HP’s Palm acquisition a threat to Microsoft

HP’s purchase of Palm could not only savewebOS, but should also cause a few shivers for Microsoft.

Where Redmond may have lately seemed the up-and-comer to challenge Blackberry with its Windows Phone 7, HP–by virtue of its hardware sales–may actually be in a better position. HP will, however, have to learn a thing or two about integrating mobile devices with the desktop, and particularly with Microsoft Exchange servers.

HP is paying nearly $1.2 billion for Palm, a premium of nearly 25 per cent. Some Palm shareholders are unhappy at the low price. But, given the company’s dismal performance, this is certainly the best bailout they were going to get. Meanwhile, HP shares dropped to $52.68, just over 1 per cent, in afterhours trading.

HP’s investment is a tremendous endorsement of Palm’s webOS operating system. In fact, it’s the only future possible the OS, as many other firms turned down an opportunity to put Palm out of its misery. HP CEO Mark Hurd’s task is to make them wish they had.

It’s strange that a company as successful and diverse as HP has become under Hurd isn’t more of a player in consumer mobile devices. Palm for all its troubles gets high marks for its hardware and operating system. Having HP as a parent could provide the muscle Palm has lacked in the marketplace.

HP has only limited success with its iPaq line of mobile devices, although they have been generally well received and attractive to HP’s business customers. By comparison, a Palm Pre and its successors should be an easy sell.

The task for HP is to take a come-from-behind position and leverage webOS into products that expand the company’s presence in both business and consumer markets.

For a model, HP need only look at Apple which at one time was in essentially the same position that HP found itself in before buying Palm. Granted, the world has changed greatly since then, mostly because of Apple’s ability to dominate the consumer market, but except for Research in Motion, nobody has really captured the imagination of corporate customers. By building a consumer-y smart phone with loads of business features, HP could do Blackberry one better and challenge whatever Microsoft does with Windows Phone 7.

Palm CEO Jon Rubinstein will stay on, which is a mixed blessing. If Rubenstein and company had done such a great job, it wouldn’t need HP. Of course, HP is unlikely to repeat the sorts of amateurish mistakes that have marred Palm’s product introductions, including its decision to introduce the first Palm Pre only days before Apple introduced the iPhone 3GS.

The downside for HP is that it may be too late. The company can expect to make large investments if it hopes to snatch a victory from the jaws of Palm’s defeat

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The key to success will be creating an ecosystem that includes music and application stores which only Apple and to a much more limited extent Google have been successful at doing. It seems like someone will eventually get this right, but formidable barriers exist and Apple seems intent on erecting more. This includes the recent requirement that iPhone apps be built using only Apple’s tools, limiting a developer’s ability to build applications that run on the iPhone and other platforms.

So far, developers have shown little interest in webOS, and HP must find a way to create interest which hasn’t existed before. The only real way to do this is to sell a bunch of handsets–but why would customers want to buy a handset with such limited application support? So it becomes a chicken-and-egg situation for HP.

The best thing about the deal is the number of potential choices that it will offer businesses and consumers. HP has a solid operating system to work with, but a business that essentially fell flat. Having turned HP around, CEO Hurd may be right guy for the job.

Silicon Valley mergers generally turn out to be bad ideas, although HP did manage to turn its acquisition of Compaq into a deal that made at least some sense. Whether it can do that with Palm is a question that will be answered over the next several years.