“We’ve learned and struggled for a few years here figuring out how to make a decent phone. PC guys are not going to just figure this out. They’re not going to just walk in.”

Palm CEO Ed Colligan, December 2006

“Five hundred dollars? Fully subsidized? With a plan? I said that’s the most expensive phone in the world and it doesn’t appeal to business customers because it doesn’t have a keyboard, which makes it not a very good e-mail machine.”

– Microsoft CEO Steve Ballmer, January 2007

At 37.9 percent, Nokia’s share of the global handset market is the largest in the industry. Odd then to learn that it is not the most profitable. And odder still to learn that that honor belongs to Apple, which has been in the handset market for just two years.

According to Strategy Analytics, Apple’s third-quarter iPhone operating profit was $1.6 billion, while Nokia’s was $1.1 billion. Driving Apple’s profits: Strong sales, high wholesale prices and tight cost controls.

“We have identified at least 4 key factors underlying Apple’s success,” Strategy Analytics analyst Alexander Spektor explains. “First, Apple created a simple sub-brand–the iPhone–which was memorable and easy to remember. Second, the firm developed an attractive family of models with standout usability that enabled Apple to charge way-above-average prices to operators and consumers. Third, Apple distributed and co-marketed its handsets through top-tier carriers in numerous high-value countries. And fourth, the vendor has kept a solid grip on production costs by working with Foxconn, the world’s largest contract handset manufacturer.”

Quite an achievement for Apple (AAPL) and a major humiliation for Nokia (NOK), which has seen its dominance eroded by the likes of Apple and Research in Motion (RIMM), and not just in North America, but in Europe. Indeed, in its latest quarter Nokia’s smart-phone market share dropped by six points.

As Strategy Analytics analyst Neil Mawston noted at the time, “[Nokia has] no iPhone killer to drive a major revival in its smartphone volumes. [It] is still struggling in the U.S. smartphone market, and with competition intensifying in China as well, Nokia’s battles can only get tougher in 2010.”

In August 2007, just after former Apple exec Jon Rubinstein joined Palm, Apple CEO Steve Jobs warned Palm CEO Ed Colligan against poaching his company’s employees. “We must do whatever we can to stop this,” he said, according to communications reviewed by Bloomberg. Colligan declined. “Your proposal that we agree that neither company will hire the other’s employees, regardless of the individual’s desires, is not only wrong, it is likely illegal,” he told the Apple CEO, noting–ironically–that Cupertino had hired away some two percent of Palm’s workforce as it began developing the iPhone.

And that’s proven a wise move. Today, the U.S. Department of Justice is investigating just such gentleman’s agreements as a collusive restraint on trade. And Palm (PALM) and Apple (AAPL) are sparring over intellectual property and the Pre handset, which Apple claims “falsely pretends to be an iPod.” How convenient for Palm that these communications should emerge now when its Cupertino rival is giving it such a hard time. And such a distraction for Apple legal….

Of course, Jobs was right to worry. Within a year of his warning to Colligan, Palm hired away Mike Bell and Lynn Fox, Apple VP of CPU software in the Macintosh hardware division and head of Mac PR respectively, among others hired later. And within two years, Palm debuted a new handset that some consider a worthy rival to the Apple iPhone.

“The key thing was our CEO, Ed Colligan, had the insight that once the [BlackBerry] Pearl came out, the smart-phone business was going to be a consumer business, and Palm was not positioned for that and needed a major transformation, and that’s what we got involved in doing. The whole notion was you wanted to take that cultural legacy of innovation that created the Pilot and the Treo and then apply it to the next customer.”

–Roger McNamee lauds Palm CEO Ed Colligan at our recent D: All Things Digital conference

Now we know why it was Palm executive chairman Jon Rubinstein and investor Roger McNamee on stage at D last month talking up the Pre, and not CEO Ed Colligan: Colligan was on his way out.

On Wednesday, Palm (PALM) named Rubinstein as its new chairman and CEO. Come Friday he’ll succeed Colligan, who is leaving the company after 16 years to join McNamee at Elevation Partners. Apparently Palm, who recruited Rubinstein, a former Apple (AAPL) engineer, to turn the company around has decided it would much rather have him in its highest office than Colligan under whose leadership it was foundering.

In a statement, Rubinstein–who has spent the past two years quarterbacking the development of the Pre and its webOS–welcomed his new role. “I am very excited about taking on this expanded role at Palm,” he said. “Ed and I have worked very hard together the past two years, and I’m grateful to him for everything he’s done to help set the company up for success. With Palm webOS we have ten-plus years of innovation ahead of us, and the Palm Pre is already one of the year’s hottest new products. Due in no small part to Ed’s courageous leadership, we’re in great shape to get Palm back to continuous growth, and we plan to keep the trajectory going upward.”

Reached for comment late Wednesday afternoon, Roger McNamee offered up this rather canned statement on Palm’s leadership transition: “With Ed’s decision to step down, Jon Rubinstein is the natural choice to lead Palm into its next phase of growth. Jon has proven to have exactly the right mix of product vision, organizational leadership and operational capabilities to help Palm regain a leadership position. We are grateful for the leadership role Ed has played in initiating this transformation and getting through the successful launch of webOS and the Pre.”

Palm shares are up 3.75 percent at $12.44 on the news.

Seems that in the end, Palm (PALM) decided it would be folly not to match the $199 price of Apple’s (AAPL) iPhone, though according to CEO Ed Colligan, the Pre is far superior to it. Asked at the Consumer Electronics Show if Palm would try to take market share by undercutting the iPhone on price, Colligan told MediaMemo’s Peter Kafka, “Why would we do that when we have a significantly better product?”

Perhaps, because you must? As J.P. Morgan analyst Paul Coster noted this morning, “The $199 price point was absolutely necessary, in our view, to go head to head with RIM and Apple.”

Interestingly, this means the Pre will indeed ship just days before Apple’s Worldwide Developers Conference, the event at which the company is expected to announce its next-generation iPhone. Which suggests that perhaps, as I theorized yesterday, Palm is hoping the Pre will benefit from the iPhone halo. “By debuting so close to the presumed announcement of the iPhone, Palm would be ensuring that its new device is fresh in the minds of anyone mulling the purchase of Apple’s latest offering–or writing about it,” I wrote. “It would be parasitically riding on the back on the Apple media juggernaut. Question is, can it hang on without getting trampled?”

In an interview with Bloomberg, McNamee–co-founder of Elevation Partners, which owns 39 percent of Palm (PALM)– claimed owners of Apple’s (AAPL) iPhone will switch en masse to the Palm Pre when their contracts expire. “You know the beautiful thing: June 29, 2009, is the two-year anniversary of the first shipment of the iPhone,” he said. “Not one of those people will still be using an iPhone a month later. Think about it–If you bought the first iPhone, you bought it because you wanted the coolest product on the market. Your two-year contract has just expired. Look around. Tell me what they’re going to buy.”

I dunno, the iPhone 3.0?

A hubristic claim, even for McNamee and one reminiscent of those ill-starred words Palm CEO Ed Colligan uttered back in 2006:

“We’ve learned and struggled for a few years here figuring out how to make a decent phone. PC guys are not going to just figure this out. They’re not going to just walk in.”

Look, Ed! Behind you!

Yeah, those PC guys never stood a chance…

In a statement, Palm blamed the drop on declining demand for its “maturing legacy smartphone products” and the souring economy. And the company is clearly banking heavily on the Pre to turn its sullied fortunes around. “The much-anticipated launch of the Palm Pre remains on track for the first half of calendar year 2009, but as expected we’ve got a difficult transition period to work through,” said CEO Ed Colligan. “Despite the challenging market environment, the extraordinary response to the Palm Pre and the new Palm webOS reaffirms our confidence in our long-term prospects and our ability to reestablish Palm as the leading innovator in the growing smartphone market.”

A few other noteworthy remarks from Colligan:

• The Pre will launch in concert with an application store that allows for over-the-air and USB downloads.
• The company is hammering out Pre partnerships with carriers in Canada, Latin America and Europe and plans to expand to U.S. carriers outside of Sprint (S) in 2010.
• Palm isn’t worried about a battle with Apple (AAPL) over the company’s iPhone intellectual property. Colligan says the company has 15 years worth of patents that could be brought to bear in such a conflict if need be, though he doesn’t expect one to occur. “We’re very respectful about people’s intellectual property, we believe we’re huge innovators and have been for a lot of years and that this product has an enormous number of innovations in it,” he said. “If something does happen there, we do have the portfolio, we think, to defend ourselves and to be successful doing that. But nothing’s happened to date, so we’re really just focused on getting the product out the door.”

PREVIOUSLY:

• Don’t Forget the Multi-Touch Prior Art in Minority Report
• Apple Awarded Patent on Palm Pre Gesture Area?
• Palm to Apple: Bring It
• Apple COO: “We Will Not Stand for Having Our IP Ripped Off”

The biggest unknown is price, which went unmentioned during the demo. My assumption is that Palm would try to take market share by coming in significantly lower than the $200 or so Apple wants for its iPhone. But when I ran that theory by Palm CEO Ed Colligan, he looked at me liked I’d peed on his rug. ‘Why would we do that when we have a significantly better product,’ he asked, then walked away.”

– Peter Kafka, MediaMemo

CEOs and Palm evangelists convinced that Palm’s new Pre handset is anything more than table stakes at the handset poker game would do well to consider two bits of Apple (AAPL) news and rumor that suggest Cupertino may be hard at work on a next-generation handset capable of mercilessly beating all others into sobbing submission.

The first: A rumor that iPhone 3.0 will support quad-core processors destined for an upcoming iPhone hardware revision. If this proves true and Apple (AAPL) does release a multi-core GPU iPhone–which is not as much of a stretch as you might think–it would likely support features we’re more accustomed to seeing on the PC. And as The Apple Core’s Jason O’Grady notes, “It would slaughter pretty much every portable gaming platform on the market.”

The second: Apple has applied for a patent on a behind-screen camera that could capture images “while the display elements are in an inactive state (in which the display elements are darkened and at least partially transparent).” It doesn’t take much of a leap to see that technology brought to bear on a next-gen iPhone and the long rumored iChat AV Mobile.

Those are two potential killer features for a device that already has three things the Pre does not: a maturing platform, a thriving developer ecosystem and a market leading music player and store. Are they just rumor and speculation? For now, certainly. But given the pace of innovation in the mobile industry, and more specifically, at Apple–where the multi-touch phone that Palm (PALM) is now aping originated two years ago–they’re not beyond the realm of possibility, are they?

By all appearances, the Pre is a slick little device. But is it formidable enough to stand its ground next to Apple’s iPhone, Research in Motion’s (RIMM) BlackBerry and the groaning board of Android devices currently in the handset market product pipeline? Palm (PALM) certainly seems to think so. In fact, the company is so confident in the Pre that CEO Ed Colligan seems to think it won’t need a sub-$200 price point to pull share from Apple (AAPL), et al. “Why would we do that when we have a significantly better product,” he asked ATD’s Peter Kafka earlier this afternoon.

Well, here’s one reason: To stay in business. Because despite Colligan’s claims of a “significantly better product,” Palm hasn’t raised the smartphone bar much (if at all) with the Pre. In fact, the device is as noteworthy for the features it may not include as for those it does. Absent from today’s grand unveiling was any mention of video. Also missing was a rival to Apple’s App Store and the robust developer-consumer ecosystem Apple has created around the iPhone and iPod touch. Even Google’s (GOOG) Android OS debuted with that. And the name; well, “Pre” isn’t likely to do very much for Palm’s already much diminished brand recognition.

Now, perhaps video and an app store are coming. But even if they do, will the Pre really be worth paying a premium for, as Colligan suggests? I’m not so sure–especially when the inevitable updates to the iPhone and BlackBerry remove the few advantages it does have over those devices. “Fast Web browsing” and “efficient multitasking” just aren’t big differentiators anymore.

That magnetized conductive charging platform sure is nice, though.

UPDATE: Turns out Palm is planning an App Store rival. According to the Pre press release, “The platform’s flexible environment will also allow developers to distribute their applications over-the-air via an on-device Palm application store.” And though no mention was made of video during Thursday’s Pre unveiling, the device will support it–both on the device and streaming. Said a Palm spokesperson, “The Pre has video playback, including YouTube video from the internet.”

PREVIOUSLY:

• Yeah. Those PC Guys Never Stood a Chance, Palm.
• Palm: Spare Change for Financial Viability?
• Alms for Palm?
• Palm New-ness: A Target Price of Zero
• Palm: Hey … Hello? Excuse Me … Over Here!

For Palm (PALM), which has lost two-thirds of its market value this year, the funds will help underwrite the cost of launching its new Nova operating system and the first line of products to run on it. For Elevation, however, which already holds a large stake in the handset maker, it seems more of a good-money-after-bad exercise–though neither Elevation nor Palm would ever admit it.

“There’s an enormous amount of opportunity left,” Palm CEO Ed Colligan said last week. “If you look at just the replacement market in this business, every year there’s phenomenal numbers of even just replacement devices, so the chance that there’s not another opportunity ahead or we can’t build a platform position here I think is not real. So it’s incumbent upon us to create really compelling products and a differentiated enough platform that people will recognize that and come to Palm. We have millions of users that recognize our brand of delivering them fantastic solutions over the years. We expect they will look to us again and we hope as feature phone users migrate to smartphones that we will get more and more of them as well.”

We’ll see. Palm shares are trading up some 32 percent on news of the Elevation investment.

Palm’s (PALM) flaccid second-quarter performance comes in stark contrast to that of Research In Motion, which beat estimates for its fiscal third quarter and offered up a stronger-than-anticipated forecast for its fourth.

[Image Credit: Steve Isaacs]

We’ve learned and struggled for a few years here figuring out how to make a decent phone. PC guys are not going to just figure this out. They’re not going to just walk in.”

– In 2006, Palm CEO Ed Colligan utters the words he’d be choking down two years later.

The invitation-only event Palm plans to hold during the 2009 Consumer Electronics Show in early January promises “all that Palm New-ness you’ve been waiting for”–“new-ness” presumably referring to the company’s new Nova operating system and the first line of products to run on it. And after five straight quarterly losses and a year in which it lost two-thirds of its market value, Palm (PALM) best deliver on that promise. Because Wall Street is fast losing its patience with the much diminished handset maker, which, according to Gartner (IT), holds a paltry 2.1 percent of the smartphone market. Indeed, Canaccord Adams analyst Peter Misek essentially threw in the towel on the company Wednesday slapping Palm with a Sell rating at a target price of zero.

“Due to increased competition in the industry, Palm has lost its place as a leading smartphone manufacturer and has gradually become less relevant as more competitors have introduced more innovative smartphone devices,” Misek explained. “The company is financially distressed and lacks any viable future catalysts which could help restore profitability…. We believe that Palm has become largely irrelevant in the smartphone space due to a series of strategic errors and poor execution. With very little balance sheet flexibility to mount a comeback, we believe that Palm shares remain a very risky bet, even at current valuation levels.”

Ouch.

Clearly, Misek doesn’t put much faith in the Palm New-ness that will be on display at CES next month. But there are others who do. Said Mike Bell, a 16-year Apple (AAPL) veteran who joined Palm last year: “I’m fundamentally convinced we’re onto something huge. Some of the stuff we’re working on here is mind-blowing–better than anything I’ve seen before.”

Hard to believe, given what we’ve seen from Palm these past few years. But perhaps Bell’s right. We’ll find out next month.