Lenovo Eyes Struggling Palm

The pathway to using Palm and its Web OS as a gateway to the U.S. smartphone market is fraught with challenges, analysts say.

Palm Pre
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Lenovo may be considering a bid for struggling smartphone maker Palm, but it's a move that analysts say would be risky for the Chinese computer maker.

Lenovo, the fourth largest PC maker in the world, became the leading candidate to buy U.S.-based Palm after other potential Asian buyers dropped out of the bidding, Reuters news agency reported Friday. Potential suitors no longer in the running included HTC, the fifth largest smartphone maker in the world; and Huawei, the world's second largest telecoms equipment maker.

On the surface, Lenovo's purchase of Palm would be beneficial to the computer maker because it would give the company an immediate entry into the U.S. smartphone market, the largest in the world. Lenovo only has a presence today in the Chinese market, which the company reentered late last year when it bought back its phone unit from a group of investors it had sold the division to 18 months earlier.

If Lenovo used Palm as a gateway to the U.S., then it would have to be willing to invest heavily in marketing and product development, with no guarantee it could lure customers from more successful rivals, such as Apple, Research in Motion, and manufacturers of smartphones using Google's Android operating system. At the same time, Lenovo would have to continue to build market share in China.

"It may just be a little bit too much for them right now, given where they are in the mobile phone market," analyst Jack Gold of J. Gold Associates, told InformationWeek.

In addition, Lenovo would have to convince wireless carriers that Palm is still a strong brand. Verizon Wireless this month gave an indication of the value of Palm's smartphones in the market when it dropped prices to as little as $30 and offered a second phone at no charge. "It's not clear that Palm's channel (carriers) is all that enamored with Palm right now," Gold said.

Contributing to that discontent are poor sales. For the fiscal quarter ended Feb. 26, Palm reported that the number of smartphones sold plunged 29% to 408,000 units. By comparison, Apple sold 8.7 million iPhones in its most recent quarter.

One Palm asset often cited as valuable is its operating platform, WebOS. But despite strong reviews, the OS is far behind the leading platforms, including Apple's iPhone OS, RIM's BlackBerry OS and Android.

"It will be very difficult for the WebOS platform to survive," Charles Golvin, analyst for Forrester Research, said.

If Lenovo is seriously looking at Palm, then it could see value in its hardware and software engineers, who built some of the best products in the market.

"There it's a much stronger fit for Lenovo to expand beyond PCs and move into smartphones," Golvin said. "They don't really have a great deal of bench strength to target that segment."

But engineering talent alone wouldn't justify Palm's price tag, which based on its current market capitalization would be well over $1 billion.

As a pioneer in the smartphone market, Palm helped to define the segment. But despite that early lead, the company failed to hold and grow market share against competitors. While analysts are hesitant to write off the company, they agree its future is in doubt.

"They have a very tough row to hoe in front of them," Golvin said.