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HP buys Palm — who cares?

April 29, 2010

HP’s deal to buy Palm underlines the keenness of PC vendors to jump into the booming smartphone game, but will likely have very little impact on the smartphone market. HP has agreed to pay $1.2 billion for loss-making Palm, best known in recent years as the investment target of U2 lead singer Bono. The firm only sold 2.4 million smartphones in the last 12-month period, giving it just over 1 percent of the market.

In the last few years all top PC vendors — including Acer, Lenovo and Dell — have rushed to the surging smartphone market hoping to boost profits. So far only Apple has succeeded, and it has taken over two years for it to build up global phone distribution.

Top smartphone vendors Nokia, RIM and Apple boast much higher profit margins than PC vendors. HP’s gross margin for its most recent quarter was 22.8 percent, just half Research in Motion’s 45.7 percent margin, while Apple’s was 41.7 percent.

Helped by new features and cheaper prices the smartphone market grew through the recession, and is expected to jump a further 46 percent this year, according to researcher Gartner.

Analysts said the HP-Palm deal will likely have little impact on the global smartphone market any time soon, with vendors strong in the United States set to feel some pressure. “Does this change anything in the short term? I don’t think so,” said Carolina Milanesi from research firm Gartner. Ben Wood, research director at CCS Insight, agreed. “I don’t think big phone manufacturers will be losing any sleep over this. We’re pretty sure they all did due diligence on Palm and decided they did not need the assets,” he said.

Analysis said the deal was set to worry HP’s closest rivals — Dell, Toshiba, Lenovo and others — who all aim to have a stake in the 1.2-billion-unit mobile phone market, especially with demand for handsets with PC-like features growing.

Palm’s crown jewel webOs platform — which has failed to impress the buying public — will controversially give HP an edge over rivals using software from Google or Microsoft. “They are more in control of their own fate,” said Gartner’s Milanesi. Own software gives HP the opportunity to differentiate from rivals and potentially get better margins.

HP’s production and sales network are crucial for Palm, which has been too niche a vendor against much larger rivals in the industry, where scale is crucial in driving down costs. Palm last reported an annual profit for the fiscal year ending May 2007, and only 408,000 Palm phones were sold to consumers in the February quarter. This compares to Nokia’s quarterly volumes of around 20 million smartphones, with RIM and Apple selling around 10 million smartphones.

Comments
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Plenty of people and organizations care.

Palm OS started the smartphone segment. They now have something they’ve never had before – enough cash and a strategic context that gives them a new clarity of meaning.

Part of the success for Apple and RIM is in owning both the hardware and software, so that the user experience is stable and reliable. HP can now do that, having acquired what was the best OS available, and arguably the best OS out there.

webOS’s lackluster sales are no more an indication of quality and technological merit as VHS winning out over Beta. We all know Palm’s corporate and marketing savvy were both sorely lacking.

HP is a solid brand, a solid company, with respected technological credibility. They have a global perspective, and a number of outlets for the value of webOS, from smartphones to tablets. Each space needs competition:

- the enterprise space has been left to RIM since…Palm fell asleep at the wheel.
- the tablet space can’t be dominated by Apple because PC people want an alternative
- HP had Slate but Windows is the wrong OS for it. Mating webOS to Slate immediately makes Slate a viable alternative.

If the smartphone industry alone is potentially a $1.2 billion market, and an HP device with webOS functionality can garner just 5%, that’d be worth $5 billion from a $1.2 billion investment. HP was once a player in the PDA space; the iPaq it bought from Compaq was respected although quickly became stodgy running Windows. But the hardware was not overly criticized, so HP can do it. Their desktops and laptops have their fans, they can build machines. And this speaks nothing of their server technologies… HP generates $10 billion in operating income – they’ve got stability, and a global, long term view, and they can see webOS fitting into it.

The biggest smartphone seller is RIM, which is entrenched in the work environment, and that’s pretty much all RIM does. If HP/webOS can take a significant bite out of that (just as RIM set out to dethrone Palm), then HP/webOS can grow incredibly without ever having to take a swing at iPhone.

And, when it does make a phone that’s geared more for entertainment than work, the webOS is a gorgeous OS with all the capabilities of iPhone and more.

There’s plenty to care about.

Posted by NonTechieTalk | Report as abusive
 

Correction – I wrote “if the smartphone industry alone is potentially a $1.2 billion market”…

Oops, I meant, if the market is potentially $100 billion, then just 5% would amount to $5 billion, which is a return on the investment.

Sorry for any confusion.

Posted by NonTechieTalk | Report as abusive
 

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