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Palm: $1.2B Down the Shredder

[The acquisition by HP will not save Palm. Guest author Michael Valukenko explains why the sum of Palm and HP is close to zero]

As an old-time Palm user, I was always secretly hoping for resurgence of this familiar and trusted company. At a rational level however, I didn’t believe that the new Palm stands a chance in rapidly changing smartphone market. See my earlier analysis in Who can save Palm here at the VisionMobile blog.

HP’s acquisition makes Palm part of large and financially solid company, but doesn’t compensate for its other weaknesses. Smartphone competition today boils down to competition of service platforms with Apple and Google leading the way. Considering the realities of today’s smartphone market, there are very few real synergies between HP and Palm.

The three missing synergies

Today people don’t buy smartphones for their hardware, but for what they can do with them. This largely means software platform and services built around the phone. Both Apple and Google excel in this area, albeit using very different approaches.

Palm’s WebOS offers a slick UI and a promise of simplified app development by fully adopting the web paradigm. But it lacks a clear differentiation (a killer use case) and an ecosystem unlocking the device into hundreds or thousands different things people could do with it. Let’s face it: It wasn’t that WebOS devices didn’t sell well because Palm lacked marketing dollars. They didn’t sell because they weren’t good enough compared to competition. HP marketing money and distribution muscle won’t save the day.

Today’s leaders – iPhone, Blackberry and Android – all have clear differentiation: iPhone is all about entertainment and Internet and is backed by large iTunes user base. Blackberry sells mobile email and is backed by corporate IT adoption and a strong distribution network. Android seamlessly integrates with Google services promising free and open Internet. The vague notion of “HP Experience” looks pretty pale in comparison.

Critically important, app developers and Internet companies already have their hands full with iPhone, iPad, Blackberry, Android, not to mention the upcoming Windows Phone 7. What does HP have to offer in exchange for some mind-share? Any bright ideas?

Last, but definitely not least. Mobile operators/carriers take on the lion’s share of smartphone promotion and subsidy costs, hoping to attract new subscribers and increase ARPU of existing ones. What can HP/Palm offer to convince operators to take marketing and subsidy dollars from iPhone, Blackberry and Android, and put them into HP/Palm?  I don’t see much. Do you?

Clear differentiation, developer mindshare and operator subsidies  are all critical today for the success of a smartphone platform. All these were and remain Palm’s weaknesses regardless of its financial situation. HP does not complement Palm in any of these critical areas.

Chasing the Apple dream
A quick glance at HP earnings breakdown reveals HP as an electronics equipment company at its core. The company generates most of it revenues from selling printers, laptops, desktop PC and servers. Smartphone unit sales are catching up to laptop sales, while laptop margins are getting thinner and thinner. It is easy to see how tempting would it be for HP management to try to emulate Apple’s model of selling high-margin devices.

However Apple owes much of its success to its vertical integration, which allows blending hardware, software and services into iconic products. This vertical integration is ideally suited for breaking new grounds and creating new product categories. It is critical factor in Apple’s ability to create such products as Apple Lisa, iPod, iPhone and iPad.

As explained by Clayton Christensen in this seminal paper, vertical integration is an advantage in emerging product categories, where it helps to overcome technical challenges. Vertical integration however becomes a disadvantage in maturing markets, where flexibility, customization and modularity are of greater importance.

It is difficult to see HP successfully reproducing Apple’s model. The opportunity to be the first with iPhone-like product does no longer exist. 

Is this good news?
The deal doesn’t look particularly bright for HP shareholders. But may be in the broad scheme of things the deal is great news for many other people: Investment bankers will pocket multi-million dollar commissions, Palm’s investors and management will be spared from their misery, HP executives will boost their ego, business newspapers will sell some ads, and bloggers (including myself) will have something to write about.

How do you think the acquisition will shape up for Palm and HP?

- Michael

[Michael Vakulenko has been working in the mobile industry for over 16 years starting his career in wireless in Qualcomm. Throughout his career he gained broad experience in many aspects of mobile technologies including handset software, mobile services, network infrastructure and wireless system engineering. Today Michael consults to established companies, start-ups and operators. He can be reached at michaelv [/at/] WaveCompass.com]

  • Craig Banfield

    Palm's webOS differentiator: The best multitasking mobile OS in the business. It also has a very good WebKit browser. It has more apps in its app store than Windows Mobile does.

    Surely HP & webOS must be in a much better position than Microsoft and its Windows Phone 7. WP7 has a lousy browser based on IE7 from 2007. It can't multitask. It can't even copy-and-paste. It has no apps. It is rushed to market before the APIs and SDK are finished, weakening the type of apps that can be developed. Windows Phone 7 looks doomed. Despite Microsoft's size, it seems to be hapless and wayward in the mobile devices market.

    Now if you believe Google's outlook for the future, web apps are the future. That puts webOS in a very good position.

  • sha

    but it's Microsoft, and I wouldn't declare them dead yet. If someone can lure thousands of developers in a blink, it's them.

    Meanwhile, you got iPhone for the Apple crowd, Blackberry for the business one, Android for the people who wants a permissive system, Symbian for people who don't know what an OS is, and WP7 for the Windows/MSFT crowd in a near future. I love to see Palm doing well, but all that leaves few room for another contender.

  • Michael Vakulenko

    Craig,

    "best multitasking OS with good WebKit browser" is not really a differentiator for the mass non-technical market. Besides, none of them is unique compared to Android, iPhone OS 4.0 and Blackberry 6.

    As for comparison with Microsoft, it's too early to write WP7 off. We should be expecting interesting times ahead.

  • Michael Vakulenko

    Sha,

    Totally agree with you: Microsoft has all the potential to get back in game. Interesting times ahead.

  • Tim Meyer

    Your essential argument against becoming vertically integrated is that it is too late, basically winner takes all. That later it is about being modular.

    However, later you say that MS may have some cool stuff. When that cool stuff arrives, Android and iPhone OS will be a couple more steps ahead, so they will always be chasing them. In any event MS is realizing that their salvation may only be in end-to-end as Android is rapidly cleaning up the licensing deals.

    This market is not going to be about winner take all, but rather solutions that will eventually hew to open standards…even Apple never liked the iTunes DRM imposed on them by the studios. Lets see where book DRM goes….

    So in this light HP has done the right thing to take their destiny in their own hands. And they get some valuable patents, which they will need in the inevitable barter.

    I am rooting for the WebOS tablet, it should be as cool as the iPad, if not more. Now if only there was an open framework comparable to iTunes.

  • Michael Vakulenko

    Tim,

    "Vertical vs. open" argument really over-simplifies things.

    Emerging mobile value chain has multiple links. According to Christensen framework, successful companies should control those links that matter. Not all of them. The important links are those where significant technical or business problems are being solved. This is where the value is created.

    Apple needed vertical integration between phone hardware, software and services to create the breakthrough and enjoy the fruits.

    Google followed with Android creating an "open interface" between hardware, software and services. This interface allows mixing and matching between hardware, software and services coming from different vendors. Such modular configuration will inevitably lead to commoditization.

    The challenge moved to service creation and monetization. Is Google open on these value chain links? Not at all. Google aims to make/control everything here from server hardware to consumer apps and billing solutions. Google is only open where it makes business sense for them to be open. Not that different from Apple in the end.

    Its too late for HP to control interface between device and its software – This specific problem is solved now and we are heading to commoditization in this area.

    Sorry for lengthy answer….

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