Daily Archives: August 13, 2009

Dark Portents for Palm and Pre

If what two market analysts are reporting today is true, Palm might have to return to the equity markets for financial sustenance earlier than it had hoped.

The analyst reports suggest the Pre could fall woefully short of the much-hypted, sky-high expectations that greeted its debut earlier this year.

First, Morgan Joseph analyst Ilya Grozovsky downgraded Palm from “hold” to the dreaded “sell” recommendation. He sharply lowered his price target for the stock, too.

As reported by Eric Savitz at Tech Trader Daily:

Grozovsky writes in a research note that his checks find Pre sales in July were down to about 100,000 units, from 200,000 in June – and that August is tracking to be even lower than July. He cut his estimate on Pre untis for the August quarter to 350,000 from 400,000, which already was low relative to Street expectations. He also contends that non-Pre shipments in the quarter were lower than expected due to cannibalization by the Pre.

The analyst reduced his forecast on sales for the May 2010 fiscal year to $580 million, from $920.5 million; his EPS forecast drops to a loss of 91 cents, from a loss of 56 cents. For FY 2011, he now sees revenue of $630 million, down from $860.8 million, with a loss of 92 cents a share, from a loss of 68 cents.

As Palm lurches toward the holiday season with excess inventory, Grozovsky foresees price cuts on the horizon. If his sales checks are accurate, that’s a reasonable assumption to make.

After that figurative poke in the eye from Grozovsky, Palm might have been forgiven for seeking comfort elsewhere. It didn’t receive any from Collins Stewart analyst Ashok Kumar, who proceeded to give it another drubbing.

In a separate news item from Mr. Savitz at Tech Trader Daily, Kumar is reported to have noted that the Pre, despite being positioned as a flagship product at Sprint, did not ship in expectedly high volumes in May and June.

Moreover, Kumar says that the Pre’s market “momentum appears to have peaked,” with “weakening demand” resulting in a 500,000-unit cut in production for the remainder of the year.

Savitz notes that Kumar doesn’t say how, or on what basis, he tabulated that estimate. A healthy dose of skepticism is always good policy, of course, but Palm has not been on a roll lately.

Its marketing campaign included execrable television commercials, and the company has had its knuckles rapped by more than a few commentators and critics this week for privacy transgressions relating to location-based information the Pre surreptitiously sends back to Palm headquarters.

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Cisco’s Eos Spawns Questions, Few Answers

As Cisco expands further into relatively unfamiliar markets and solutions, I believe it is fair to ask whether the company is overextended and playing a high-stakes game well beyond the confines of its comfort zone.

Has it reached a point where its zealous pursuit of continuous growth has taken it into foreign markets where it possesses neither the cultural sensitivity nor the language skills to flourish? Does Cisco have a mandate to be in these places?

I’m not talking about geographies, and I’m not asking these questions rhetorically.

I don’t think the jury, as represented by the abstraction of the marketplace (with its less-abstract buyers and sellers) will be able to return a definitive verdict for a while. For Cisco, these new markets are works in progress.

One of the many new businesses Cisco has launched involves its EoS online social-entertainment platform, which Cisco believes it can grow into a major technological enabler (and a billion-dollar business) for beleaguered entertainment companies — purveyors of music and movies, respectively, but also potentially professional sports leagues — trying to brand and monetize their artists and properties.

Toward that end, Cisco Systems announced today an expansion of an existing relationship with Warner Music Group (WMG) Corp., the world’s third-largest music company. As a result of the deal, Cisco will allow Warner Music Group to use the web-based Eos platform as a fulcrum on which the recording company will design and develop customized, interactive sites — replete with social-networking features — for a growing number of its musical artists and their fans.

Today’s announcements builds upon an existing relationship the two companies announced at the Consumer Electronics Show (CES) in January.

Neither company has provided a wealth statistical data on how the relationship is faring commercially, nor on what sort of financial arrangement Cisco has with Warner Music. It isn’t clear, for example, whether or to what degree Cisco shares in advertising revenue or in revenue generated from music and merchandise sales that occur on the sites.

PaidContent.org reports that WMG has seen scaling in traffic per site and in the number of sites built on Cisco Eos. The major label sees four potential revenue streams: an enhanced site experience, ticketing with enhanced experience, subscriptions, and advertising/sponsorships.

It’s very early yet, for Cisco Eos and for its partnership with Warner Music. As mentioned above, Cisco Eos was announced in January, and Warner remains Cisco’s only Eos account. Nonetheless, Dan Scheinman, senior VP and general manager of Cisco’s Media Solutions Group, says his company plans to announce partnerships with other entertainment concerns in the months ahead.

With that in mind, Jennifer Martinez at GigaOm believes Cisco’s incursion into media and entertainment will put it on a collision course with MySpace, which is trying to position itself — at least partly — as a venue for interactive music and entertainment communities.

Cisco, however, refutes the notion that it will compete with MySpace, Facebook, or with other social-networking sites. We’ll see how it plays out.

To be sure, there are many unanswered questions connected with Cisco’s EoS.

Seeking More Money from Google, On2 Shareholders File Suits

It’s worth remembering that before Google announced its acquisition bid for video-comopression specialist On2 Technologies earlier this month, the latter was listed as a veritable penny stock, with the types of shareholders those listings tend to attract. On2 was a volatile stock, getting yanked upward and pulled downward with the emotions and machinations of its stockholders.

During the last six months, the company’s listing closed trading days as low as 20 cents per share and as high as 60 cents per share. Most observers would concede that’s a pretty wide range, with plenty of peaks and valleys. The stock chart looks as though it could serve as the design blueprint for a decent roller-coaster.

At least some of On2’s shareholders have formally objected to Google’s $106.5-million offer for On2. They want more money, and they’ve gone to court, with an injunction, to press their case.

Their two suits, as reported by Reuters and others, were filed against On2’s board of directors and Google in Delaware Chancery Court on Monday. They seek class-action status, as well as a permanent injunction blocking the deal. The suits also called on the defendants, Google included, to account for all damages caused.

Google could make the issue go away, of course, by tossing more filthy lucre at the litigants and freeing the On2 board from these allegations of breaching their fiduciary duty. In fact, it’s extremely likely that this matter will be settled out of court.

Still, looking at that six-month chart, I have to wonder how far these dissatisfied On2 shareholders want to go with this matter. The stock had not closed above 60 cents in any trading day during the last six months, and it had ended two trading days near 20 cents per share.

On2 announced strong quarterly results the day after the announced acquisition. Those results served as the ostensible catalyst for the shareholder revolt.

According to the Reuters report:

Google’s offer of 60 cents a share represents a 57 percent premium from the closing price of On2’s stock on the last trading day before the announcement. According to the suit, however, the price is well below the level where On2’s stock traded in the few months prior to the proposed transaction.

The suit alleges that, on May 13, On2’s stock traded at 65 cents. The shares reached $1.16 in 2008, according to the suit.

According to Reuters data, On2’s shares began the second quarter at about 30 cents and ended it at above 40 cents.

So, with the favorable results factored into the equation, the disgruntled shareholders contend that On2’s board of directors should have cut a better deal. That’s a subjective opinion, not a dispassionate analysis, and I’m not sure those who filed the suit will want to roll the dice in a court of law. Then again, as noted above, it likely won’t get that far.

As usual, the lawyers will emerge with some gains from their endeavors as sideshow impresarios.