Did HP pay too much for Palm?

4 May 2010

HP’s purchase of Palm raises as many questions as it does answers, an analyst firm has railed, arguing the Palm brand is virtually unknown outside the US and has limited relationships with operators around the world.

Last week, HP acquired Palm for US$1.2bn, indicating a potentially strong future for HP in terms of smartphones and embedding Palm’s webOS in future connected business and consumer devices.

While the news was broadly welcomed by analysts, Strand Consult has gone against the tide of opinion and has created a list of reasons the Palm acquisition might not be a good bet.

“Did they buy a donkey that they want to market as a race horse?” Strand asked.

“Much has been said and written about HP’s purchase of Palm. On the other hand, we believe that this is one purchase that actually raises more questions than answers.

“Strand Consult has been following this market for the past 15 years and we can see that many of the articles that have been written about this purchase are based on the American market viewpoint – a market which only accounts for approximately 7pc of the global mobile market. Very few people are viewing HP’s purchase from a global perspective.

“We sincerely believe that financial analysts around the world should view HP’s purchase in the light of these issues listed below. A US$1.2bn purchase is a big deal – especially when you consider what HP is getting.”

Strand said that Palm is only a brand name in the US. Outside the US, Palm is totally unknown as a phone manufacturer. It said that Palm has no distribution in the mobile world and few and limited relationships with operators around the world.

“Palm has limited mobile experience – they have been trying to enter the industry since 2002. HP also has limited experience in the mobile industry – they have been trying without success. HP has limited distribution in the mobile world and limited experience in the mobile value chain – they have tried several times but without success.”

Strand pointed to Compaq’s iPAQ device which was created by a reference design company in Seattle and manufactured by HTC, a then-unknown manufacturing firm in Taiwan. “The iPAQ was a Microsoft brainchild that they got Compaq to market and sell, because Microsoft wanted to enter the PDA market. This was the turning point for HTC – a close collaboration with Microsoft, resulting in HTC becoming the worldwide brand it is today.

“Perhaps HP has purchased an OS, but the value of an OS is rather limited in itself, the important issue is distribution of your OS and how many devices you can get your OS running on. There are a great many OSs in the mobile world – in fact there are far more smartphone OSs than most people realise.

“Take for example Apple, they can only put their OS into the phones they sell themselves – giving Apple limited distribution. Apple’s sales have grown far less than the growth of their distribution power (operator agreements).

“Both Google Android and Microsoft have to approach mobile phone manufacturers the whole time to convince them to use their OS on each new device.

“If you look at who is most successful in terms of getting their OS onto as many devices from the most manufacturers, it is actually currently Microsoft. Measured on the number of different models running their OS, Microsoft has clearly achieved better results than Google Android,” Strand claimed.

Highest smartphone market share lies with Nokia

In terms of devices that sell, Nokia are selling the most. “Nokia has a higher smartphone market share than their overall mobile phone market share and Nokia’s smartphone sales are growing significantly more than Apple’s.

“Both Nokia with 550 million phones sold and Samsung with 220 million sold phones can decide themselves which OS they want in their devices. This means that both Nokia (Symbian) and Samsung (Bada) can replace their old OS (Series 30, 40, EMP, etc.) and put Symbian and Bada in their phones. A good example of this is Nokia’s C5, which two years ago would have been a Series 40 phone for €120, but is now a Symbian phone for €120.

“In a world where volume is important, HP has not much to offer – their PC volume does not give HP any significant advantage regarding manufacturing mobile phones. There is no doubt that Palms WebOS is a good OS. But why should developers develop services for the US market alone, and where are the tools and access to different APIs to make it attractive to develop for the OS?

“The big question is whether HP has plans to take Palm’s developer support on board and how they plan to drive it forward?”

Size matters

Strand pointed out that HP is strong in the enterprise market, but do they have a size that enables them to tell their customers that they must rely on the Palm platform, rather than on Microsoft’s Windows Mobile?

“We believe that HP will inevitably have to support Microsoft WM in the Enterprise market.

“WebOS is and will remain a niche OS, and what HP is buying is a hardware brand that is known in the US. On the other hand, it appears it will cost a lot of money to further develop webOS.

“So maybe HP will use the hardware brand and then choose to go the Android and/or Microsoft way? If that is their plan, then US$1.2bn is a high price,” the consultant firm said.

By John Kennedy

Photo: The Palm Pre

John Kennedy is a journalist who served as editor of Silicon Republic for 17 years