This excerpt taken from the PALM 8-K filed Sep 17, 2007.
The worldwide mobile handset market is a large market, with more than 1.0 billion phones shipped in 2006 according to IDC. IDC expects just over 1.4 billion phones to ship in 2011, representing an 8% CAGR between 2006 and 2011. Driving the growth of this market is a steadily expanding subscriber base. According to Gartner, there were approximately 2.7 billion worldwide mobile handset subscribers at the end of 2006. By 2011, Gartner expects there will be approximately 4.4 billion worldwide mobile handset subscribers, which represents an 11% CAGR from 2006 to 2011.
Smartphones represent the fastest growing segment within the worldwide mobile handset market. Smartphones are designed to enable data consumption and, as a result, offer a wide variety of features and functions such as internet access, server-based email, personal information management (PIM) and the ability to open documents in a variety of formats. In contrast, basic/feature phones are generally optimized for voice-only usage and lack many of the standard features provided by smartphones such as a touch screen or QWERTY/AZERTY keyboard, however, they often include consumer-oriented features such as a camera and/or music player. Smartphones comprised approximately 8% of the worldwide mobile handset market shipments for 2006 according to IDC. IDC projects that smartphones will comprise approximately 21% of the worldwide mobile handset market shipments by 2011, which represents a 30% CAGR from 2006 to 2011.
Within the worldwide mobile handset market there is a growing base of consumers that seek phones which offer feature-rich experiences. One key factor driving this trend is the growing importance of the replacement handset market as global saturation of mobile handsets continues. According to Cowen and Company Wireless Equipment Industry Outlook June 2007, replacement handsets comprised approximately 50% of the mobile handsets sold in 2006 and as of March 31, 2007, but are estimated to comprise approximately 78% of mobile handsets sold by 2010. Palm believes that replacement handset buyers tend to be more technology-
savvy and, as a result, seek phones which are more feature-rich than first time buyers. As the replacement handset market has grown, the free handset market has declined. Free handsets, generally offered as incentives to consumers who sign up for a long-term contract with a wireless carrier, have fallen to less than 30% of the U.S. mobile handset market from approximately 50% of the market just two years ago according to Credit Suisse Securities (USA) LLC (Credit Suisse). This suggests that consumers are more willing to spend money on a phone today than they were in the recent past, and that they typically do so in order to acquire a phone with enhanced features and functionality. These dynamics imply a growing base of consumers that seek smartphones, which creates a significant opportunity for Palm.
In addition to a rapidly growing base of consumers, smartphone demand growth is driven by wireless carriers. Smartphones enhance wireless carriers data-driven average revenue per unit (ARPU) which delivers a higher profit opportunity than voice-driven ARPU. Combined ARPU for the five largest U.S. wireless carriers has steadily declined at a (1)% CAGR over the past two years, primarily due to the weak performance of voice-driven ARPU, which has decreased at (5)% over the same period according to Credit Suisse. Conversely, data-driven ARPU for the five largest U.S. wireless carriers has increased at a 39% CAGR during the same period according to Credit Suisse. Given the strong economic rationale for doing so, Palm believes wireless carriers will continue to seek devices that help increase data usage as a percent of total ARPU by promoting the widespread adoption of smartphones among their subscribers.
Palm has defined its core market as the worldwide smartphone market, excluding Symbian Series 60 phones and phones sold into Asia. Palm has historically excluded Symbian Series 60 phones because the vast majority have only basic functionality and provide a more limited feature set. Palm has excluded Asia because the region is typically characterized by dramatically different usage patterns and technology platforms, and distribution in some Asian countries is largely government-controlled and, therefore, difficult to establish and maintain. Since playing an instrumental role in creation of the smartphone market in 2004, Palm has consistently maintained the #2 position in its core market according to Canalys. Going forward, Palm believes Symbian Series 60 phones will begin to include many of the features and functionality that smartphones currently include and access to the Asian markets will become a greater focus for Palm, thereby expanding its addressable market. In the first half of 2007 Palm held a 15% share of its core market alongside Research in Motion (RIM), which
held 43% share according to Canalys. The remainder of Palms core market is comprised of players such as Motorola, Nokia, Samsung and Sony Ericsson as well as, most recently, Apple. As of June 30, 2007, each of these players held less than 10% share of Palms core market according to Canalys.
The worldwide smartphone market can be further subdivided into three segments: the enterprise segment, the small-to-medium business (SMB) segment, and the consumer segment. End users in each of these segments have distinct needs. For instance, the enterprise segment is characterized by end users who require robust email, high security, and manageable support. In contrast, end users in the SMB segment require a high level operating system, significant ease of use and software that is capable of delivering enterprise and consumer/entertainment solutions. In the consumer segment, end users desire aesthetically pleasing, reasonably priced devices, which often provide some incremental functionality beyond what a basic/feature phone provides. Palm believes that it maintains a leading position in the SMB market, given its ability to develop a compelling suite of applications, to provide a simple, easy-to-use, user interface and to continue to integrate these features and functions onto mobile devices. The Company believes its core competencies will enable it to take advantage of market growth across all three segments of the worldwide smartphone market.