From Computer Business Review, a sister publication.
Within five years, London-based Psion Plc could be a $5bn company once Microsoft Corp has been dealt with, that is. Having ably seen off threats from Casio Computer Co, Hewlett-Packard Co and Sharp Corp in the 13 years since it launched the world’s first personal digital assistant (PDA), Psion Computers, today accounts for a quarter of all shipments of handheld computers, second only to Japanese giant Sharp. Not bad for a $200m minnow. However, with analysts such as the Yankee Group predicting that the handheld computer market in North America alone will grow five-fold from 1.1 million units in 1996 to 5.2 million units by 2002, Psion now faces a challenge from Microsoft which, in alliance with seven computer and consumer electronics companies, is bidding to take over the hand-held computer market with Windows CE, a slimmed-down version of the Windows 95 desktop operating system. Furthermore, in the week Psion launched its latest hand-held computer, the 32-bit Series 5, it was forced to issue a trading statement to the London Stock Exchange warning that it experienced sluggish sales during April and May. So is the game up for one of the last survivors of the UK’s early ’80s computer boom? Most financial analysts in the City of London discount the importance of the trading statement. Judith Allen at ABN AMRO is among them. Clearly profits for the year have been affected, but the long-term fundamentals and the reasons people should have been investing in Psion are still very much intact, she says. Retailers, in anticipation of the launch of the new Series 5 device, says Psion, cut back orders of old models which adversely impacted sales. This, says Allen, happened before the launch of every other Psion product, and was not unexpected.
By Graeme Burton
Meanwhile, subsequent deep price cuts to the existing Psion range have already boosted demand. When Psion cut the price of the Series 3c the sell-through was the highest ever, notes Allen. In the short-term, however, the blip in sales has hit profitability at Psion, rated as one of the most profitable hardware vendors in 1996. Although Allen is impressed with Psion’s cost-cutting ability, Merrill Lynch analyst Keith Woolcock believes the recent product price cuts, combined with the high level of sterling on the foreign exchange markets, have impacted Psion’s gross margins, cutting them from around 37% to about 34%. As a result, Woolcock forecasts that full year revenues for Psion will increase only modestly from 124.2m pounds or $199m in 1996 to 140m pounds or $224m in 1997, and pre-tax profits will increase marginally from 16.1m pounds ($25.8m) to 16.7m pounds ($26.8m). But the fundamental strength of Psion, and the reason why it is still rated as a ‘buy’ by most financial analysts in the City, is related to its technology, rather than its products. Specifically, analysts are excited about Psion’s new found willingness to license its new 32-bit operating system EPOC/32. For years we debated whether we should die like Apple Computer Corp or die like IBM Corp, says Psion’s group development manager Charles Davies. But then, Microsoft’s renewed interest in the PDA operating system space, revealed last year, forced Psion’s hand to uncouple its operating system from its hardware and seek external licensees. Although Davies refuses to reveal the identity of the two big licensees he claims are already developing EPOC/32- based products, rumors in the City include Japanese consumer electronics giant Sony Corp and IBM – conspicuous by their absence from the Windows CE supporters. Written in C++, component-based and multi-threaded, EPOC/32 is, according to analysts, more compact than Windows CE and more suitable for use in a wide-range of products, such as mobile telephones, than its supposed nemesis. Currently, EPOC/32 is only available on the ARM-based microprocessors on which the Series 5 product is based, but it is designed to run on any microprocessor, says Davies. Moreover, Psion’s decision to license Citrix Systems Inc’s ICA independent computing architecture software protocol, should ensure that EPOC/32-based products will be able to connect easily to Windows-based personal computers. Further, a recent deal with Javasoft will shortly see the Java Virtual Machine ported to EPOC/32 as well. However, there are signs that the conservatively run company is being stretched to the limit already. Although Microsoft enjoys the support of seven hardware vendors – Compaq Computer Corp, Casio, Hewlett- Packard, Hitachi Ltd, LG Electronics, NEC Corp and Philips Electronics NV- and Psion only two, there are reputedly 15 other electronics companies interested in licensing EPOC/32. We don’t want more than two big licensees because we couldn’t handle any more, reveals Charles Davies. More ominous is the company’s precarious position in the US. Although it has made a respectable start in the American market, selling approximately 300,000 Series 3a and 3c devices in the last year, and with the Series 3c being named a ‘best buy’ product in May’s edition of PC World, the company’s public profile in the US is still virtually non-existent. I think their biggest problem is lack of awareness, says Steve Mann, editor of San Francisco-based magazine Handheld System. Mann believes the company would have to sink between $10m and $15m into an advertising campaign in order to gain widespread visibility. That’s an awful lot of machines they’d have to sell to pay the bill, he says. The Windows CE alliance suffers no such cash limitations even if Windows CE is having some technical problems.
Rough around the edges
It’s a little rough around the edges, some people would say quite rough around the edges, says Mann. For example, Windows CE ROMs read only memories in Casio and Compaq handheld computers contained a fault which has caused the devices to power down their circuits incorrectly, causing batteries to wear out quickly and, in some, circumstances, for data to be lost. Although Mann believes customer satisfaction to be reasonable, both Tom Rhinelander at Forrester Research and Phil Redmond at the Yankee Group estimate that returns of Compaq CE devices are running at close to 30% – Compaq refuses to comment on the claims – while the most popular CE-based system, the Hewlett-Packard HP300 series, sells only about 15,000 units a month. A ton of companies bought into this on the idea that Windows CE was a slam dunk but I think what they’re finding out is that this [Windows CE] just does not satisfy most people, says Rhinelander. That, however, is small comfort for Psion. Rhinelander believes that, at the low-end, customers prefer simple but smart devices, such as US Robotic Corp’s PalmPilot, while brand recognition will eventually drive sales of Windows CE- based machines at the higher-end when Microsoft gets it right. If Psion can come through the next couple of years we have possibly got another Nokia Oy on our hands, says Woolcock, one of the few London financial analysts unconvinced about Psion’s future. To do so, Psion will have to become the first ever company to beat Microsoft at its own game, in a market that Bill Gates has demanded his company should dominate. Investors should ask themselves how likely that is.
