Mobile Phones, Poor Economy to Dampen PDA Market to 2007

Forecast Analysis Mobile Phones, Poor Economy to Dampen PDA Market to 2007 Abstract: A stagnant economy and growing competition from mobile phones have reduced our expectations for PDA market growth. Worldwide shipments are expected to reach 13.4 million in 2003 and 21.5 million in 2007. By Todd Kort Strategic Forecast Statements The U.S. share, now nearly half of the PDA market, is expected to steadily decline to less than 40 percent by 2007 as PDAs become more popular in other regions and the U.S. market becomes more like other advanced countries in the adoption of mobile phones. PDAs will remain popular with users who have considerable mobile data needs, and the growth of wireless fidelity "hot spots" will stimulate demand for wireless PDAs. Gartner Dataquest expects that worldwide PDA shipments will grow at a compound annual growth rate (CAGR) of 12.3 percent through 2007 to 21.5 million units, with PDA average selling prices falling from $311 in 2002 to $248 in 2007. The end-user value of PDA expenditure will grow at a CAGR of 7.2 percent to $5.3 billion in 2007. Publication Date:10 March 2003

2 Mobile Phones, Poor Economy to Dampen PDA Market Forecast Overview Gartner Dataquest has released a companion report to this document that focuses on quarterly worldwide PDA forecasts for 2002 through 2004. That document is "1Q03 Update: Global PDA Forecast Scenarios, 2002-2004," HARD-WW-DP-0429. By contrast, this document examines the annual outlook through 2007 and discusses regional trends and the PDA OS battle. Regional PDA Forecast Through 2007 Gartner Dataquest expects that 2003 will show some recovery in the PDA market after a 9 percent decline in worldwide shipments in 2002. Much of the forecast unit growth of 10.9 percent to 13.4 million units will be because of a significant decline in PDA prices, spurred by growing competition among Palm OS and Pocket PC licensees in the $200-to-$400 price band. Despite this double-digit unit growth, we expect PDA expenditure to remain flat at about $3.8 billion in 2003. The United States has been the largest consumer of PDAs since the industry began. The U.S. share of the PDA market has slowly declined and was 49.3 percent in 2002. Western Europe and the Asia/Pacific region accounted for 19.8 percent and 16.6 percent of the worldwide market, respectively, in 2002. In 2007, we expect the United States to account for about 37 percent of worldwide PDA shipments, Western Europe 23 percent and the Asia/Pacific region 21 percent. In terms of end-user spending on PDAs, the U.S. market was responsible for 51.4 percent of worldwide spending in 2002. Western Europe and Asia/Pacific accounted for 20.8 percent and 13.4 percent of spending, respectively. In 2007, the U.S. market is expected to produce about 38 percent of PDA purchases, followed by Western Europe at 26 percent and Asia/Pacific at 20 percent. In general, we expect that regions other than the United States will find wireless PDAs to be attractive, especially in enterprise applications, and will catch up with the United States to some extent while the United States does likewise as regards mobile phones. We assume that some of the enthusiasm U.S. consumers have shown toward PDAs will gradually evaporate as users find nearly equivalent personal information management (PIM) functionality available in phones. Tables 1 and 2 show our PDA shipment and revenue forecasts. 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 10 March 2003

3 Table 1 Worldwide PDA Unit Shipment Forecast (Thousands of Units) 1999 2000 2001 2002 2003 2004 2005 2006 2007 United States 2,798 5,999 6,460 5,939 6,400 7,100 7,780 8,500 8,000 6.1 Canada 243 478 510 453 510 570 650 730 750 10.6 Western Europe 964 2,148 2,549 2,381 2,700 3,310 3,830 4,350 4,900 15.5 Japan 700 846 861 656 766 943 1,171 1,451 1,600 19.5 Asia/Pacific 303 1,307 2,287 2,002 2,215 2,715 3,215 3,711 4,515 17.7 Central and Eastern Europe 40 56 63 65 74 91 108 130 155 19.2 Latin America 111 321 492 505 640 856 1,007 1,263 1,450 23.5 Middle East and Africa 22 35 49 53 58 73 88 105 124 18.5 World 5,181 11,189 13,271 12,055 13,363 15,658 17,849 20,240 21,494 12.3 Table 2 PDA End-User Revenue Forecast (Millions of Dollars) 1999 2000 2001 2002 2003 2004 2005 2006 2007 United States 867 1,716 1,899 1,930 1,818 1,896 2,023 2,168 2,000 0.7 Canada 75 134 143 141 143 151 166 184 186 5.7 Western Europe 342 687 841 781 824 986 1,118 1,244 1,372 11.9 Japan 315 400 299 209 214 225 262 306 336 10.0 Asia/Pacific 76 271 467 504 560 678 777 886 1,066 16.2 Central and Eastern Europe 8 12 14 15 16 19 22 25 30 15.4 Latin America 39 88 148 160 170 210 230 269 305 13.7 Middle East and Africa 6 10 13 14 14 17 20 24 27 14.6 World 1,729 3,316 3,824 3,753 3,757 4,182 4,618 5,106 5,321 7.2 PDA OS Forecast Through 2007 Palm OS lost about 10 market share points, from 65 percent to 55 percent, since 2000. However, Palm OS shipments nearly stabilized in 2002, falling less than one point despite continuing difficulties at Palm and Handspring. Sony's spectacular rise in the PDA market since mid-2001 has been responsible for some of the declines by Palm and Handspring, but Sony has also helped Palm OS retain customers who may have otherwise defected to other platforms. Microsoft Windows CE licensees have steadily gained market share since the introduction of Windows CE 3.0 in April 2000. At that point, Microsoft's share had declined to about 10 percent of the market, but it finished 2000 at 12 percent and grew to 19 percent in 2001 and 25.8 percent in 2002. Microsoft exercises more rigid control over its licensees than PalmSource, with mixed results. Perhaps most importantly, Microsoft has established a set of minimum hardware requirements for its licensees and 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 10 March 2003

4 Mobile Phones, Poor Economy to Dampen PDA Market has licensed its OS to more than 30 companies, which tends to increase price competition. With Handspring exiting the PDA market completely by the end of the first quarter of 2003 to focus on smartphones, PalmSource finds itself with two licensees that account for more than 90 percent of the Palm OS PDA market. Players such as Acer, Garmin, Legend and Symbol fill important niche markets, but they cannot compare with the 30-plus vendors Microsoft has lined up, including heavyweights such as Hewlett-Packard, Toshiba and Dell. In forecasting OS success, we look at recent market trends and examine the levels of resources being aligned behind each camp. The PDA market is not terribly significant to players such as Microsoft, HP, Dell and Toshiba, and their lack of focus on PDAs may partially explain why they only control a quarter of the PDA market. PalmSource, Palm and Sony may not have the resources of the other camp, but their intense focus on PDAs has contributed to their success. As the enterprise market gradually becomes a more significant portion of the PDA market, it seems likely that this will shift the balance toward the Microsoft camp in the years ahead. More important will be the ability of Microsoft to develop reference designs that enable its licensees to address lower price segments that provide the bulk of PDA shipments. It is important to make the distinction between unit share and revenue share. Palm can sell products such as the Zire for less than $100, while the least expensive Pocket PC today is $250 (and a year ago it was more than $400). Thus, in terms of revenue share of the worldwide PDA market, Palm OS licensees captured just 43.5 percent in 2002, while Windows CE licensees were close behind at 39 percent. While Palm OS is expected to capture more than 52 percent of PDA shipments in 2003, the revenue share will be in the neighborhood of 41 percent. Windows CE licensees should surpass Palm OS licensees in revenue with 44 percent of a $3.8 billion market in 2003, despite having just 31 percent of unit shipments. Tables 3 and 4 show our PDA forecast by OS. Table 3 PDA Shipment Forecast by OS (Thousands of Units) 1999 2000 2001 2002 2003 2004 2005 2006 2007 Palm OS 3,046 7,330 7,414 6,636 7,000 7,900 8,800 9,500 9,380 7.2 Windows CE 1,141 1,345 2,524 3,114 4,200 5,700 7,150 9,050 10,414 27.3 Linux - - 22 260 350 500 629 790 900 28.2 RIM OS 142 420 429 272 333 300 220 150 150-11.3 Symbian OS 284 458 536 278 180 150 70 50 50-29.0 Others 569 1,636 2,344 1,495 1,300 1,108 980 700 600-16.7 Total 5,181 11,189 13,270 12,055 13,363 15,658 17,849 20,240 21,494 12.3 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 10 March 2003

5 Table 4 PDA Revenue Forecast by OS (Millions of Dollars) 2000 2001 2002 2003 2004 2005 2006 2007 Palm OS 1,979 1,705 1,633 1,554 1,612 1,734 1,805 1,679 0.6 Windows CE 592 1,212 1,463 1,659 2,109 2,503 2,977 3,332 17.9 Linux (All Flavors) - 9 100 114 125 148 170 180 12.5 RIM 189 184 123 133 105 70 42 38-21.1 Symbian 229 268 164 90 62 27 17 15-38.0 Others 327 445 269 208 171 137 95 77-22.1 Total 3,316 3,824 3,752 3,758 4,183 4,618 5,105 5,321 7.2 Gartner Dataquest Perspective Conclusions and Recommendations Sony's insistence on using add-on cards (Compact Flash cards requiring Sony drivers and MemoryStick) to work in its PDAs may help Sony boost its profit margins, but the inability to accept many off-the-shelf add-on Secure Digital or wireless fidelity cards is a turnoff to enterprise buyers. Sony's tactics are costing it the ability to become a serious enterprise PDA vendor. This leaves Palm as the dominant enterprise player in the Palm OS market. The increasing competitiveness of Pocket PC vendors in the $250-to-$400 space dampens enthusiasm for Palm's Tungsten models and is a major concern for Palm. Because of these factors, we expect to see continuing gains by Pocket PC in the enterprise PDA market. Microsoft's development of new low-cost reference designs with Samsung should bear fruit in late 2003, enabling Pocket PC vendors to make further inroads on what has been exclusive Palm OS territory. Research in Motion has unique strengths in wireless e-mail that make BlackBerries the logical choice for mobile e-mail users, but RIM has thus far offered little to customers with other interests. RIM has become serious about licensing its technology to other PDA vendors, and we can expect some Palm OS and Pocket PC devices to incorporate BlackBerry-like capabilities by the end of 2003. Low-power ARM-based processors from Intel and Texas Instruments will be critical to enabling this capability. Having RIM-like wireless e-mail on mainstream PDA platforms should spur enterprise adoption of wireless PDAs in 2004 and beyond. IBM may lend some legitimacy to Linux-based PDAs in late 2003, but Linux models that are designed to integrate with IBM's WebSphere are not available yet. Symbian OS is fine for smartphones, but lack of business application support has left it wanting in the PDA space. With no uptick in IT spending expected during 2003 and economic conditions remaining in the doldrums, we do not expect this to be a strong year for PDA sales. In the longer term, growing competition from smartphones, low-cost notebook and Tablet PCs will likely limit PDA 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 10 March 2003

6 Mobile Phones, Poor Economy to Dampen PDA Market shipments to a CAGR of about 12 percent, with expenditure growing only about 7 percent per year. Any breakthroughs in battery technology, micro fuel cells, or power management are likely to favor increased usage of converged devices. PDAs have begun to gain capabilities that make them suitable replacements for notebooks in limited applications, particularly wireless e- mail. The instant-on capability is a key benefit offered by PDAs along with pocket ability. However, these capabilities are also found on mobile phones. The larger displays and more powerful application processing capabilities offered by PDAs relative to mobile phones are the key differentiators, and these will continue to make PDAs a viable choice well into the future. Key Issue At what rate will each computing hardware platform grow or decline in the next five years? This document has been published to the following Marketplace codes: HARD-WW-DP-0440 For More Information... In North America and Latin America: +1-203-316-1111 In Europe, the Middle East and Africa: +44-1784-268819 In Asia/Pacific: +61-7-3405-2582 In Japan: +81-3-3481-3670 Worldwide via gartner.com: www.gartner.com Entire contents 2003 Gartner, Inc. and/or its Affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice. 113539