Chad Brand
After it was made public that smart-phone maker
Palm (
PALM
)
had put itself up for sale, most every rumored suitor was an Asian
hardware firm such as HTC or Lenovo (LNVGY.PK). The logic was that
Palm had a strong set of assets that would be a good fit for a
foreign company looking to make a splash in the U.S. phone market
without having to build the business from scratch. When
Hewlett Packard (
HPQ
)
surprised the Street this week with an agreement to buy Palm for
about $1 billion, some praised the deal while others expressed
their doubts. To me, it makes sense that HP would buy Palm as a way
to more quickly enter the market for mobile devices, but I really
doubt that we will look back two or three years from now and say
buying Palm really paid off for HP.
There is no doubt that HP is getting a large patent portfolio, a
strong team of engineers, and a proprietary operating system in
Palm webOS, and it is reasonable to assume that HP did not have
other ways to acquire such assets for less than the price it is
paying for Palm. However, the question really is whether HP can
gain traction in an already crowded market for smartphones and
tablet PCs. Large hardware makers always seem eager to compete with
the market leaders when new hot products come about but I do not
think there is room for everyone.
Dell (
DELL
), for instance, is another computer maker that is developing both
a cell phone and a tablet PC. HP is widely known to be developing a
tablet and now with Palm it will be able to easily enter the cell
phone market as well. Owning the operating system will make these
products easier to control and produce than they were for HP before
the deal (having to use Microsoft's (
MSFT
) mobile operating system in their products raises HP's costs due
to licensing fees and gives them less flexibility in the design of
the product), but companies like HP and Dell still face the
challenge of bringing to market a product that people want more
than a BlackBerry, iPhone, or iPad.
The track record of large computer-focused firms trying to
invade leading innovators' turf is poor. Both HP and Dell have been
trying for a long time to break into other consumer electronics
sectors but really have not been successful. Many companies were
convinced that they could grab a chunk of the MP3 player market,
even with Apple's (
AAPL
) iPod as the best in class product, but companies like SanDisk (
SNDK
) (with its Sansa players) failed to gain much ground. Why would
this trend change this time around? Do we really think a tablet PC
from HP or Dell will be better than the iPad and therefore really
hurt Apple? Can Barnes and Noble (
BKS
) or Sony (
SNE
) really take a bite out of the e-book reader market by dethroning
the iPad or the Kindle?
It is highly unlikely that companies, no matter how large, can
come along later with a me-too product and succeed. As a result,
while we all can understand why HP buying Palm for $1 billion makes
sense if their goal is to go after these markets, it is a lot
harder to have confidence that such an endeavor will prove even
remotely successful. For only $1 billion, which is mere pennies for
a company as large as HP, they probably do not think it is a large
risk to take. And they are probably right, on that front at
least.
Disclosure:
No position in HP or Palm at the time of writing, but positions may
change at any time
See also
Borders Seeks e-Book Strategy
on seekingalpha.com