Palm purchase a risky move for HP, analysts say

WebOS-based systems from HP would face intense smartphone, tablet competition

It's no sure bet that Hewlett-Packard's $1.2 billion purchase of Palm Inc. will be successful, analysts say, citing intense competition for smartphones and the 12 months it would take for HP to build a WebOS tablet to compete against the iPad.

A team of five IDC analysts said HP has only a one in four chance that the acquisition will prove a success. In the event that the acquisiton proves successful, though, HP's bet will pay off 20 times, they added in an IDC research note.

"Even with a deep-pocketed parent, Palm still faces formidable headwinds as it attempts to build a presence in the smartphone space," the IDC team wrote, noting especially how strong the Android mobile OS will be by 2013, when it projects it to be second in the worldwide market after Symbian. An HP-Palm WebOS-based smartphone would also face Apple's popular iPhone device.

Ken Dulaney, an analyst at Gartner Inc. also sees the Palm acquisition as risky for HP.

First off, he noted, "Palm stockholders get more value than I thought [Palm was worth]. For HP, they get a smartphone business in a box. But it's by no means a sure bet. There is a lot do."

Dulaney said that even though Palm's WebOS is a solid mobile operating system, it faces strong competition from "big players with many models." Dulaney and the IDC research team also noted that in addition to competing against iPhone, BlackBerry and Android devices, HP must battle to attract independent developers to build WebOS applications in addition to or rather than apps for more popular operating systems like iPhone, Symbian and Android.

"There are so many [companies] after developers [so it's] a big challenge," Dulaney said. "I'm not sure that HP has enough clout today to get to them."

Nokia, the biggest maker of mobile phones in the world, even open-sourced its Symbian OS primarily to get more developers interested in making apps for it, he noted.

The IDC analysts added that Palm "has proven unsuccessful in gaining widespread support the WebOS platform amongst developers so far" -- less than 4,000 applications have been developed for WebOS compared to 150,000-plus available for the iPhone through Apple's App Store. If the Palm acquisition is completed, HP will have to invest heavily to gain significantly more developer support, the IDC analysts said.

HP expects the deal to close by July 31.

Jack Gold, an analyst at J. Gold Associates, expressed mild reservations about the deal, but added that HP needed a WebOS product to compete in the smartphone market. In addition, HP benefits from having many former Palm executives already working at HP, including Todd Bradley, head of HP's Personal Systems Group, he added.

Gold did note that HP has had mixed success with previous acquisitions, including the $19 billion Compaq deal that closed in 2002. "HP has not always been good at integrating acquired technologies into their business. While the potential for success is there we will have to wait and see how well HP does at integrating Palm into the mainstream operations before calling this a win for HP."

The IDC analysts said that "HP needs to move at warp speed to bolster Palm's position, relationships and products which are heavily under siege by Apple, RIM and others." HP, while a top worldwide provider of PCs, "will need to manage this business differently than the PC business" because there's far more innovation and fragmentation in the mobile device industry, they added.

Also, Palm has little presence outside the U.S., meaning HP will have to push its suppliers to lower component costs to create cheaper smartphones and other devices where carriers don't subsidize devices as is done in the U.S., IDC said.

Steve Hilton, an analyst at Analysys Mason, said HP's best chance of success could be building a WebOS-based smartphone directed at corporate users. HP could use Palm to "dislodge RIM and Nokia" in enterprise settings by utilizing its already powerful corporate sales and marketing organization.

Gold and IDC said that HP could find success in building WebOS-based tablets, though such a project could take 12 to 18 months, keeping HP well behind devices like Apple's iPad and others.

"WebOS is well-positioned for relatively easy migration to media tablets, allowing it to better participate in the rapidly developing tablet device market," IDC's team wrote. IDC estimates about 7.6 million tablets will sell this year and that annual sales will reach 50 million by 2014. Gold said WebOS "could easily be re-positioned for tablets and other consumer devices" providing a "key growth area" for HP.

Dulaney disagreed with the potential for WebOS tablets, saying that such an effort would present "a huge challenge" to HP, mostly because the operating system is relatively new, while the iPhone and iPad run operating systems based on Apple's mature OS X software. "Much has to be done to WebOS" before it can run tablets, he added.

The presumption that HP will build a WebOS tablet has fascinated bloggers and analysts, including Jay Yarow at The Business Insider, who noted that he expects HP's Bradley to outline the combined firm's tablet plans once the deal closes.

Matt Hamblen covers mobile and wireless, smartphones and other handhelds, and wireless networking for Computerworld. Follow Matt on Twitter at @matthamblen, or subscribe to Matt's RSS feed . His e-mail address is mhamblen@computerworld.com.

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