Smartphone 90-Day Outlook

By Paul Carton and Jim Woods

In recent years, ChangeWave consumer surveys have chronicled a seismic shift to smartphones, with Apple (AAPL) and Research In Motion (RIMM) locked in a two-horse race while most of their competitors have been caught in a downward spiral.

But does the upcoming Palm (PALM) Pre launch signal another thoroughbred entering the smartphone race?

Early consumer reaction to the Palm Pre launch was one of several issues looked at in a March 17-23 ChangeWave survey of 4,292 cell phone owners, which also focused on the consumer impact of Apple's just announced iPhone upgrades.

Smartphone Demand -- Next 90 Days

The overall shift to smartphones continues, although a slight dip is forecast for the spring season, as Apple and Research In Motion have no immediate product launches scheduled for the next 90 days.

After the huge launch of the iPhone 3G and the impressive successes of the new Blackberry models, 11.2% of respondents say they'll be buying a smartphone over the next 90 days, 1-pt less than in our December 2008 survey.



Despite this small decline, the 11.2% number is the third-highest percentage recorded in a ChangeWave survey dating back to 2005 -- and the new product launches and upgrades set for the summer are likely to boost that number as we approach the third quarter.

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RIM vs. Apple vs. Palm

Research In Motion's BlackBerry models (41%) continue to maintain RIM as the overall market share leader among consumers, while Apple (24%; up 1-pt) remains firmly in second place.

Of course, future share is what we're most interested in, and that's where we are seeing the first signs of an uptick for Palm.

For only the second time since October 2006, Palm (4%; up 3-pts) has registered an uptick in planned smartphone purchases among consumers. The public anticipation generated by the recent Pre announcement is driving this Palm uptick, as we'll see in a moment.

Going forward RIM planned purchases remain strong -- an accomplishment considering RIM recently completed a wave of new product launches, which normally results in a slowdown in the aftermath.

Yet among respondents planning to buy a new smartphone in the next 90 days, 37% say they'll get a RIM BlackBerry -- just 2-pts below the surge seen in our prior survey and the highest level of demand in the smartphone industry.

For comparative purposes, compare these RIM findings to the 22-pt drop Apple experienced between June and September 2008 (from 56% to 34%) in the aftermath of its successful iPhone 3G launch.



Note that consumer planned buying for the Apple iPhone remains steady (30%; unchanged), leaving Apple a strong second to RIM going forward.

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Moreover, Apple is expected to release upgraded iPhone models with improved features and new pricing – perhaps as early as this summer. And in another positive for Apple, the survey results show these new models and pricing plans have considerable potential to move the needle:

• 9% of consumers say they are likely to buy a 32GB iPhone 3G ($299)
  
• 11% say they are likely to buy a 16GB iPhone 3G ($199)
  
• 8% say they are likely to buy the 8GB Traditional iPhone ($99)
  

The Cupertino, California manufacturer is also expected to release its next generation iPhone operating system -- iPhone OS 3.0 -- within the next few months. And one-in-five consumers (20%) say they're More Likely to buy an iPhone as a result.

But what of the Steve Jobs "effect"? With his recent health disclosure and taking a leave of absence -- midst speculation on whether Apple will stumble without him -- we asked consumers what effect it would have on their likelihood of buying Apple products if Jobs were to permanently step down as CEO:

If Steve Jobs were to step down as the CEO of Apple, what effect -- if any -- would it have on your likelihood of buying Apple products in the future?



Four-in-five (80%) now say it would have No Effect on their likelihood of buying Apple products. And while 9% still say they'd be Less Likely to buy Apple products if Jobs steps down, that's a 5-pt improvement from six months ago.

So while Apple still has a long way to go in ameliorating consumer concern, things do appear to be moving in the right direction.

When you put it all together, our latest survey findings bode particularly well for the iPhone's long term outlook. Its latest moves have clearly positioned it for dynamic growth as the consumer economy moves out of recession.

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A Closer Look at the Palm Pre

Unlike its two industry rivals who attract consumers simply on the strength of their brand name, Palm has numerous additional obstacles it will have to overcome for the Pre to reach its full market potential.

Our survey has taken a close-up look at the early demand trends for the 2009 Palm Pre launch, and compared them to the early potential demand for both the RIM BlackBerry Bold (2008) and the original Apple iPhone (2007).

Note that in each comparison we were looking at all consumers, not simply those purchasing in the next 90 days:



A total of 1% of consumers say they're Very Likely and 4% Somewhat Likely to buy the new Palm Pre in the future. This compares to 4% Very and 13% Somewhat Likely before the 2008 RIM Bold launch, and 5% Very and 11% Somewhat Likely before the 2007 original iPhone launch.

Who are the most likely buyers of the new Palm Pre? Current Palm customers of course, with 14% saying they're Very Likely and 23% Somewhat Likely to buy the new model. Beyond existing Palm owners, the Pre also shows the potential to attract customers from some competitors, particularly Sanyo (3%) and HTC (3%).

Bottom Line. Clearly, for the first time in more than two years we are picking up increased consumer interest in Palm, and that in and of itself is a big improvement for the Sunnyvale, California manufacturer.

And while early interest for the Pre is less impressive than the early interest for the Bold or the iPhone, considering the enormous struggles Palm has had in recent years, the Pre appears likely to breathe life back into the company if the new model performs even close to expectations.

But above and beyond the Pre's performance, Palm itself will have to outperform mightily going forward for it to be competitive in this race. Not only are they up against two industry giants along with a slew of lesser competitors, but they have to overcome widespread negative perceptions about their recent product lines and major concerns about their exclusive Pre telephone service provider, Sprint (S).

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Palm's Sprint Problem. The survey showed 17% of consumers say the most important reason they're not considering buying the Palm Pre is because they don't like the requirement to use Sprint. (We note, however, that the same percentage say they won't buy an iPhone because they'd have to use AT&T).

The bigger problem for Palm in our survey is that Sprint (10%) trails AT&T (31%) and Verizon (30%) by a huge margin in terms of current market share. Moreover, only 1% of consumers who are likely to change cellular service providers in the next six months say they'll switch to Sprint. Thus, considering Sprint's weakness, the Sprint exclusivity deal is yet another big obstacle Palm will have to overcome as part of its Pre launch.

Palm's Customer Satisfaction Problem. Only 31% of Palm's customers report they're Very Satisfied with their current Palm smartphone. Conversely, the Apple iPhone stands head-and-shoulders above the competition, with four-in-five owners (79%) now reporting they're Very Satisfied with their iPhone. RIM ranks a strong second with 50% of its customers saying they're Very Satisfied.



Thus even if the Pre can outperform, it will take world class marketing and a huge advertising budget for Palm to rebuild its brand name in order to compete successfully in the high end smartphone market.

In spite of the obstacles, the Pre shows real market potential, and it's no small feat to have stirred enough industry excitement to have nearly tripled Palm's stock price thus far in 2009.

But considering the multiple issues Palm faces in order to pull off a successful Pre launch, expect high volatility for the stock going forward. A post-launch cooling in the Street's love affair with Palm is very likely in the offing.

Click here to check out more of the latest ChangeWave research findings.

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The ChangeWave Alliance Research Network is a group of 20,000 highly qualified business, technology and medical professionals -- as well as early adopter consumers -- who work in leading companies of select industries. ChangeWave surveys its network members weekly on a range of business and consumer topics, and converts the information into a series of proprietary quantitative and qualitative reports.

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