Analysis Of HP-Palm Acquisition - InformationWeek

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Eric Ogren
Eric Ogren

Analysis Of HP-Palm Acquisition

HP turned the smartphone space on its head Wednesday with its surprise purchase of Palm. At first blush, the deal would appear to help both companies, but it is far from a sure bet to save Palm's line of webOS devices.

HP turned the smartphone space on its head Wednesday with its surprise purchase of Palm. At first blush, the deal would appear to help both companies, but it is far from a sure bet to save Palm's line of webOS devices.This news is the result of a large number of bad decisions and miscalculations on both HP and Palm's parts. Before today, HP had no legitimate play in the vital smartphone space, and Palm's good software was dying a slow death in bad hardware. Both companies needed a fix, and HP's $1.2 billion acquisition of Palm looks to be the salvation each firm so desperately needs.

Let's spin the clock back a few years to gain some perspective, starting with Palm.

Palm defined the smartphone with its Treo line of handhelds. The Treos married the PDA form factor with a cell phone and birthed a new device segment that is now responsible for hundreds of millions of units sold per year. Palm used its own operating system, Palm OS, which was an evolution of its Palm Pilot OS. With the Treo 600 and later Treo 650, Palm suddenly had serious clout and sold its devices by the boatload. It even had a good developer story, and plenty of applications for users to buy.

Then some interesting things happened. RIM introduced its first BlackBerry devices and Microsoft created "Pocket PC Phone Edition." With these devices, RIM and Microsoft officially became much tougher competitors with Palm. Based on the success of its mobile email system, RIM grew quickly. Microsoft did too, with its strong enterprise base. This all added up to a healthy and competitive smartphone market.

The problem is, Palm stalled in developing its base operating system and its hardware. Palm, for one reason or another, decided to stick with its Treo line of devices, despite the fact that the competition was fielding more attractive hardware with more advanced capabilities. Palm eventually went so far as to license Windows Mobile from Microsoft, because its own software -- good though it was -- just wasn't strong enough for business users. Then the iPhone was announced. Then Android. While those devices (and their operating systems) broke new ground, Palm made only the most evolutionary upgrades to its line of devices. It also made a bunch of silly moves to separate its hardware and software businesses.

Palm was in trouble. Its sales were dwindling, and with no future for Palm OS, it had to make a drastic move. Enter Jon Rubinstein. Palm stole its now-CEO from Apple, where Rubinstein headed up development of the famous iPod.

Rubinstein began work on a brand new system that was different from the ground up. Taking advantage of all that the web and wireless networks have to offer, Palm announced webOS in January 2009. The OS looked so strong, Palm's outlook suddenly seamed bright again. The problem? Palm wrapped webOS in the Palm Pre, a device of middling design and build quality. It followed the Pre with the Pixi, another device of middling design and build quality. To make matters worse, it sod the devices solely through Sprint (which has its own problems).

The list of shoulda-coulda-wouldas goes something like this: Palm should have launched with every U.S. and foreign carrier possible. It should have moved faster to bring better devices to market. It should have aimed for the high-end instead of fielding $99 devices that -- on a spec level -- barely compete with feature phones.

The result? Palm isn't selling enough phones, it isn't making enough money, it needs to be propped up by some bigger, stronger entity with some cash to burn.

Enter HP, the supposed White Knight.

A few words on HP's history. HP made some really, really solid Pocket PC-based PDAs. In the early 00s, it was churning out solid hardware that was appealing and business friendly. They were expensive, and didn't have cellular radios, but they were good enterprise devices at the time.

But smartphones, as we know, pretty much killed the PDA market off entirely. HP's acquisition-merger with Compaq yielded some interesting fruit that unfortunately fell to the ground and rotted. HP has pushed out Windows Mobile-based smartphones under the iPAQ brand over the course of the last few years, but they've been mediocre at best. Not only were most of the unattractive handsets, they were not designed well and cost a lot of money. HP also made the mistake of making devices that would only work on AT&T's (then Cingular's) network.

HP has continued to make iPAQ smartphones, but I couldn't tell you who on earth is buying them. They're not bad, but they're not great either. Lacking any sort of carrier distribution, however, pretty much means they are DOA.

HP's story? It know smartphones are important, but it hasn't been able to execute. Its iPAQ's stink, and HP knows it can't sit back and cede this entire market to Apple, RIM, Microsoft, Google and others.

So, it only makes sense that HP would do the right thing for both itself and Palm and buy up the listing smartphone maker, right? HP gets a smartphone strategy with carrier deals and Palm gets more money to back it up. Sounds like a win-win. But is it?

Based on statements made by both Palm and HP, they think this is the answer. HP said quite clearly that it intends to invest in Palm's webOS and is already considering bring the platform to other form factors. Palm's CEO gets to stay the helm of the product he's built, and he's very excited about the future of Palm's products. But there are a few problems.

First: Palm's developer story doesn't come remotely close to that of the competition. We all know the numbers here. Apple's iPhone Apps Store has some 150,000+ apps, Google's Android Market has around 50,000, RIM's Apps World has 6,500. Palm's has a meager 2,000 or so. Apple and Google are already so far ahead of the others, it's possible the other platforms will never catch up. HP's buy-out of Palm does not improve the developer story at all. Without developers who are committed to writing apps, webOS can't have a future -- or at least can't have a future that is as full and rich as its competitors.

Second: Integrating the firm's is going to take time. There's no way the combined companies are going to be able to do anything to speed up the current device line-up. Palm still needs to sell phones. It has to get better hardware to market ASAP if it is going to do that. Seeing that Palm has really only created two new phones in the last 18+ months, I am not hopeful that it has something hiding up its sleeve. There's going to be a new iPhone by summer. The new BlackBerry OS will be available by September. Microsoft will introduce the new version of its mobile platform by November. Palm needs to be able to head these off and convince buyers that webOS is the way to go. It's not going to do that without better hardware. If Palm had good hardware in the pipeline, it wouldn't have sought out a sale so soon.

Third: Both firms have a history of making bad decisions and bad hardware. Two wrongs don't make a right. Just because HP will back Palm up doesn't mean that Palm's existing pipeline is any better than what we've already seen from either company. Whatever device happens to be the first to come to market that was developed jointly under both firms after the acquisition needs to be a smash hit on every level. Every feature will need to be class-leading from the get-go. I am not convinced they can do this.

Fourth: The competition is fierce and unrelenting. Killer new smartphones aren't being released once per quarter or every six months by Apple, RIM, Google and others, they're being announced nearly every week. Speed is a serious and real issue here. The competition is already fielding devices with 8- and 12-megapixel cameras. The Palm Pre has a 3-megapixel shooter, the Pixi a 2. They need to get new devices to market ASAP to head off the existing threats.

In the end, this deal does at least one thing: it gives Palm time. With HP's resources, it won't die a quick death and will have at least a fighting chance instead. But Palm needs to go from a featherweight to a heavyweight. It needs to bulk up and win a few rounds, or its going down for the count.

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