresses, to-do list and memos–because those were the most commonly used applications. Whenever someone urged him to cram more functions into the unit, Hawkins held fast. “There were a lot of battles,” he says. “But I just said no, we have to keep it simple.”

Hawkins figured his main competition was paper, not computers. So he made sure that looking up the day’s schedule was no more difficult than opening a Filofax: one push of a button and there it was. Details about an appointment could be called up with two taps. “The way you look at your day on the Palm is the way you look at your watch,” says Dubinsky. “That’s the sort of performance we felt we needed.”

Dubinsky, meanwhile, finally found an angel. U.S. Robotics, the leading modem seller, based in Skokie, Ill., was looking to extend its brand. “They weren’t in Silicon Valley, so they didn’t know the conventional wisdom that these things were dogs,” she says. In September 1995, the Midwesterners bought Palm Computing.

In April 1996, the Pilot 1000 debuted. Dubinsky and her colleagues watched anxiously to see how the gadget freaks would react. Word of mouth was critical. “If they vote thumbs down, it’s over,” she said. For the first four months, the sales reports were “flat, flat, flat, flat.” Then, magically, they took off; the Palm was a hit. Hollywood moguls started using it. Pilots began showing up on television (Murphy Brown) and in the movies (recent sighting: Wag the Dog). Within 18 months, more than a million were shipped, a faster launch than the first cellular phones and pagers enjoyed.

A wave of competitors rushed in, but most missed the point of the Pilot’s success. With few exceptions, like the Sharp SE- 500 and Texas Instruments’ well-designed Avigo, the competing devices still tried to do too much. Those that tried to do it with Microsoft’s first, hastily cobbled together version of Windows CE 1.0 posed little threat to the Palm. Their keyboards were tiny, and entering data was a hassle. WinCE 1.0 was clearly not ready for prime time.

Back at Palm, officials heaved a sigh of relief. When the first WinCE devices came out, Dubinsky recalls, “we said, ‘Uh-oh, it’s all over for us now.'” But consumers weren’t as interested in what came to be known as “tweeners”–computers that are neither full-featured laptops nor true handheld pocket devices. “They were sort of in never-never land,” she says. By the end of 1997, Palm had grabbed two-thirds of the market for handheld devices, and those running on WinCE 1.0 were far behind.

But Microsoft had not given up. Last November it released a new version of CE called 2.0, and on Jan. 8 it made a brazen me-too play on Palm’s brand name: Microsoft called its new devices Palm PCs. “We were astounded,” says Dubinsky. “It was an incredible sign that they felt insecure enough about their product that they tried to leverage our name.” Microsoft officials insist that the name is merely descriptive, like desktop or laptop. They may have to defend that stance in court. Last week Palm’s new parent company, 3COM, which merged with U.S. Robotics in June 1997 (the deals come fast in the world of high technology), sued Microsoft in Europe for trademark infringement.

Perhaps more troublesome for 3COM and Pilot, Microsoft also announced seven new hardware partners, led by consumer-electronics giants Casio and Philips, that plan to introduce their own versions of Palm PCs in the coming months. Both Casio’s Cassiopeia E-10 and Philips’ Nino 300 will offer digital voice recording, automatic data synchronization and one-handed operation, among other features.

Palm is sticking to simplicity. Anyone who wants more features, says Dubinsky, can get them from Palm’s growing network of 5,000 developers, who are making add-on products such as PilotMail and PilotClock. WinCE 2.0 is clearly an improvement, however, and analysts say it could do well with corporate buyers because of its adaptability. “The first WinCE was a learning experience,” says Gerry Purdy, president of Mobile Insights, a market-research firm. That’s typical of Microsoft: first get a product out, then get it right. “But 2.0 is a whole new operating system,” he adds. If Palm concentrates on expanding its consumer base and Microsoft’s partners focus on the business market, both will succeed, he predicts.

Meanwhile, Palm’s chief visionary is toting a new block of wood–more research for a future product. “Am I worried?” Hawkins asks. “Sure, I worry all the time. I’d be foolish not to think about the competition. But I still feel we’ll be successful against them. They just don’t get what makes this business tick, and they’re going to fail.” He believes there will be plenty of opportunities in the future for pocket-size–or smaller–consumer devices that can access information. Plenty of competitors too, but Palm will be up to the task, Hawkins says. “We’re just getting started here.” And he still has plenty of wood in the garage.