Apple 2.0

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Apple vs. Palm: Fresh shots across the bow

July 24, 2009: 9:24 AM ET

Warning Shots by Judith HuntTo the delight of an armada of tech writers, Palm (PALM) has responded to the shot Apple (AAPL) fired across its bow last week with a cheeky little blast of its own.

The issue is whether Apple will continue to allow the Pre to sync seamlessly with iTunes, the feature of Palm's whizzy new smartphone that got the most attention in advance of its launch in early June.

Apple unleashed an iTunes software update last week that shut down the feature. It was accompanied by a sharply worded warning that -- uncharacteristically -- named names. The update, it said, had "disabled devices falsely pretending to be iPods, including the Palm Pre."

Palm responded with a quick workaround. In its description of the new features of an operating system update released Thursday, Palm's official blog saved the best -- Steve Jobs-style -- for last:

"Oh, and one more thing: Palm webOS 1.1 re-enables Palm media sync. That's right — you once again can have seamless access to your music, photos and videos from the current version of iTunes (8.2.1)." (link)

Palm can play this cat-and-mouse game -- the sort that big companies usually engage in with ankle-biting hackers -- because the Pre division is run by former Apple engineers, including the guys who built the original iPod.

But it's not clear how much longer Apple can let it go on. In a lively debate on Investor Village's AAPL Sanity board (free subscription required), participants were of two minds.

Some called for Apple to bring out its legal big guns, as COO Tim Cook has repeatedly threatened to do. "The sync," wrote one investor, "will be crushed in the palm of Apple's quite formidable hand."

Others worried that an infringement lawsuit could make Apple look bad and give the Pre publicity they seem to feel that Palm -- whose sales lag far behind the iPhone's -- can ill afford on its own.

But according to a report to clients issued Friday morning by RBC Capital's Mike Abramsky, the Pre is not doing that badly in the marketplace. Fresh retail checks at 25 Sprint (S) stores, he reports, show that the Palm Pre's momentum "remains robust."

"We estimate Palm has sold 325,000 - 375,000 Pres to date, ahead of our expectations," he writes. "Sprint stores have stock, but inventory continues to be tight (only estimated 2-4 days), given strong sell-through. Stores are receiving shipments every couple of days, indicating manufacturing constraints continue to abate."

Abramsky's research contradicts reports -- repeated in the AAPL Sanity debate -- that the Pre's return rates might be as high as 40%. "Most buyers," he writes, "appear delighted with their new Pre user experience." He estimates returns at 2% - 3%, which he says are in line with average smartphone returns.

Top reasons for Pre returns, according to Abramsky:

  1. personal preference, i.e., Pre/WebOS not their "cup of tea" and/or too much effort to learn a new OS (particularly for older buyers);
  2. other hardware issues (burned out pixels, fit/finish, etc.); and
  3. poor battery life.

Abramsky notes that Apple had similar post-launch quality issues with the iPhone. "Notwithstanding initial glitches," he concludes, "user satisfaction with Pre and WebOS experience appears high, sustaining robust sales and limiting returns in line with averages."

Translation: The Pre will live to fight another day.

Illustration re-posted by permission of Judith Hunt. For more her work see here.

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Philip Elmer-Dewitt
Philip Elmer-DeWitt
Editor, Apple 2.0, Fortune

Philip Elmer-DeWitt has been following Apple since 1982, first for Time Magazine, and now on the Web for Fortune.com.

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