Palm has plans to halt production of the Pre and Pixi models due to excess inventory. It is no secret that sales have not met expectations, and since they were probably producing at or near expected levels, their inventory has grown past levels necessary to service the customer.You may have heard this story before. Back in February there were reports that Palm had halted production then. Over the Air blogger Eric Zeman reported that Palm claimed this was just a temporary shutdown due to Chinese New Year where all production in China halts for just over a week.

Now American Banking News says in their March 20th report that Palm plans to halt production. I cannot find the news from Palm, but it may be that their site hasn't been updated over the weekend. Palm's stock did fall nearly 30% on Friday to $4 per share though, so there may be truth to it.

According to a Morgan Stanley Analyst, Palm has way too much inventory on hand given current sales levels. Palm sold 408,000 phones to consumers yet shipped 960,000 to partners. That is a lot of inventory sitting on store shelves and domestic warehouses. The total number of unsold devices is estimated at 1.15 million. If Palm could sell 408,000 phones per quarter, they would have almost nine months of inventory before they had to turn the production machines back on.

The article compares this to Android which sells about 5.5 million phones per quarter and the iPhone at 7.5 million phones in the same time period. On average, Android and the iPhone each sell more in one week than Palm does in a quarter.

If these figures are accurate, this puts Palm in a particularly bad situation. First of all, having nearly 1.2 million phones in inventory is a huge drain on cash resources. Second, I expect sales for each quarter to drop from the recent level of 408,000 units as it generally does for any phone. Enthusiasm wears off and early adopters already have it. The only people really buying it now are those that are waiting on contracts to expire. Third, even if Palm gets T-Mobile or AT&T on board as distributors, that likely won't help the inventory situation much. The lion's share of phones in inventory would be for Sprint and Verizon, so they are CDMA based. AT&T and T-Mobile need GSM based phones, so that is all new production. Fourth, what Palm really needs to do to spur sales is come out with an updated OS, updated hardware or both to reinvigorate interest in the device. An updated OS, as in 2.0, would really help, but we've heard no rumors of such, so it likely isn't on the short term horizon. Updated hardware would spur interest, but that will only exacerbate the inventory problem of existing devices.

Palm's only real course of action is to deeply discount the devices, to the point where they give them away to the carriers at cost. They won't make a profit on them, but they will at least convert them to cash. They could even sell at a slight loss and hope to make it up on sales of accessories and apps sold through Palm's application store.

No matter how you slice it, this news isn't good for Palm or WebOS fan.

UPDATE: Palm has contacted me to refute the article by American Banking News. Palm has made no such announcement. When asked to verify the inventory figures in the article, Palm declined to comment.