Case Study

The Problem: Handmark had 50% of the market for software for PDAs. Unfortunately, fewer people are buying PDAs

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For Handmark, it all changed with a single phone call. The company's vice president of sales, Tom McKeon, was sitting at his desk last October when the phone rang. It was a senior buyer for the Best Buy chain, and the news was bad. Founded in 2000, Handmark had built a thriving business selling software for PDAs -- personal digital assistants, such as the PalmPilot. The Best Buy executive was calling to warn McKeon: Over the next few months, he said, Best Buy -- Handmark's biggest retail partner -- was planning to slash the number of both PDAs and associated software titles it sold. "I got a sinking feeling in my stomach," McKeon says.

The news was not completely unexpected. Research firms had been tolling the "maturity" of the PDA market for some time. Such devices, they predicted, would soon be as obsolete as the Betamax, replaced by so-called smart cell phones capable of both data and voice services. McKeon and his colleagues at the Kansas City-based company had read these reports. But the Best Buy call still hit them hard. Revenue at Handmark had swelled to $20 million, thanks to the popularity of titles that allowed consumers to play Scrabble or consult the Oxford American Dictionary on their PDAs. With just 20 employees in three offices, the company controlled 50% of the market for PDA applications at retail and enjoyed high-profile shelf space in huge chains like Staples and CompUSA.

Obviously, that market share would be meaningless if PDAs wound up on the technology scrapheap. And signs were beginning to point in that direction. In 2003, the worldwide PDA market had dipped 4.6%, according to the Gartner Group, compared with an 18% jump for mobile voice-and-data handsets. Clearly, if Handmark was to survive, the company would have to break into the market for mobile phone applications. And it would have to do it fast.

So CEO Augie Grasis convened a series of emergency "wireless summits" to confront the problem. The company's executives gathered once a month in the United Airlines executive lounge at the Denver Airport, a point roughly equidistant from Handmark's offices in Dallas, Kansas City, and Silicon Valley. With documents, tablet PCs, and phones strewn about the overstuffed leather couches, they tried to map a way into the cell phone market.

The barriers to entry were steep. Most glaringly, Handmark had no business relationships with mobile network operators -- the guardians of the menus, or "decks," from which most mobile phone applications, like ring tones and games, are downloaded and purchased.

The company did have longstanding ties with some of the country's largest retailers, but few consumers had begun to purchase phone applications at brick-and-mortar stores. The challenge was getting consumers to alter their purchasing behavior. McKeon had spoken with several retailers and knew that they were eager to begin carrying an all-in-one software and hardware bundle geared to neophyte smart phone users. It was, McKeon said, a "dream product." But Handmark's engineers balked at the notion. Not only would McKeon's dream demand around-the-clock customer support -- an extremely costly proposition -- but the competition would be tough, from bigger, deeper-pocketed companies like Microsoft and Sony. The executives moved on to other options.

The other thing retailers wanted, McKeon said, were games consumers could play on their phones. That's what the wireless carriers wanted too. Teenagers, after all, were the group most likely to purchase mobile phone applications. Here, Handmark was on familiar turf: A full 50% of its PDA revenue came from games. Cell-phone-based games, the executives figured, could be made from recognizable brands, much like Handmark's bestsellers, which included Trivial Pursuit, Monopoly, and Tetris.

Unfortunately, Handmark immediately hit another obstacle. All of the big names in the U.S. wireless market -- Verizon, Cingular, AT&T, Sprint, and T-Mobile -- were being courted aggressively by game developers large and small. As a result, says Grasis, "the cost of licensing for games was very high." Licensers like Disney and Atari were selling the rights for their best characters and games to the highest bidders. It was a war Grasis knew he could not afford to fight. And Handmark once again found itself at square one.

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