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Back to the Drawing Board for Dell's Smartphone?

Dell smartphone

Efforts by Dell to force its way into the hot smartphone market may have hit a snag, with an industry analyst claiming its prototype device failed to please carriers -- which means the computer-maker may consider buying a mobile company to help bolster the effort.

"In terms of specifics, we hear Dell built prototypes with both Windows and Android operating systems, but the feedback was lack of differentiation versus current and upcoming products from HTC, Samsung, LG, Nokia, Motorola, etc.," wrote Shaw Wu, a research analyst at Kaufman Bros., in a report obtained by InternetNews.com. "We are also hearing the upcoming Palm Pre has not helped, generating interest from carriers as a viable competitor."

After Dell dropped some tantalizing hints about its entry into the smartphone market -- rumors lent further credence by comments last month by CEO Michael Dell -- industry watchers began speculating that a Dell-branded smartphone would be unveiled at last month's Mobile World Congress.

But a Dell smartphone was a no-show at the event. Meanwhile, Apple has been working to solidify its position in the space with a number of long-sought updates for its popular iPhone, while rival Acer has signaled its own entry into the market. At the same time, Palm's (NASDAQ: PALM) upcoming Pre smartphone is hotly anticipated and, based on early glimpses, being widely praised. And then there are a slate of other major players' new smartphones based on the Google-backed Android operating system, also expected to make waves in coming months.

That's left everyone wondering what the No. 2 PC maker has planned. And if Wu's sources are accurate, they'll be wondering for a while longer.

While a Dell spokesperson declined to comment on the report, industry analyst Rob Enderle said it sounds like the PC maker needs to go back to the drawing board.

"If you're going to enter this market, it has to be with a device that's compelling," Enderle, principal analyst for the Enderle Group, told InternetNews.com. "A device like the Palm Pre is exactly that kind of device. It needs to be something new or dramatically different like the Pre or the new Android devices. If Dell is talking about another Windows Mobile device, the market doesn't need that. There are enough in the market already."

Enderle, who has worked in the past with Dell on consumer projects like a potential, unreleased iPod competitor, said he has no direct knowledge of Dell's mobile phone plans. But from his perspective, a carrier like Verizon could still use a hot new consumer device.

However, to woo carriers, a Dell smartphone would have to compelling enough to compete against newcomers like the Pre, which is slated to ship in June, and the G1 Android phones now offered by T-Mobile --- not to mention the Apple (NASDAQ: AAPL) iPhone.

What's next?

As Dell rethinks its phone design, it may also be reconsidering its approach to the smartphone business entirely, according to Wu.

A redesigned phone "will likely involve vertical integration of some sort including software and/or services," he wrote in his report. "For this reason, we believe Dell is contemplating making acquisitions to help in this effort."

Wu declined to elaborate to InternetNews.com.

[cob:Pull_Quote]While this first-look news appears bleak, Wu said in his report that "our sources indicate that Dell remains committed to the cell phone space as it appreciates the opportunity in smartphones and longer-term cannibalization potential of PCs."

Indeed, it seems everyone in the tech sector is scrambling to cash in on the smartphone market, pegged to grow even during the recession, but hardware manufacturers facing declining sales may have more at stake if they fail to capitalize on the opportunity.

And while Wu's report may seem grim for Dell, he said he remains optimistic about the company's long-term potential for success in the smartphone market.

"At the end of the day, we believe PC vendors may have an advantage over traditional cell phone competitors as a smart phone is more PC than cell phone with all the computer functionality and voice as a commodity," Wu said.

[cob:Special_Report]If that's the case, Dell's unlikely to be the only major PC player benefiting from the trend -- especially as with rivals already shipping or near to shipping their own smartphones.

Acer, the fast-rising No. 3 PC maker, announced its first family of smartphones, called Tempo, last month at the Mobile World Congress conference in Barcelona. The Tempo family is comprised of the M900, F900, X960 and DX900 and all of them use Microsoft's Windows Mobile OS. The phones are expected to be available in the next four or five months.

Acer may also be releasing an Android smartphone later this year. Right now, insiders are following Android developments carefully, waiting to see how the T-Mobile G1, the first Android smartphone out, will fare in the market.

This buzz is being fueled by speculation that sales of smartphones using the Android platform will overtake the iPhone by 2012, as U.K.-based research firm Informa Telecoms and Media predicted in a recent report.

West Coast Bureau Chief David Needle contributed to this article.