FOOL'S EYE VIEW
Lessons From Psion

By Alan Oscroft
July 11, 2001

Carburton Street, London -- I remember a very important announcement at school one day, more than a few years ago. The school had bought a new piece of technology, a video recorder, and it could be booked by teachers who had some valid bit of education to be done with it.  Not long after, I got to see it. A huge great box made by Philips that could record the telly! Wow, who could have imagined such a  thing?

It was a good few years after that, though, before video recorders became the ubiquitous and commoditised products that they are today. And it hasn't been the pioneering Philips who has cleaned up the market either -- the Japanese consumer electronics giants have the bulk of it.

It's Always The Same

Technology's like that, though. So often, some whizzy new-fangled thing comes along, and it seems clear that there's a definite market for it out there (and sometimes it's the "Duh! Why didn't I think of that?" kind of clarity). The expectations are there, but the reality is quantitatively disappointing -- the thing does become successful, but it takes far longer for critical mass, and therefore ubiquity, to be achieved. And it so often isn't the early pioneers who achieve the most success.

Something like that appears to be happening to Psion (LSE: PON), and the news this morning that the company has canned its next generation of Bluetooth-enabled  handheld devices will have disappointed many investors. Bluetooth, for those not familiar with the name, is a wireless network technology that will allow all sorts of devices (phones, PDAs, computers) to communicate with each other and do things like synchronise their stored addresses and phone numbers, for example. There's surely a big market for that.

Psion has been at the forefront of several "Yes, of course!" technological advances, so why does it appear to be losing its way? There are several things that can derail a pioneer.

Complacency

It was Psion who pretty much single-handedly created the market for pocket computers, and its various "clamshell" designs were the only serious contenders for such a long time. I wanted one, but they were always way too expensive.

But Psion is now an also-ran, and it got there by complacency. That complacency manifested itself in two areas: firstly, Psion kept its prices high and milked its near-monopoly cash cow for all it was worth, and secondly it lost its way with innovation, preferring slow evolution of its clamshell product line rather than pushing revolutionary new designs.

The writing that was on the wall turned into numbers on the bottom line when the first palmtop computers from Palm Inc (Nasdaq: PALM) were unveiled. They were gorgeous, they were small, and they were cheap. A Psion for £450 or a Palm for £150? That was a no-brainer for me, and I still have my first Palm.

Critical Mass

Bluetooth products face a different problem. Put simply, if you go out and buy the very first Bluetooth-enabled device, what is it going to communicate with? Until there are phones that can do it too, and plug-in cards for personal computers, and all sorts of other things, a palmtop computer with Bluetooth will be like the nutter on the bus -- it will want to talk to everything, but nothing will want to listen.

Technologies that rely on implementation by lots of different companies making lots of different products before they can gain acceptance are the ones that will most likely face the biggest difficulties achieving critical mass.

Technological Dependency

With Psion having lost the pocket computer battle, and not able to get off the blocks yet in the Bluetooth race, just about all that is left is Symbian. But Symbian is an example of another "obviously good" technology that still has a big hurdle in its way. This time it is its dependency on markets outside of Psion's direct control.

A common operating system platform aimed mainly at the next generation of mobile phones isn't going to sell if people aren't making those phones, and people won't be making the phones if the telecommunications operators aren't rolling out the networks that will require the phones. And the telecommunications operators are facing an extended slowdown right now.

Despite the initial exuberance, it seems increasingly likely that even if high-bandwith 3G telephony has a great future (which I certainly reckon it has), its critical mass is probably going to take a lot longer to achieve than many people realised.

Lessons for Investors

It's easy to criticize a company with hindsight, and as an early supporter of Psion it would be a little hypocritical of me to do so. But that's not really what I want to do anyway. Instead, I want to use hindsight for a more important purpose; that of learning something for next time. So what should we learn from what's happened to Psion? From Psion's three product lines, I think we can learn the following...

1) There are many ways in which a company pioneering a new technology (like Psion with its handheld computers) can lose its way and allow competitors to dominate the market as it grows towards maturity.

2) New technologies that rely on simultaneous and widespread acceptance by other manufacturers, like Bluetooth, can be riskier than technologies that can be implemented and brought to market by an individual company working alone.

3) Companies will also face higher risk when they are developing technologies, like Symbian, that require the prior success of other technologies that are not yet mature and which are outside the control of the company in question.