Palm’s New Reach

You've probably never heard of Jon Rubinstein, but in computer-engineering circles, the 52-year-old former Apple engineer is a legend. He helped create two of the most iconic products of the past decade: the original brightly colored egg-shaped iMac, which saved Apple from going out of business, and the iPod, which turned that once-ailing computer maker into the hottest brand in consumer electronics. So in the summer of 2007, when Rubinstein (nickname: Ruby) joined Palm, the beleaguered consumer-electronics company, to develop a new smartphone, people in the industry began paying attention once again to an outfit that most had written off as dead. They also began wondering whether Palm could do what every other phonemaker has tried to do and failed: create a device that could outshine Apple’s iPhone. The result is the Palm Pre which debuts today at the Consumer Electronics Show in Las Vegas and will go on sale by the middle of 2009. It embodies Palm's best shot at reclaiming both market- and mind-share.

Rubinstein, Palm's executive chairman, was quick to downplay comparisons when NEWSWEEK met with him at Palm's Sunnyvale, Calif., headquarters in December for a sneak peak at his latest creation. "We're not trying to build an iPhone clone," he said. And though Apple CEO Steve Jobs was furious about Rubinstein's move to Palm, and grew even angrier when he started poaching some of Apple's top talent, Rubinstein insists he's not driven by a desire to upstage his former boss and longtime colleague. "I worked with Steve for 16 years. Now supposedly I'm a traitor. But this has nothing to do with Apple," he says.

Still, over the course of two days, Rubinstein and others at Palm couldn't help pointing out that the Pre outperforms the iPhone. Palm's advantages include faster Web browsing, a better camera, and the ability to run many applications at the same time. Egos being what they are in the Valley, it's easy to believe that despite all the talk about not competing with Apple, these guys do, in fact, secretly harbor the desire to knock Apple firmly on its backside—and that while the marketing guys may have decided, correctly, that it's best not to pick a fight with a bigger, wealthier opponent, the engineers simply can't help talking smack.

At the very least they are praying that Rubinstein can breathe new life into Palm, and that the company can stop its steep decline and hang on long enough for the Pre to make a difference. The stakes could not be higher for a 16-year-old company that boomed in the 1990s thanks to its Palm Pilot personal digital assistant and then boomed again by morphing the Pilot into a smartphone called the Palm Treo. At one time these gizmos were the cutting edge of cool; today, they seem like relics from some dark, distant age, eclipsed by the Research in MotionBlackBerry and the iPhone. Hampered by an aging software platform, Palm has limped along by selling devices that run Microsoft's Windows Mobile software. But revenue is plunging, losses are mounting, and Palm is burning cash. In December Palm had to take a $100 million investment from its private-equity sugar daddy, Elevation Partners, in order to remain afloat.

Nevertheless the mood is upbeat at Palm; though the company has announced layoffs, it is also bringing aboard new talent. Equally upbeat are the people at Elevation Partners, which invested $325 million in Palm in June 2007. Back then Palm was starting to look like high-tech roadkill. But Roger McNamee, the veteran Valley investor who runs Elevation Partners, saw in Palm a company with a well-known brand and well-established carrier relations in a market that he was convinced was about to explode. McNamee came to the deal with a simple thesis: More than a billion cell phones are sold each year, but only about 5 percent are smartphones.

Over the next few years, smartphones will start to make up an ever-bigger slice of the pie, perhaps growing to 50 percent of the market within a decade and becoming the most popular way of accessing the Internet. The mobile-computing space today looks a lot like the early days of the PC market, when it was obvious that PCs were going to be huge but nobody knew who the winners would be and there was loads of growth yet to come. Right now a half-dozen smartphone platforms are competing in the market, but none has gained dominant market share. As McNamee sees it, the market opportunity is so big that Palm can succeed even if Apple and RIM and all the others continue to grow. "Our success is totally independent of what the others do. We would not have invested based on the premise that RIM and Apple would fail. If we get even 1 percent of global market share," he says, "we'll be huge compared to where we are now."