Palm and HP: You Be the Analyst
Is HP's purchase of Palm a good deal or a bad one? How will it change the smartphone industry? The world wants to know and it's up to you to tell them. Here you'll find the issues and some analysis, but the final judgment is yours. You be the analyst.
When considering a merger/acquisition, I look at the number of things, but start with the Golden Rule of Tech: Mergers rarely accomplish what the buyer hopes in terms of opening new markets or grabbing share in existing ones. The bigger the dollars involved, the more reason to be suspect.
Thus, every merger starts from behind, and this one is no different. The bias is toward cynicism, not sweetness-and-light. History is broadly against Palm and HP.
With that in mind, here are the key issues to consider in narrowing down to whether HP/Palm is a winner or loser.
The Big Issues
In considering a specific deal, I look at the two companies involved, the products/technologies they produce, competitors, the environment in which the deal takes place, and how current and potential customers are likely to respond. This is a very long post, but only touches on these issues.
I do not spend a lot of time looking a numbers. I am aware of relative sales and share for each vendor, but have never needed hugely specific numbers to pick winners and losers. Rather, I've found that number crunching can lead to bad analysis because it loses the idea that markets are living organisms and subject to huge changes. Besides, my conclusions and those of the spreadsheet crowd are usually pretty close anyway, if arrived at differently.
Hewlett-Packard -- HP can afford the purchase and has $13 billion in the bank. The company's dark days under Carly Fiorino are behind it. CEO Mark Hurd is a smart leader with an excellent track record. He's already turned HP around, so making Palm a success should be a snap? Not hardly, but possible and within Hurd's range. But, if the deal goes sour, Hurd will still have a job.
Palm makes products that overlap with HP's iPAQ line, which have been well-received but only a moderate success. iPAQs are also based on Windows Mobile.
The arrival of Windows Phone 7 is a perfect inflection moment for HP. If Windows Mobile customers have to move to a new smartphone OS anyway, why not move iPAQ customers to webOS? With Palm's OS in its portfolio, HP will no longer be dependent on Microsoft getting smartphones right someday.
In this sense, HP was Microsoft's customer to lose--and it did. It would not surprise me to see new iPAQs running Windows Phone 7, but how many HP will actually sell remains to be seen. It might be best to make a clean break and make webOS the only smartphone line that HP offers.
Palm -- Key question: Why didn't Palm make it? It's easy to blame competition, but that was a given when the new investors dropped $325 million into the company for their turnaround attempt. The good news is that Palm largely got the products right.
On the business side, did Palm ever have enough money to compete successfully? If not--which now seems pretty clear--then HP is going to have to spend big if it wants to carve out a bigger place for itself in the smartphone market.
Palm's business management can be questioned. Execution was a problem, though it is hard to say how much was possible if things had gone really well. From outside, it is hard to tell if management screwed up or was simply attempting the impossible no matter how well plans were created an executed.
Still, Palm botched its early product launches, enabling Apple to quickly grab the spotlight, and even marketing amateurs should have seen this coming.
A question for HP: Leave both the technical management and business side in place or make changes in the business side? Overall, Palm seems able to create quality products but has been unable to sell them. Selling has become an HP strength under Hurd.
You decide what changes need to be made, probably on a sliding scale from HP really runs Palm to HP provides adult supervision, access to customers, and the money Palm needs to execute at a higher level.
There is general agreement that webOS is a good-to-great smartphone OS and Palm is able to design and manufacture good products. I will add, "that people would want if Palm had more apps, excellent enterprise support, and an excellent music store." Lacking those things, even great hardware is going to land with a thud.
Good products are not enough. Smartphones require ecosystems of applications, content, and accessories. Apple is the standard for this. Question: How well must HP/Palm, Android, or Windows Phone 7 do to compete with Apple? And which, if any, of these competitors will succeed?
If you don't believe that a big ecosystem is necessary and rewarded by customers, then you might consider to Research in Motion to be unassailable in the enterprise market.
Speaking of Research In Motion, this where everyone that wants enterprise sales has to grab market share. Actually, from both RIM and Microsoft, which has had big corporate sales in the past but whose lax smartphone strategy has created a huge opening for HP/Palm and Android.
Corporate customers are likely to see HP as a more solid partner in the smartphone space than Microsoft and, perhaps, even RIM.
Microsoft is vulnerable as its customers look to replace aging hardware. Many will never seriously consider Windows Phone 7, which may be too great a departure from current user interfaces to be a success. Or maybe not. You're the analyst and it's something to factor in.
Another factor: Can RIM move into the 21st century? To some, the BlackBerry line seems behind the times, though it remains the de facto standard for corporate smartphones. If you think new BlackBerry models will get it right, then you've placed a cap on what HP/Palm (and everyone else) can achieve in the business space.
As for Apple, the iPhone has not been a huge success with business. New enterprise-friendly features in the next-generation operating system, due this summer, may help. But, it seems clear that people who do lots of e-mail and editing on their smartphones want a keyboard.
There is no reason to believe Apple is about to release an iPhone with a physical keyboard, but Palm already has both keyboard and non-keyboard smartphones. Head-to-head, HP/Palm can be a bigger competitor with RIM for business customers than Apple is likely to ever be.
Android is still a bit of a mystery. My bet is that Android never becomes a single platform, where every handset runs every application. Google is not exercising that kind of control over the platform and hardware manufacturers show every willingness to "personalize" Android to death.
The Android applications store, though open, is not as confidence-inspiring as Apple's iron hand over the apps it allows to run on the iPhone.
In short, Android remains a bit of a mystery, which doubtless limits it acceptance and appeal. If you don't see these challenges, then while Android is unlikely to create huge problems for Apple, it could make life tough for everyone else.
In such a world, Android could top Apple on total smartphone sales, but still be "less of a platform." Android's success would be more of a challenge to HP/Palm and Microsoft, who might respond by taking on Android in the business space alone, rather than battling both Android and Apple for consumer sales.
Continued economic improvement bodes well for global smartphone sales. This is, though Americans often forget, a truly global market. Palm is not a global player, which is something HP will doubtless change.
How strong will HP's commitment to Palm be? How much money is Mark Hurd willing to invest before Palm turns the corner? It better be billions, especially if the economy remains sluggish or slides backward.
Has the smartphone market already been decided? That is possible, and probably what people will say if/when both HP/Palm and Microsoft fail to make a dent and Android grabs market share. If you believe the market is decided, then HP is throwing good money after bad.
If it's true that Apple is unassailable in the consumer space, but Android is weak, then there is still the business customers to battle for. This will be tough if RIM is really in the battle--which I wonder about--but leaves potential for everyone else to play. If RIM is on the way down (or can be pushed), then there is tremendous opportunity for growth.
We've already talked about customers in a variety of contexts. But not in terms of demand: A growing market can hide a number of sins. This really means international growth, so the success/failure of HP/Palm may be decided outside the United States.
HP has excellent customer relationships and respect in the market, which is a big win for Palm. HP brings credibility with business customers and consumers, as well as the appearance of staying power that Palm lacked. In some ways, Palm's fate was sealed early on when the Pre failed to sell match Apple in sales. After that, "how long can Palm last?" because a fair question.
Which we now have had answered.
I am staying away from offering an opinion of HP's likelihood of success or failure with Palm. I've offered a glimpse at some of the factors I've considered. You may agree or disagree with my questions, answers, and assessment. And you may be right--it's always possible--when you're the analyst.
Please share with me how you look at these issues, the factors you think I've missed, as well as your conclusions.