The Next Small Thing

Wrong Strategy, Wrong Product

Hawkins and Dubinsky made the perfect entrepreneurial pair. Together they sat down to create a plan, which they built around a few defining principles: Palm Computing would design software for handheld devices but let other companies build and market them. The software would support general-purpose computers that were small enough to be mobile yet powerful enough to rival desktop machines. Palm's products would target individual consumers rather than business users. And the company would surround itself with blue-chip partners that had muscle in the marketplace.

It was a carefully crafted plan. And every principle in it was wrong. Palm survived because it was lucky enough to be second on the market, smart enough to recognize the gravity of its mistakes, and lean enough to reinvent itself before it ran out of cash. "I was intent on raising plenty of money and spending it as slowly as possible," says Dubinsky. "At Apple, I saw how being 'overcapitalized' gave you the freedom to make mistakes."

There were plenty of those - beginning with Palm's partners. Thanks to the Tandy connection, Casio agreed to manufacture the handheld device that would run Palm's software. Thanks to the Dunlevie connection, Geoworks agreed to provide an operating system. Intuit agreed to provide personal-finance software. America Online came on board as well.

Early on, something felt wrong. "I'd come to a meeting, and there would be people from six different companies sitting around the table,'' Dubinsky recalls. "We negotiated every detail.''

It was startup-by-committee - and Palm's debut product reflected how dysfunctional that committee was. The device, called Zoomer PDA, was slated for sale at Radio Shack. But it was priced at $700 - which was steep for a mass-market retailer. Zoomer did lots of things, most of them badly. It had an absurdly small keyboard. Its handwriting-recognition software, based on PalmPrint, was primitive for the task at hand. It included drivers for printers and fax machines (which made it bigger and slower), even though few people expected to print or fax from a PDA.

Ed Colligan, now 37, joined Palm as its marketing manager in June 1993, the same month in which Palm announced Zoomer. (The product shipped in October.) Colligan is quick-witted, wiry, combative. He could sell ice to Eskimos. But he couldn't sell Zoomer. "It was a dog,'' he says. "I was going, gulp, Did I do the right thing in coming here?" Jeff Hawkins was equally disappointed: "It was the slowest computer ever made by man. It was too big and too expensive. We executed badly."

Fortunately, Zoomer wasn't the worst dog in the kennel. Hawkins and Dubinsky were mortified when Apple announced that it would release the Newton in August 1993 - two months before Zoomer shipped. Palm's strategy was to get Zoomer into the market first, to create a buzz, and to follow quickly with upgrades and improvements. But Newton stole Zoomer's thunder - and saved Palm's bacon. Precisely because Zoomer arrived after Newton, it was spared all the ridicule heaped on Apple's PDA. Who wants to kick the second lousy product to appear in a new category? And in Zoomer's wake came a wave of equally uninspired offerings - from Hewlett-Packard, Sharp, GO, and Toshiba. Zoomer got lost in the shuffle.

"The entire market was lousy,'' Dubinsky says. By the end of 1994, she estimates, venture capitalists and consumer-electronics companies had invested $1 billion in the PDA market - and no one had anything to show for it. Most companies now opted for one of two courses of action: Either they went out of business (like GO, which had liquidated by 1994), or they stubbornly persisted (like Apple, which kept introducing new versions of Newton).

Palm Computing took a different route. Sure, the company had misfired badly. But thanks to Dubinsky's frugality, it still had enough cash to reload. So during the spring of 1994, Palm conducted in-depth surveys of the hardy souls who had actually purchased Zoomer. What these people said opened the company's eyes. More than 90% of Zoomer owners also owned a PC. More than half of them bought Zoomer because of software (offered as an add-on) that transferred data to and from a PC. These were business users, not retail consumers. And they didn't want to replace their PCs - they wanted to complement them. People weren't asking for a PDA that was smart enough to compete with a computer. They wanted a PDA that was simple enough to compete with paper.

The findings were too radical for Palm's partners. The alliance split apart. Jeff Hawkins split off - into a whole new product space. "Jeff basically went off on his own," say Colligan. "When he came back, he was like Moses holding the tablets.'' But this time, there weren't Ten Commandments - there were two guiding principles. They lie at the heart of why the Pilot became such a breakthrough.