My 1.2 Cents on HP and Palm

by Dave Michels
This acquisition appears stupid to me. I haven’t felt so strongly about the stupidity of a merger since eBay bought Skype. I assume there must be some patent or buried gem in this deal as on the surface it just doesn’t add up.

Supposedly, HP wanted WebOS, the undervalued cell phone operating system. Let me emphasize undervalued – the going rate for a smart phone is $199 (2 yr contract) – the Palm PRE is currently available new from Amazon for $0.01 (2 yr contract).

Fluke? Maybe, but does the world need WebOS? Is there really a void not being addressed by Apple, Android, RIM, Symbian, and Nokia? Oh, it’s for other yet to be created devices like a new padlet is it? $1.2B for a product that doesn’t exist? John Paczkowski of Digital Daily writes:

The true cost of the acquisition is likely to run quite a bit higher, according to Deutsche Bank analyst Chris Whitmore. In a research note to clients this week, Whitmore argues that HP needs to work some serious financial magic on Palm in order to make it EPS neutral in 2011. Specifically, it needs to triple revenue to $1.2 billion and double gross margins to 44 percent while keeping operating expenses flat. “By all measures, this appears to be a Herculean task given the declining momentum behind WebOS among consumers & developers,”

But fear not, HP’s Jim Burns, VP of investor relations, assures us with “We’re going to increase [spending on webOS], And we’re going to increase sales and marketing as well.”

$1.2B is a lot of money.

Here is the likely strategy. HP was about to launch their version of the iPad based on Windows7 (HP Slate). And on many specs, the device looked superior to Apple’s. – Apple proved the market for the iPad concept, and realistically Windows7 is not going to be a viable competitor. WebOS could be (with a lot of work).

So, HP needs to redo their Slate – the one Steve Ballmer carried around at CES. HP is probably very frustrated that they can’t control Win7 to fix some issues (CES was five months ago) and fell in love with the Apple concept of complete control over OS and hardware. HP killed the Win7 Slate and will likely launch their Slate with WebOS this year. It all sounds great.

The only problem is the $1.2B and the shear amount of effort it will take to effectively compete against Apple that managed to sell 1M iPads in 28 days. HP has to create an ecosystem, including an appstore, a slate, an ebook partnership, manage an acquisition, recruit developers, and who knows what else. Assuming they want to copy Apple’s model. If they didn’t want to copy it, they could have gone with Android (for free) and leveraged an existing and growing ecosystem and still have control over the OS. But they didn’t do that.

Whatever their goal, I hope it works. eBay owning Skype never really made sense to me, but Skype (and eBay) are reasonably successful, so maybe it was the best thing to ever happen. (I said maybe).

$1.2B is a lot of money.