Why Palm Can't Win: It's Stuck in a Cell-Phone Market Dead Zone

Lenovo is the latest company considering a bid for smartphone maker Palm (PALM). But such a move, for Lenovo or any other company, would mean investing in a brand that has about as much commercial appeal as another L'il Wayne rock album.

That's because Palm is caught in a dead zone between the two categories of products that excite consumers the most. At one end of the spectrum is high fidelity, which includes products or services that deliver a fantastic, cool experience, that usually cost more and that are more difficult to get. At the other end is high convenience, those products or services that are ubiquitous, inexpensive and familiar. To illustrate: Wal-Mart (WMT) is high convenience. A great boutique shop is high fidelity.

Consumers usually like products or services that fit clearly in one category or the other. Products that land in the middle -- those with so-so fidelity and so-so convenience -- struggle for acceptance. One great example of this was the Cadillac Cimarron, General Motors' misguided attempt in the 1980s to make an economy Cadillac. Talk about a fidelity and convenience clash.

Rapper L'il Wayne's Rebirth record further illustrates the middle ground's lack of appeal. Even though it sold decently, critics murdered it as being too rap for rock fans and too rock for rap fans. Even his devoted followers aren't clambering for an encore.

Where Are the Apps?

So here's Palm's problem: The mobile market used to be focused on a phones' coolness; now it's centered on what the phones actually do. In other words, it's all about the apps now and about how good the phones are at using and accessing those apps. Want proof? Commercials for Apple's (AAPL) iPhone or Motorola's (MOT) Droid phones focus entirely on apps.

This trend means that phones with the best apps win. In a reinforcing cycle, app developers will flock to the phones with the most customers. So far, the iPhone and Google's (GOOG) Android -- not Palm -- are clearly winning the most customers and developers by sticking to either end of the customer trade-off spectrum.

The iPhone and iPhone operating system are staking out the high-fidelity territory. Google's Android system, already included in phones by Motorola and HTC, is on the path to becoming a convenient, ubiquitous operating system for phone manufacturers around the world.

Meanwhile, Palm's WebOS gets high marks from reviewers, but it's not as high-fidelity as the iPhone operating system, especially when married to Palm's phones. Palm also isn't as convenient and as ubiquitous as Android, which can increasingly be found on all kinds of phones.

Palm Loses Market Share

The penalty for landing in this dead zone has been consumer apathy. From December to February, Android-based smartphones gained 5.2% market share, making up a total of 9%, according to ComScore, which tracks and provides Web metrics. The iPhone stayed flat at about 25%, while Palm lost 1.8%, falling to a 5.4% market share.

Even more telling: In a survey early this year by Appcelerator, a Mountain View, Calif.-based company that offers a platform to Web developers to build applications, 87% of 1,000 developers said they were very interested in making iPhone apps, and 81% said they were very interested in making Android apps. Just 14% said the same about Palm apps, a sign that Palm's market share will likely continue to slide.

For what it's worth, Windows Mobile, Symbian and, increasingly, BlackBerry phones are landing in the same dead zone. Apple is winning fidelity; Google is winning convenience; everyone else will hang around as also-rans.

So while Palm is up for sale, it's finding few buyers. Lenovo is rumored to be interested. But as viewed through the lens of consumer trade-offs, Lenovo would appear to be better served by leaving Palm on the table and making phones that do a great job running Android apps.