Conventional wisdom had IBM buying Sun (coverage), so of course Oracle ended up as the actual buyer (coverage). Speaking of Oracle, you might recall that they were supposed to acquire JBoss (coverage). Actual purchaser? Red Hat (coverage).
Which is why I was surprised that I was surprised that Palm, first headed to HTC and subsequently Lenovo, was snapped up by HP on Wednesday. It’s never the rumored acquirer, it’s always someone else.
As Joel West pointed out, Palm had lost 73% of its market cap since October. Which meant nothing to the industry; discussion of the implications exploded Wednesday. The Wall Street Journal’s Michael Corkery put it this way:
For a relatively small deal, Hewlett-Packard’s $1.2 billion acquisition of Palm is certainly getting a lot of attention.
No fewer than 34 Wall Street analysts weighed in on the deal this morning, and the tech bloggers buzzed with instant analysis–many predicting doom for HP’s Palm experiment.
Quantitatively, “Acquire Palm” and webOS were trending topics on Twitter, at least in Boston, well into Thursday. Ditto on Wikipedia.
Why? There are many reasons, among them affection for the brand, appreciation for the elegance of webOS and a belief that this benefits the open web. But really this announcement is about one thing: mobile is the new desktop.
People have been saying that for years, of course. Here’s a quote from 2008, another from 2009, and a nice post from February of this year. The clearest evidence that these assertions are correct, however, arrived yesterday afternoon in the form of the $1.2B acquisition of Palm.
To explore why, let’s turn to the Q&A.
Q: Before we begin, anything to disclose?
A: Not too too much here. Microsoft and Dell are RedMonk customers. Apple, Google, HP, HTC, and Lenovo, meanwhile, are not RedMonk customers. Palm is not a RedMonk customer, but we know Ben and Dion very well. I think that covers it.
Q: Ok, first up: can you refresh us on what was announced yesterday, for those who missed it?
A: Sure. HP is buying Palm for $1.2B. Here’s the press release from HP in case you’re interested.
Q: So the question on everyone’s mind: Why Palm? Why now?
A: That’s actually two questions on everyone’s minds. Let’s take the second one first. Setting aside for a moment the specific merits of Palm itself, why would you invest in this space, now? Probably because it’s the space poised for growth. It really is the new desktop. Think about it: over the past few years, Acer, Dell, HP, Lenovo et al have been fighting it out in an increasingly saturated, low margin business. Why, for example, did IBM sell that business to Lenovo? Ask five people from there, and they’ll all tell you the same thing: it wasn’t profitable enough.
Now along comes Apple, who essentially puts a computer in everyone’s hand, with the iPhone. Unlike an average PC, these computers are objects of lust. Objects of lust that can be more easily lost, stolen or broken because they leave the home. Objects of lust that will be on display in public, and thus become status symbols. Objects of lust that are far more likely to be upgraded regularly than your average PC. Objects of lust that are sold on a one per consumer basis, rather than getting one for the household and splitting it. Objects of lust that let consumers do things they’ve never done before, every day, multiple times per day. The real question is, as a hardware manufacturer, why would you not be interested in the non-PC market? And the answer is of course you’d be interested. Seriously, materially interested.
Q: But why now?
A: Because for all of the penetration of the iPhone and Android class devices, this market is just getting started. Look at any hardware vendor’s roadmap and you’re likely to see not only a smartphone play, but all manner of MID/tablet/smartbook devices as well – largely ARM driven. Because that’s a compelling market. The hardware, of course, is only one part of the equation. And, arguably, not the hardest part.
Q: Ok, why Palm?
A: Let’s answer first the reason they’re not buying Palm: hardware. Palm’s strength, at least in the current market, is the software, not the hardware. The two big weaknesses they had were the carrier relationship – Sprint was a poor choice – and the actual handsets. Ask around. Palm’s current hardware is adequate. Reviews have been fairly mixed, and frustration with the speed of the hardware has led to overclocking of the phone itself: hardly a validation of the performance of the device. So HP’s not likely to be buying the firm for the hardware.
Q: What are they buying the company for, then?
A: Three things: webOS, the Palm brand, and the patent portfolio.
Q: In that order?
A: webOS is the focus, both according to conventional wisdom and by HP’s public facing rhetoric: “our intent is to double-down on WebOS.” As for the other assets, I’d probably go patents second, brand third. Palm is, in spite of its recent difficulties, a popular, visible and mostly fondly remembered brand. Which will help in an increasingly saturated device market.
The patent portfolio, on the other hand, could be crucial. It’s not even impossible that the patents are more attractive to HP than webOS.
Q: Why are the patents so important?
A: The patent system as it pertains to software, at present, is a mess (coverage). Mobile, far from being an exception here, typifies the problems, as Mike Elgan documents. Consider HTC. First sued by Apple for the violation of 20 patents, many of which are actually implemented by Google’s Android operating system, they thus feel compelled to enter a cross-licensing agreement with Microsoft. Whose patents cover what? And are they valid? Who’s actually infringing? Maybe The Shadow knows, but nobody else does. Hence the problem with the system, and the value of the patents.
Q: How does Palm help here?
A: Palm, as might be expected, has accumulated over the course of its existence a number of patents related to the mobile and handheld space. How valuable is this IP? The argument was made a few weeks back that the value of Palm’s IP alone was worth $8-$9 per share (well over the $5 and change paid). The market didn’t share this opinion, of course, but the value of the patent portfolio should not be understated. It’s a big piece, and one of the more attractive assets that Palm has. By owning Palm, or so the theory goes, HP is insulated from the kind of litigation that HTC has faced: Apple might be reluctant to directly pick on a firm with its own relatively extensive IP portfolio in the mobile space for fear of the inevitable countersuit. No cross-licensing from Microsoft necessary.
Q: And what about webOS?
A: webOS is a really nice piece of work, but it may be even more valuable in context.
Q: How so?
A: Consider the mobile device OS – meaning phones and tablets, etc – landscape at the present time. The players, apart from webOS, are: Android, Apple’s iPhone/iPad OS, MeeGo, RIM, Symbian, Windows Phone 7, and roll-your-own. Chrome OS will eventually be relevant as a subset, but is probably not versatile enough to play all the way down market to the phone. Ticking through issues with the choices:
- Android: little opportunity for differentiation, means that you’re putting your faith in Google whose OS story is conflicted by Chrome.
- Apple: Apple doesn’t license their OS out, and even if they did, HP’s not likely to go that route again after what happened with their aborted iPod partnership.
- MeeGo: the Linux based offering has some very interesting technologies, but a fragmented developer story and questions about who’s running the show raise red flags (coverage).
- RIM: great platform for email and for business. Substantially less great for consumer devices.
- Symbian: the pro is that there are lots and lots of Symbian devices; the con is that few like to use them; more, the developer community has little interest in this route.
- Windows Phone 7: Microsoft’s reboot of their mobile story is interesting, but like Android, offers little opportunity for differentiation and requires trust in Microsoft’s development path, which in mobile is a questionable proposition.
- Roll your own: the question every vendor has to ask themselves here is: are we competent enough to design an OS from scratch that will compete with Apple? Judging by market traction for Android, most vendors’ answer to this question is: no.
You can make a case for many of the options above, then, but they all have their drawbacks. As does webOS, of course, but those drawbacks will be, by owning Palm, things that HP can directly address themselves, rather than relying on a third party. At least in theory.
Q: Is this just about owning the entire stack, then?
A: That’s certainly part of this opportunity, as Cote covers in his analysis, quoting Todd Bradley, EVP of HP’s Personal Systems Group as saying the following:
We see further opportunities beyond smart phones into additional connected mobile form factors. We anticipate that with the webOS we will be able to aggressively deploy an integrated platform that will allow HP to own the entire customer experience, to effectively nurture and grow the developer community, and to provide a rich, valued experience for our customers. With Palm HP acquires a strong operating system to deliver a unique customer experience in applications to over 2000 apps and growing, a platform to deliver mobile cloud-based services, and an opportunity to drive preference in the market among consumers.
But it’s the first part of that that I think is really important. “We see further opportunities beyond smart phones into additional connected mobile form factors.” Translation: mobile is the new desktop, and we don’t want a repeat of the desktop cycle we’ve gone through in the past.
Q: Can HP pull that off? They’ve got enterprise operating system experience with HP-UX, but what’s their consumer DNA?
A: Ian Skerrett had, effectively, that same question. The answer is, we just don’t know.
Historically, it has been very difficult for enterprise vendors to play in the consumer world, and vice versa: there are very, very few vendors that sell to both groups well (coverage). HP does happen to be one of those, selling heavily to the enterprise but extracting signficant revenue from the consumer via its PC and printer offerings, among others. Still, there’s a massive difference between selling printers to consumers and developing a mobile operating experience and sustaining the ecosystem around it that will be competitive with the best of Apple and Android.
Q: Is it a good idea for HP to make such a big consumer play?
A: Questions of “good” with publicly held institutions such as HP are usually better phrased as: can they make money doing it? And the superficial answer is, of course, look at Apple’s market cap. The more substantive answer is, it’s possible, but they have to understand that consumer businesses need to be run very differently than enterprise businesses. It’s a totally different set of design priorities.
Q: How does HP go about it?
A: I’m in agreement with James: step one is retaining Ben Galbraith and Dion Almaer, and providing them with both the room they need to maneuver and the resources they need to be successful at scale. HP’s not going to find two candidates better suited to the task of evangelizing a web based operating system to compete with Apple, etc. Bigger picture, HP should try and think about this much like EMC did with VMware: give them the ability to succeed, then get out of the way. The worst thing they could do would be to repopulate Palm with a bunch of HP executives from their enterprise businesses. If HP can use its expertise and supply chain weight to rapidly improve the hardware, leaving the software design to the experts, Palm’s got a chance.
Whether they will approach it that way is, of course, an open question.
Q: Was this financially a good deal? Is HP big enough, financially, to make this work?
A: Again, that depends on whether they can make money. But generally speaking, this was a very small deal by HP’s standards. I’ve seen more than a few people in the early going forget just how big HP is. Apple’s market cap is far larger (244B to 124B), but HP’s annual revenues are nearly 3X Apple’s. So plunking down a billion dollars at a multiple just over 1X is not a massive risk for the firm, though the valuation makes you wonder just how quickly the business was in decline.
Q: What were the analyst reactions to the deal?
A: My colleagues Cote and James, as you’ve probably already read, were generally positive. After that, however, opinions are far more mixed. Credit Suisse Group analyst Bill Shope:
While we understand the importance of HP’s mobile computing strategy, we believe the company’s M&A efforts should be primarily focused on the enterprise opportunity. In our view, the evolution of the next-generation datacenter will require significant organic and M&A investments in storage, networking and servers.
Our industry analyst colleagues over at IDC were no more positive:
A team of five IDC analysts said HP has only a one in four chance that the acquisition will prove a success.
In that same piece, Ken Dulaney over at Gartner was similarly skeptical, saying:
“There are so many [companies] after developers [so it’s] a big challenge,” Dulaney said. “I’m not sure that HP has enough clout today to get to them.”
Q: Does that change your analysis?
A: No. There are legitimate questions, as there are in any acquisition, and it will depend on execution. I can’t give odds as IDC did until I know more about how HP’s going to proceed. Shope’s criticisms around the next-generation datacenter, for example, don’t really acknowledge the possibility – as Sun’s Jonathan Schwartz once aimed for – that HP could monetize both the front end (devices) and back end (datacenters) simultaneously. Dulaney, meanwhile, is right question to question developer traction, but I’m actually optimistic on that front.
A: Out of all the explanations I saw post-acqusition of that optimism, I thought Jeff Waugh summed it up best: Web > C++. Still puzzled? If you’re going to bet on an operating system like webOS, now is the time to do it, with interest in and traction around HTML5 surging. If that environment can narrow the gap between native and web applications ability to access native hardware functionality and performance, webOS could become a really compelling environment. Elsewhere, Gartner’s Dulaney claimed that the “the market has voted against webOS,” but I don’t believe that to be correct. I think the market voted against Sprint the carrier first, and the hardware second. Reactions to the webOS operating system have been, in my experience, uniformly positive. Facebook’s Joe Hewitt – the guy who built the Facebook app for the iPhone, for example, calls it “probably my favorite mobile OS.” Meaning that if the carrier and hardware mistakes can be corrected, the outlook for the platform is materially different.
The developer value proposition previously for Palm’s webOS was shackled; you can target a couple of devices that run only on Sprint’s third tier network and subscriber base. If HP can roll out more webOS device types – say marrying it to their Slate as Garrett speculated – with wider carrier options, that’s a very different volume opportunity from a developer perspective. Couple that with the potential wave it can ride in HTML5 and I think there’s at least some reason to be optimistic.
Q: What does this mean for vendors like Acer, Dell, Lenovo and so on?
A: It certainly complicates their lives. With Palm, HP picks up a very usable brand with a potentially developer compelling operating environment, at a time when all of the above are facing hard, difficult choices with respect to their operating system plays. Consider the leaked roadmap from Dell: even if it’s not accurate, it sums up the choice problem neatly. Do you bet on Android? MeeGo? Or both, as in this case? And if it’s both, how do you prepare customers for a very different experience from device to device, when Apple will transition them seamlessly from iPhone to iPad? When you talk to the OEMs, they’ll tell you it’s a tough decision. Even one of the most seemingly straightforward – Android – becomes problematic as vendors engage with Google and are bounced back and forth between the Java based Android and the web based Chrome.
HP’s story with Palm, conversely, will be simpler. It will suffer in application volume, at least initially, relative to both Android and Apple, but it will be one platform, that they control, across the device types.
Q: Can anyone other than Apple go it alone, and be successful with a single vendor operating system? Isn’t the diversity of the Android ecosystem, for example, likely to doom HP?
A: Either way, HP’s going to find out. But while there is no question that, as Linux more than adequately demonstrates, collaborative platform development experiences will have significant advantages, there are downsides to this approach as well. Witness the frustration of users who see other hardware platforms being upgraded to the latest versions of Android faster, while they suffer through months and months of delays. HP, as a single entity, will not be able to match the Android ecosystem for variety and choice of devices. But that hasn’t hindered Apple much.
Q: How about some questions from the audience? Here’s one from Mauricio Godoy: Do you think Palm’s WebOS will run on HP’s tablet?
A: I think HP is effectively telling us it will, when they say: “We see further opportunities beyond smart phones into additional connected mobile form factors.” So yes, I think it’s likely that we’ll see webOS on HP’s tablet eventually.
Q: And Ian Skerrett: how about ‘$1.2 billion seems a lot of money for a mobile OS when there are 3 OSS available. Is webOS worth $1.2 billion?’
A: HP’s multiple for Palm was exceedingly small, reflective of their rapidly declining financial fortunes. So HP was acquiring the asset relatively cost-effectively, as such things go. Remember too that HP’s not just getting webOS, they’re getting Palm’s patent portfolio, and at least in theory – the people who know how to design an effective consumer OS. Add it up and it moves the transaction ledger much closer to fair.
Q: From Bob Sutor: MS-HP patent deal will avoid similar MS IP issues with Android?
A: Without a full review of Palm’s patent portfolio, it’s difficult to say with any certainty. This is, however, one of the assets I’ve been told was most coveted by potential acquirers. Palm was responsible for a lot of early innovation in this space, and given how broadly patents can be read these days with respect to software, I’d say it’s likely that Palm will insulate HP to some extent. Certainly more so than would Android, as HTC discovered.
Q: Another from Bob: HP/Palm: cool enough to have success in the market?
A: Most people I know who have Palm’s think they are very, very cool. Whether HP will negatively impact that experience remains to be seen, but if they can tweak aspects of the equation webOS should be a very attractive option for consumers. Personally, I would absolutely consider buying a tablet device runing webOS.
Q: One last one from Rich Sharples: Google, apple, RIM have a ‘service’ behind their phone (store, apps, mail) – that seems to be important – HP ??
A: An excellent question. Palm did launch, in conjunction with the release of the Pre, an app catalog. And it would be relatively straightforward to target mail services like GMail on the platform, much as the iPhone streamlines implementation and configuration for Google users. But it’s an open question, and one that pretty much every hardware vendor is asking themselves: what is my app store story? Marketplaces (coverage) are a big deal these days.
Q: Any other questions?
A: No, I think 3300 words is enough. If you’re a client and want to chat, you know where to find us.