The Palm HP deal broke just as we had completed the last issue of Faultline and so we have had to read much of the coverage, some of it opinionated and from well respected analysts, and most of them thought the move was a dumb one for Hewlett Packard and that it was dumb luck for Palm to survive.
Certainly the deal is right for Palm. HP has substantial resources and before the deal was announced had $13.5 billion in the bank, despite continual purchasing of its owns shares over recent years.
The company has not been thought of as innovative and for much of its lifetime it has not even been adventurous. Its last period of adventure was probably ended by the departure of Carly Fiorina as CEO, in 2005, when the current CEO Mark Hurd took over.
During Fiorina’s period in charge the company acquired rivals such as Digital Equipment Co and PC maker Compaq, both innovators in their time, but acquired primarily for their market share and to take them out as a rival and to consolidate the market. That’s not what’s happening with the purchase of Palm. HP is fairly well established in 4 major businesses, servers, outsourcing, printers and PCs ‘ and it has become more like a services company of late, following in the footsteps of its great rival IBM, rather than a product company.
It has still gone in for large mergers, mostly to acquire established product lines and to buy market share and to prevent rivals buying out companies which it partners with and relies upon. Back in November 2009 HP bought the company that spawned 3Com in a $2.7 billion deal, more than twice the size of this present deal for Palm. But 3Com’s business is older and established. People acquired with the merger may have even talked about the good old days when they owned Palm. But the truth is that 3Com was less speculative, and the company paid closer to two times revenue, compared to the one times that it is paying for Palm.
HP still has unique products and like all dull services businesses, it hankers are being perceived as inventive (hence its various HP Invents advertising campaigns) in the same way as Apple.
And this is the reason that most observers give for its purchase of Palm ‘ but we might propose a few others and a few potential problems that this might throw up and a big clue is in another story that broke this week, the cancellation of the HP tablet computer relying on Windows 7.
The device was shown at CES with lots of fanfare and since then it has emerged that Hewlett Packard is not only also developing an Android version, but it has shuttered the Windows version.
Now that HP has acquired the owner of a rival operating system in WebOS, it is likely that it would prefer to offer any tablet computer it comes out with on WebOS, and many HP watchers were speculating at least this much during the week.
It’s tough to see how this helps HP but it does have a major problem in portable devices. It had its own Personal Digital Assistant (PDA), the Journada, before it inherited the iPaq from the Compaq merger and in its last annual accounts, while it never broke out the iPaq revenue, it hinted that within the Personal Systems Group, handhelds were a problem and a falling revenue stream.
So if we phrase this entire story differently, it soon makes sense that HP should buy Palm. The questions it has been asking itself for some time is just how was it going to reverse declining revenues in handhelds at a time when more and more Notebooks and Netbooks are about to be replaced by handheld categories of devices such as the iPad.
In its statement about just how widely HP will push WebOS across its portfolio the company said quite clearly that it saw broad opportunities across a range of form factors.
So this is not about seeing a wonderful new innovator that it can integrate into the group after all, but seeing that the Windows 7 operating system is too bulky for these types of devices and that Android could end up making HP a slave to the Google advertising machine, and HP wanting some say in its device strategy as many new portable form factors emerge.
Tablets, we have said many times, are simply a special case of the Smartbook, where a Smartbook is a device you can work on for an entire working day, without plugging it in, while constantly on the internet. In order for it to cover this sector and any subsectors such as tablet PCs, e-book readers that double as workstations and thin client, cloud connected, cloudbooks, HP needed to make a jump to the ARM processor architecture, because Intel powered ATOM devices still use about 4 times as much battery as an ARM powered device (although it’s trying to fix that, see story elsewhere in this issue). And like most mobile phones, the Palm Pre and Pixie are ARM powered devices and WebOS is optimized for ARM and runs on a TI designed chip.
That doesn’t mean that HP has to stick with TI chips, but right now the TI OMAP architecture is going through something of a renaissance in portable devices as an applications processor, primarily because both Qualcomm Snapdragon and Samsung ARM core powered chips are only recently available in volume and few designs have come out with them integrated. The Snapdragon in particular offers 3G connectivity on the same chip as applications processing, which is expected to considerably dilute TI’s grip on this market. This new generation of devices is expected by the late Summer and HP needs to have a tablet plus other form factors by then.
Once it has covered all the new form factors HP can maintain or improve its market share of portable devices, and the rest of the HP empire, supporting enterprise, will be able to seriously recommend HP portable devices as part of their solutions and then its problems are over. But if HP had purely stuck to Windows, and its share of portable devices was annihilated by the excitement around new generations of ARM devices, then it had a major problem at the low end.
The big question is perhaps why exactly does HP need to control the operating system environment instead of just adopting Linux or Android or the soon to arrive Chrome? Well, quite simply it doesn’t, except to the extent that it is easier to create devices with highly integrated entertainment graphics performance like the iPad if, like Apple, you control all the elements of a device. Apple even controls the chip design, but HP is unlikely to go down that route.
But give the immense wealth of applications that come with the Android App store, HP may also decide to hedge its bets and opt to support Android anyway, in parallel with WebOS. By dropping Windows Phone 7 from the equation HP is keeping the number of OS’s it has to support down to two, on portables.
What HP might be doing is trying to seed its own WebOS App store that it will acquire with Palm, and tilt it, through its own application development efforts, towards the enterprise nature of the rest of the HP business. But even if it does this, perhaps getting in on the act for enterprise portability, then we think it must also cover all bases by porting most of those apps to Android as well. So some predicting that the purchase of Palm is a blow to Android, may be right in that Android may not get ALL of the portable business of HP, but we believe that it is still possible for it to remain, or rather become, significant at HP. The trouble is, in order not to send out a ‘wrong signal’ to its investors, HP is likely to curtail any further development of Android for the time being, until Palm is firmly ensconced in its stable.
The truth is that while HP gets plenty of its revenue from its myriad software products, it has never really produced a ‘hit record’ product in software to drive devices sales. If we go all the way back to its Unix operating system HP-UX, or its OpenView, a systems management initiative that HP pushed hard under a separate name for years, it becomes obvious that HP is no kind of innovator in software. OpenView still exists under a generic HP brand, along with hundreds of other software tools, all designed to improve server performance and management. HP-UX is robust as hell, but never had the following or advanced features of an OS like Solaris at Sun.
So perhaps we can see this entire venture not in terms of HP trying to crash into the portable device marketplace, or into software, but rather the failure of its supplier Microsoft, to give one of its longest standing allies enough of a helping hand in software. This has perhaps led to disillusion at HP and the feeling that it must control its own destiny on portable devices in the future.
In the takeover statement, filed on the SEC web site, HP said it would now be able to participate more aggressively in the fast-growing and highly-profitable mobile connected device market and that it would make additional investments in product development and go-to-market activities. It even praised technologies at Palm such as remote manageability, which HP said at some point it may spread further into its enterprise space, outside of just consumers.
HP acknowledges that the deal will cost it money and told investors to expect a few cents of dilution to its earnings in the second half of fiscal 2010 on top of the $1.2 billion cash purchase price. But said that apart from that it would not significantly dent its results going forwards. The company will be run as an independent operating unit within HP’s Personal Systems Group after closing.