With its purchase of Palm, Hewlett-Packard acquired more than just a smartphone maker. It also picked up a whole new strategy for its mobile devices.
HP said Wednesday it plans to acquire Palm for $1.2 billion, or $5.70 per share, which amounts to a 23 percent premium over Palm's actual stock price at the end of the day. But for a leading technology company like HP with almost zero mobile phone presence and $13.5 billion in cash, picking up a company with a fully developed mobile operating system, a decent lineup of devices, and trove of mobile patents is a bargain. It will also make HP a viable competitor in the growing mobile market.
Mobile phones are now a $100 billion market. There were 182 million smartphones shipped in 2009, and that number is expected to rise to 247 million units this year, according to iSuppli. HP not getting in on that is unthinkable, particularly since practically all of its major competitors in the consumer space have some sort of mobile strategy. With Palm, HP gets the 10th largest smartphone brand as of the end of last year. Palm's hardware accounted for 1.5 percent of all smartphones, but wasn't growing, according to iSuppli.
By planning to infuse plenty of funding into its new mobile strategy with Palm, HP is expecting "solid growth" going forward, Todd Bradley, executive vice president of HP's Personal Systems Group, said on a conference call with investors Wednesday.
It's been years since mobile phones were a priority for HP. Compaq, which was acquired by HP, was an early leader in handhelds, creating the iPaq, the first handheld running Windows CE to get much popularity. HP kept the iPaq brand and lineup when it bought Compaq, but the effort lost steam as phones and handhelds merged. HP has continued to make some phones under the iPaq brand, but it has become a relatively minor player. Right now, the only mobile phone it offers is the iPaq Glisten, which is marketed mainly to business customers.
But this acquisition isn't strictly about phones. This is about HP's future mobile OS. Bradley said several times HP will "invest heavily" in WebOS, and use it on slate PCs, Netbooks, and phones. HP was not ready to talk about possible time lines as to when a WebOS slate or WebOS Netbook would be available, but said it planned to increase the $190 million Palm was spending annually on research and development.
One contrarian view is that HP didn't actually need to spend that much to develop a viable mobile OS. "The good news is that HP made a strong move toward becoming a player in the mobile market. The bad news is that it's the wrong move. Palm could be valued for its brand, its intellectual property, its platform, or its people," said Charles Golvin, an analyst who follows the mobile industry for Forrester. "HP doesn't need the Palm brand; the IP helps an existing player not a new entrant; we don't think the WebOS platform is viable long term in the face of its competition; and HP could sweep up Palm's people individually at a much lower price."
But it's unrealistic that HP could sit by and spend years building their own mobile OS while Apple, Google, and Research in Motion charge ahead. Besides being behind those three in mobile phone sales, HP also lacked a third-party mobile developer community. And as Apple has shown us, apps are quickly becoming the most popular way to interact with smartphones. Without a robust mobile application marketplace, it will be almost impossible to make inroads in the mobile market. Palm's WebOS comes with a built-in developer community, albeit a small one when compared to Apple's or Google's. But for HP, going from practically none to 2,000 third-party mobile apps in one day isn't bad.
And while using an existing, free mobile OS like Android is certainly an option, it's also an option for anyone. HP has long been saying it will use software to differentiate its products. Now it actually can. Owning and controlling its own OS has many benefits, starting with being able to dictate who can make applications, when the product is updated, and ensuring that the hardware and software work together as seamlessly as possible. Palm's long been a source of innovation in Silicon Valley and has a large patent portfolio (1,650 to be exact), which Bradley was privy to as former CEO. Though Android is free, using a proprietary OS will shield it from potential lawsuits or necessary licensing deals with Apple or Microsoft.
Bradley also acknowledged HP's current partnership with Microsoft on Windows Phone 7, which he said it does not plan to abandon. Though it's not clear what devices the Microsoft mobile OS would run on, it's possible HP might use that for a specific class of phones, say for business clients, while pushing WebOS on its consumer mobile devices.
One of the main questions that remains is what HP plans to do with the Palm brand. On Wednesday, Bradley mentioned HP's plans for WebOS frequently, but didn't call out the Palm name nearly as often. It's possible that the Palm brand could be discarded while the products, like Web OS, and even Pre and Pixi, could live on under the HP name.
CNET's Ina Fried contributed to this report.