HP Buying Palm Makes Great Sense

Hewlett-Packard (HPQ) bought Palm (PALM) today for its webOS to compete with Apple and Android in the battle for the next dominant OS. The reaction was generally positive, and I think will become even more so as the strategic dimension of the move are understood. One commentator even gushed it would rock the smartphone world as much as the merger with Compaq did in 2001. That is a bit much, as that deal cost HP a huge amount for a commodity business (maybe the author is supporting HP’s CEO at the time, Carly Fiorini, in her bid to be a Senator.)

The key to understanding the deal is that Apple and Android have established a huge lead in ecosystem support for their devices, and really have changed the market from one of “smartphones” to one of “app-phones.” RIMM’s blackberry still has a huge following, but has fallen behind in the race for sexy devices that capture the hearts and minds of the users. Microsoft has fallen so far it has had to reboot its Windows Mobile strategy, and Nokia’s Symbian seems simply lost outside of a shrinking Nokia loyal following.

The next wave of the market is to extend these phone OSes into tablets, beginning with Apple’s iPad, and then into smart TVs. Eventually these device environments should rule a whole slate of consumer devices, and may even begin to cannibalize PCs much as PCs toppled minicomputers and have eaten deeply into the mainframe. TechCrunch has a wish list for HP, including this webPad:

Personal note: I did a forward thinking assignment for a laptop maker back in the mid-90s, and envisioned where the laptop would go. We had two directions, one of which was the portable web viewer. Voila! It is here. A webOS tablet which runs Microsoft Office apps, and can print (you cannot print from an iPad), would have a huge leg up on Apple’s iPad from the get go for business users.

HP’s options without Palm look limited. The time it would take to build its own OS and launch a competing device strategy would have doomed it from the start. The history of technology is that the race to get an “architectural lock” on developers is a sprint not a marathon. Hence HP would have been relegated to yet another Android supplier, putting it in the same commodity position that it has ended up with in PCs.

HP’s options with Palm look promising. It has the heft to push webOS into business markets, and the longevity to keep Palm developers in the fold. It can use webOS across a whole line of consumer devices. And it grabs a huge patent portfolio.

The whisper on the deal is that tablets are the real goal of the deal, not smartphones.

HP got Palm at a cheap price. It is such a scale player it needs to make this sort of bet, the sort IBM gave up on two decades ago, in order to stay in the technology game. In one fell swoop, it has devastated the strategies of a dozen other companies, including Dell, Lenovo, and a plethora of unbranded Chinese companies like HTC, Haier and ZTE.

And if it fails, it can always switch to Android.

PS: Elevation Partners was the biggest backer of Palm, a firm with Bono of U2 as a partner. VentureBeat reports that they esaped a potential debacle with a small $25M profit on a $460M investment.

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