Here I was, getting back from checking out downtown Boston, still adjusting to the jet-lag and thinking of taking a nap. Instead I decide to check my feeds and Twitter and I read an HP press release published 10 minutes earlier about its Palm acquisition. I froze; grabbed my brain from the wall it was stuck on after my head exploded; then proceeded to really think about what had just happened; and then waited for the conference call to begin. Of course, it’s way too early to determine what the end result of this acquisition is going to be; but, it’s never too early to speculate. (In the interest of full disclosure, I currnelty own shares of Palm stock)
The Good
HP’s Scale
I know it sounds like HP is throwing the word “scale” around a lot, and it may sound like more PR buzz than actual content, but scale really is HP’s strength in this deal. Scale is what HP brought to the table for VooDoo (more on that later) and 3Com. As my TDL colleague Chris Oldroyd said to me, “at least everyone has heard of HP outside the US, in the UK no one knows Palm”. HP has scale in a couple of ways. First, they have global reach — it is a global brand while Palm is very much a national brand. More importantly, HP has scale of manufacturing and delivery. They can leverage their supply chains to deliver at a global scale. This is something that Palm was sorely lacking. Just take a look at Palm’s release of the Palm to the European market. It took over six months for a global GSM device to be released. The Palm Pixi never saw an overseas release and the Palm Pre Plus and Pixi Plus have been extremely slow to market as well. HP on the other hand is able to manufacture and release a single device to multiple markets at once, with little to no delay in between. If HP applies this scale to Palm’s devices, it could catapult WebOS to the front of the Smartphone platform race. Take a look at it this way: as popular as the iPhone is, it’s global market share is but a mere spec on the map when it’s compared to Nokia’s market share. What does Nokia have that Apple doesn’t? You guessed it, scale. Even though Nokia’s OS seems dated, Nokia is able to leverage it’s large manufacturing, supply, and delivery chains to flood the full spectrum of the market with a multitude of devices targeting various demographics and market segments. Apple on the other hand has a single device that it is trying to sell to all segments. So yes, scale is important.
Diverse Product Portfolio & WebOS’s Scalability
Although HP’s diverse product line goes along with its scale, it merits its own mention for a couple of reasons. HP has tried its hand at selling mobile devices before (and still does) by leaning on the soon to be defunct Windows Mobile platform; yet it never achieved the success of other CE manufactures like Samsung or LG. The fact that HP had to license Windows Mobile, really limited its ability to expand from Smartphones to other devices. We have already heard and seen WebOS’s scalability. No, not the type of scale HP has as a company, rather WebOS’s ability to easily port itself to different devices and different screen sizes. The Pixi is a good example of this in which Palm had to do virtually nothing to the OS to have it work on the smaller screen. Ultimately, this means that we could see WebOS span across HP’s existing product line, such as the forthcoming HP Slate. In fact, the presentation shown during the conference call made it very clear that a tablet form factor running WebOS is definitely a product we will see. Don’t be surprised if WebOS is also used as a quickboot secondary OS on notebooks, desktops, or even as a primary OS on netbooks. HP could go as far as integrating WebOS on some of their feature rich printers or as an embedded OS on monitors. It doesn’t take long to see how HP’s line of products could benefit from what is currently a dedicated Smartphone OS.
HP’s Financial Resources
It goes without saying that Palm had money issues. It would not have aligned itself with HP if it had enough cash to continue to invest in both software and hardware engineering. It was because of Palm’s lack of financial resources that it had to pick and choose what it could and could not do. It’s also the reason why it had to partner with Sprint as a launch partner which seemed to be the first in a long stack of dominoes that led to today. Well money is definitely not an issue with HP. As of press time, HP’s market cap sat at a healthy $125.9 billion (yes, that’s billion with ‘b’). To paint a better picture, HP’s revenue came in at $114.6bn with a net income of $7.66bn. Compare that to Palm (PALM | Revenue: $437mm, Net Income: -$853.8mm), Apple (AAPL | Revenue: $42.05bn, Net Income: $7.477bn) and Research in Motion (RIM | Revenue: $14.34bn, Net Income: $2.265bn). The fact that the acquisition will be an all cash transaction ($5.70/share, approx. $1.2bn) is just another indicator that HP is not hurting for cash. So what does that matter? Well its simple really; more cash equals more resources which equals more research and development of WebOS. HP made it very clear that it intends to “double down” on WebOS, and give it the money injection it needs. With HP’s checkbook, WebOS no longer has the limitations it had on it before. Rather than deciding on whether it should spend on creating new hardware or adding new features to the software, it can now do both.
Palm’s Experience & IP
One of the reasons many (myself included) thought that HTC would scoop up palm was because of Palm’s massive patent portfolio. Now, HP gets to reap the benefits of that patent portfolio. More than patents though, HP actually gets Palm’s IP. Actual technology that HP could also infuse across different products. On top of that, HP will be retaining a lot of Palm’s key players, including Rubinstein. These key players have years of experience behind them, including work on some very significant devices. Keeping these key people post-acquisition gives WebOS a bright future. After all, what’s the point of having a great OS if you don’t know how it works?
Key Opportunities
There are some key markets that HP can take advantage of. Many large enterprises still rely heavily on Blackberry devices and BES. The iPhone has made some inroads there, but RIM is very much a dominant force in that area. Palm was at one point that dominant force, and at this point in time, seems like the only viable contender in that space. Both Android and iPhone are very consumer oriented, and Windows Phone 7 looks like it will be as well. Most Android devices rely on touch input which does not always lend itself to someone who needs to quickly type out multiple e-mails throughout the day. WebOS is the only OS that offer true multi-tasking — a feature that would no doubt be appreciated by enterprise users. It also offers hardware form-factors that are perfectly suited for the heavy content-creator and it all comes together with a fluid and up to date OS. Combine that with HP’s established enterprise relationships with many Fortune 500 companies and WebOS can be very well positioned to take over RIM’s corporate throne. One thing that has affected RIM is Blackberry’s association with enterprise users rather than the every day consumer. WebOS on the other hand is “pretty” enough to be able to appeal to the mainstream consumer as well. The truth is that enterprise users are only business users during business hours. After business hours, these users want something that they can use in their everyday life. WebOS can deliver that while Blackberry has not been able to. That duality is an opportunity HP can take advantage of. It offers the power and flexibility demanded by an enterprise, and the fluidity and simplicity required by the mainstream consumer.
The Bad
Bad Voodoo
Like any large corporation, HP has acquired its share of companies. 3Com being one of its most recent, but also Voodoo in 2006. Voodoo especially rings a bell in this case simply because of what was said, and what actually happened. For those that are not familiar with Voodoo, it was a boutique computer seller focused on high-end gaming rigs. It was not uncommon for a PC to go for upwards of $10,000. Voodoo was known for its quality, customer service, and innovation. What seemed like a reaction to Dell’s acquisition of Alienware, a competitor to Voodoo, HP soon acquired Voodoo. In the HP’s press release, it was stated that “HP plans to maintain VoodooPC’s current distribution model and brand name along with its marketing, sales, support, and development operations.” Additionally, VoodooPC’s statement added “The benefits of this acquisition to VoodooPC are immense, not least of which is having a direct conduit to HP’s unparalleled innovation and international presence.” Sound familiar? Today, the Voodoo brand is nothing more but a memory to fans of the boutique PC maker, most of the Calgary staff was laid off or relocated to Texas, and loyal VoodooPC customers quickly saw the change in customer service. HP deliver two co-branded desktops (the HP Blackbird002 and Firebird) and then simply absorbed the IP. There are still mentions of Voodoo innovation affecting other HP products, but nothing even comes close to resembling a Voodoo PC. This history does not bode well for Palm. To be fair, Palm and Voodoo are two very different companies, focusing on very different markets. Nonetheless, the fact that the same message was delivered at the time of Voodoo’s acquisition has to at least raise some flags to be watched. On a good note, VoodooPC’s then CEO Rahul Sood is still with HP as Chief Technologist of HP’s Personal Systems Group; so Rubinstein sticking around shouldn’t be an issue. In fact, Sood has already published his own thoughts on the acquisition which were positive of course. I proceeded to ask if he thought Palm would be absorbed in the same manner Voodoo was. I have not received a response as of press time.
Goodbye Palm
As mentioned previously, Voodoo’s brand is long gone. Although Todd Bradley stated that HP intends to run Palm as a unit under HP, it does not seem like HP intends to keep the Palm brand around. Of course HP has enough exposure that it does not have to rely on Palm’s brand, but Palm is a brand synonymous with mobile devices, at least in the US. Keeping the brand around in some form or fashion would be good, but don’t expect it to happen. Admittedly, part of it has to do with the fact that it’s just sad to see Palm go. Whatever the case, the Palm brand is likely only temporary at this point, so bid your farewell now.
Execution
As mentioned before, HP has tried its hand at selling mobile devices before, yet it has mostly gone unnoticed. Acquiring an amazing OS does not make it an automatic success. HP has to be able to execute first. The HP brand is known across the globe — as a computer manufacturer. HP has to convince the consumer that it can be a Smartphone maker as well. That very much ties into marketing, but it also ties into its scale. HP’s scale is worth nothing if it decides to keep WebOS focused on the US market. It can’t only say that it’s going to inject money into WebOS, it has to do it. It can’t only say that it’s going to leverage WebOS on other products, it has to do it. And it doesn’t just have to do it, HP has to do it right.
Final Thoughts
Ultimately, I think this is good for Palm. Palm has attempted to do what no other company has attempted; admit it was in trouble and reboot itself. It really innovated and created a platform like no other, which was difficult to do given that Apple had already set some high expectation and standards. Unfortunately, it’s low resources did not allow it to take advantage of that platform which is why it ended up in the situation it is in now. HP understands the huge market opportunity in the mobile space and they seem to “get” WebOS. If they deliver on their promise to stand behind WebOS, and infuse it into products outside of just Smartphones, WebOS will become the new Android. WebOS employees (along with WebOS fans) deserve the opportunity to see the product they worked hard on, flourish. Hopefully, two innovative companies can show the world why WebOS deserves the top spot.
Sources: