Is the Palm Pre suffering from high return rates?

Palm is estimated to have sold 300,000 of the new smartphones in June

The Palm Pre might be subject to excessively high return rates, according to an equities market researcher. But then again it might not.

Slideshow: How the Palm Pre and Apple iPhone stack up

Kevin Dede, an analyst with Jesup & Lamont, said in a research note issued Monday that Palm's soaring stock price was overvalued, given that returns of its recently released innovative smartphone seemed high. A "great many returns" were sparked by problems with the slideout keyboard and dead pixels on the touchscreen, according to Dede. Users posting to various Palm-related forums also report cracked screens.

Dede's report was detailed in a story by John Paczkowski, managing editor for the Wall Street Journal's All Things Digital site.

But a closer reading of Dede's research raises serious doubts about its validity, as a number of bloggers and analysts have noted.

Dede based his conclusions about the possibly high number of returns on two sources. One was his impromptu survey of a trio of local retail outlets where the Palm Pre is sold. Based on discussions with clerks, Dede concluded that one in three Palm Pres were being returned. The second was a June survey of users on the Pre Central Web site. They were asked "How many times have you exchanged your Pre?" About 40% of those responding, Dede noted, said they had returned their Pre at least once.

Wired's Priya Ganapati polled a range of non-equities analysts to assess Dede's methodology. They were not impressed.

Packzkowski himself, "to be fair" noted this evidence is "anecdotal at best." But he also cites "quite a few complaints" at Palm's own forum and at the SprintUsers site. "So clearly, something's going on here."

"Something" covers a multitude of assumptions. The main issue is the assertion that anecdotal information accurately describes whatever is going on in this case. Yet there's no publicly released data on the actual return rate for the Pre - the percentage of the total sold that have been returned, including being returned more than once. There also doesn't seem to be any comparative data, both for Palm's other smartphone products, and for rivals like the iPhone or the BlackBerry Storm.

But one can compare anecdotal stories about these products, like this one a year ago from ABC News, which reported Apple's terse "no comment" to iPhone user complaints "about widely reported dropped calls, slowness in accessing the Web and lack of access to AT&T's 3G network," a litany of complaints that recently had risen to a "fever pitch."

RIM's BlackBerry Storm fared somewhat better, according to the Wall Street Journal, which described only a "bit of a bumpy start," though one user wanted to "throw it in the ocean due to my frustration with its overall usability."

Palm provided Network World the same formal statement it has provided everyone else: "We think the Palm Pre is the best product we've ever shipped. While we haven't seen anything out of the ordinary we will continue to closely monitor both Palm and Sprint customer service channels."

In a June 30 post, PreCentral's Dieter Bohn wrote: "At this stage, though, it does appear that we may be looking at a rather large set of Pre phones with poor build quality, but as-yet it's unclear if the issues are related to a particular run or a problem with the overall design and materials."

But even so, he's unconvinced as yet that the Pre's return rates are higher than what-ever-normal-is. A new poll on his blog asks "Have you returned or exchanged your Pre?" As of this writing, 60% of nearly 2,800 respondents say "nope," 17% say yes, and 9% say "more than once, for a total return/exchange of 26% of those responding to the survey.

Palm is estimated to have sold 300,000 of the new smartphones in June, on average about 10,000 units per day. If the PreCentral percentage represented an actual return rate (and if you assume returns and exchanges are the same thing), Sprint, Radio Shack, and Best Buy would be processing on average an additional 2,500 returned or exchanged phones nearly every day.

Palm's stock price, which is what Jesup & Lamont's Dede was concerned about, has risen from $3.30 per share on January 6 to a July 22 close of $14.37, down somewhat from its June peak of $16.58.

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John Cox

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