Hewlett-Packard Buys Palm and Focuses on webOS

Hewlett-Packard emerged as the surprise buyer for Palm, paying $1.2bn - the low end of expectations - for the Pre maker. The PC giant gains a relatively cheap shot in the arm for its smartphone strategy, some useful presence in its core enterprise market, and some technologies that could help it stake a claim in the emerging devices that sit between phones and notebooks - a vital territory in which any PC vendor must shine in order to sustain growth.

Focal Points:

• The best that can be said for Palm is that it has found a buyer, something that was looking dubious as various interested parties, nearly all from Asia, dropped out. Some of its innovations will survive in the HP line-up, even its if venerable brand disappears in time. The future of its main technology asset, the advanced though underused webOS, is uncertain though. HP says it will keep the platform and build on it, but it is only likely to invest in it, at the expense of its current favorites, Android and Windows Mobile, if it can drum up the significant developer support that Palm failed to attract.
• HP timed its purchase well, staying under the radar while takeover talk boosted Palm's price, then swooping in once HTC, Huawei and others dropped out, forcing the share price down on fears that Palm would be left stranded. It is not clear whether Lenovo, which was understood to be in serious talks, dropped out too, but it obviously was not prepared to engage in a price war, even though the Chinese PC maker is an arch-rival of HP's. Like HP, it has recently beefed up its smartphone strategy, and looked to expand this beyond the enterprise and into consumer handsets and new device formats like tablets and smartbooks.
• The fact that Lenovo did not put up a fight for Palm suggests that it does not believe its competitor has bought a game-changer in the mobile internet world. It is probably right. HP itself, although it paid a 23% premium on Palm's low Tuesday closing price, is still shelling out quite a low sum.
• The larger firm's chief strategy officer, Shane Robison, told The Financial Times that the main attraction was webOS. Some analysts said the deal would alienate HP's long term partner Microsoft, but in fact it had already indicated an Android strategy. It may back away from the Google OS now, though given the growing developer momentum behind Android, it would seem very risky for HP, such a small player in the phone world, to go out on a limb and try to establish webOS as a separate platform, however differentiated. This would take considerable resources, and the most HP could hope for would be a percentage point of additional market share in an increasingly cut throat market.
• It seems more likely that HP will use the user interface and tools surrounding webOS to enhance Android and/or Windows Phone offerings and create a strong user experience, as Dell is seeking to do with Stage, which will also span both OSs. webOS could also be very valuable to HP in its R&D for the emerging hybrid devices segment - categories like cloudbooks and smartbooks will be geared to cloud services, streaming content and the browser-as-OS, and in these respects, webOS is the most advanced platform in the mobile market (though soon to be leapfrogged by MeeGo and Chrome OS).
• For now, though, HP claims it will put webOS at the heart of its plans to become a serious smartphone player. This is a tough call, given the power of Nokia, RIM and Apple, and the stepped-up activities of Samsung, LG and even Dell. HP believes its advantage lies in its strong customer relationships with many top telcos, and says that, if it creates sufficiently differentiated phones and mobile internet devices, it will be able to persuade the large carriers to support them aggressively - something Palm failed to do. Although it did secure large operator deals for the Pre and Pixi, only Sprint positioned them as top tier handsets, while at other partners such as O2, they were under-marketed compared to the iPhone and other devices.
• Todd Bradley, head of HP's personal systems group and himself a former Palm CEO, pledged that the new owner would leverage its superior resources to help webOS fulfil its potential, increasing R&D spend and putting the OS into a far wider range of products, including tablets. For the short term, HP would also seek broader distribution for the Pre Plus and Pixi Plus and increase their sales and R&D budgets.
• The scale of HP will certainly be important, giving potential developers a more attractive target than just two handsets with mediocre sales. But there are clear flaws in the plan. HP's track record in smartphones is far poorer than Palm's, and it also has no proven record in supporting its own software platforms on client devices. HP does have strong hardware design experience, as well as economies of scale and manufacturing discipline, and could come up with some genuinely attractive products for the mobile web market - but the question remains whether it needs to split the developer market, or would do better creating an excellent piece of hardware, and then running Android, MeeGo or Chrome OS on it. Two of these are unproven too, but the power of Intel/Nokia and Google, respectively, almost guarantees developer interest.

HP's move completes a strange circle of history for Palm, reuniting it with 3Com, which HP bought for $2.7bn earlier this month. 3Com acquired Palm and its then-owner US Robotics in 1997, though Palm was then spun off in 2000. After that, it made the fatal decision to spin off its software arm as a separate unit, Palmsource, subsequently bought by Access Technology - this was the root of its downfall. Although Palm retained a license for the OS, it had lost its crown jewels and meandered through Windows and other strategies before trying to repeat the magic effect of Palm OS with another platform webOS. This came too late, and we suspect HP will soon realize that too.