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HP’s acquisition of Palm – Did they buy a Donkey that they want to market as a Race horse?

Much has already been said and written about HP's purchase of Palm. However, we believe that this is one purchase that actually raises more questions than answers. Strand Consult has been following this market for the past 15 years, and we can see that many of the articles that have been written about this purchase are based on the American market viewpoint - a market which only accounts for approximately 7% of the global mobile market. Very few people are viewing HP's purchase from a global perspective.

We have compiled a list that summarises our thoughts regarding this acquisition. We sincerely believe that financial analysts around the world should view HP's purchase in the light of these issues listed below. A 1.2 billion USD purchase is a big deal - especially when you consider what HP is getting. We would like to draw your attention to the following points:

 

1. Palm is only a brand name in the USA. Outside the USA Palm is totally unknown as a phone manufacturer.

2. Palm has no distribution in the mobile world and few and limited relationships with operators around the world.

3. Palm has limited mobile experience - they have been trying to enter the mobile industry since 2002.

4. HP also has limited experience in the mobile industry - they have been trying, but without significant success.

5. HP has limited distribution in the mobile world and limited experience in the mobile value chain - they have tried several times but without success.

6. Even Compaq's iPAQ was not a Compaq brainchild, but a product created by a reference design company in Seattle and a then unknown company in Taiwan, which we now know as HTC. The iPAQ was a Microsoft brainchild that they got Compaq to market and sell, because Microsoft wanted to enter the PDA market. This was the turning point for HTC - a close collaboration with Microsoft, resulting in HTC becoming the worldwide brand it is today.

7. Perhaps HP has purchased an OS, but the value of an OS is rather limited in itself. The important issue is distribution of your OS and how many devices you can get your OS running on. There are a great many OSs in the mobile world - in fact there are far more smartphone OSs than most people realise.

8. Take for example Apple, they can only put their OS into the phones they sell themselves - giving Apple limited distribution. This has resulted in Apple's sales growing far less than the growth of their distribution power (operator agreements).


9. Likewise both Google Android and Microsoft have to spend time and energy approaching mobile phone manufacturers the whole time to convince them to use their OS on each new device. Measured on the number of different models running their OS, Microsoft is currently the most successful and has clearly better results than Google Android.

10. Having your OS on as many devices as possible is very important, helping to increase the likelihood of being on a successful model that ships enormous numbers of units.

11. When we examine how devices subsequently sell, we can see that Nokia are selling the most. Nokia has a higher Smartphone market share than their overall mobile phone market share and Nokia's Smartphone sales are growing significantly more than Apple's.

12. Both Nokia with 550 million phones sold and Samsung with 220 million sold phones can decide themselves which OS they want in their devices. This means that both Nokia (Symbian) and Samsung (Bada) can replace their old OS (Series 30, 40, EMP, etc.) and put Symbian and Bada in their phones. A good example of this is Nokia's C5, which two years ago would have been a Series 40 phone for 120 Euros, but is now a Symbian phone for 120 Euros.

13. In a world where volume is important HP has not much to offer - their PC volume does not give HP any significant advantage regarding manufacturing mobile phones. HP’s R&D costs for developing an OS will not decrease unless sales volume of the OS increases.

14. There is no doubt that Palms WebOS is a good OS. But why should developers develop services for the US market alone, and where are the tools and access to different API's to make it attractive to develop for the OS?
15. The big question is whether HP has plans to take Palms developer support on board and how they plan to drive it forward?

16. HP is strong in the enterprise market, but do they have a size that enables them to tell their customers that they must rely on the Palm platform, rather than on Microsoft's Windows Mobile? We believe that HP will inevitably have to support Microsoft Windows Mobile on the Enterprise market.

17. WEB OS is and will remain a niche OS, and what HP is buying is a hardware brand that is known in the US. On the other hand it appears it will cost a lot of money to further develop WEB OS. So maybe HP will use the hardware brand and then choose to go the Android and/or Microsoft way? If that is their plan, then 1.2 billion USD is a high price.


The biggest question is whether HP in the short term can create a growth in their share value, so that they can justify the investment in Palm? In the long term, the investment must create revenue and profit. We believe that it will be tough for HP to create enough revenue and profit to justify this purchase of Palm.

We could easily make the above list much longer. From where I'm sitting it looks to me as if HP has looked at the value that iPhone has created for Apple's shareholders and said “hey, we need a product like that too”. If you look at what they got for their 1.2billion USD, it appears as if HP purchased a donkey, and is hoping that they can pass it off as a racehorse to their shareholders.

If you take two minutes to look at what we wrote about
Palm & Handspring back in 2002: http://www.strandreports.com/sw482.asp,
Nokia´s N-Gage launch: http://www.strandreports.com/sw566.asp,   
what we wrote about Android in 2007: http://www.strandreports.com/sw2916.asp 
and what we wrote about the iPhone in 2009:  http://www.strandreports.com/sw3501.asp  - you will agree that everything we predicted so far has been pretty much spot-on. Then again, we are by no means newcomers in the mobile industry.