HP's 'Risky' Plan to Take Palm Beyond Smartphones to Mobile Device for Telehealth, Education

Critics have quickly weighed in following HP's blockbuster news that it plans to buy Palm for $1.2 billion.

Following the announcement, Todd Bradley, executive vice president of HP's Personal Systems Group, held a brief conference call to discuss the deal. Several times during the call he said HP (NYSE: HPQ) plans to migrate Palm's webOS software to other platforms, such as tablet devices.

"The tablet/slate products are such new products we see opportunities broadly for consumers, but also enormous interest from channel partners for things like health care and education," said Bradley. "I think you'll see webOS deployed in consumer and commercial products."

HP has actually been shipping a range of tablet devices for years, aimed mainly at specific vertical industries such as medical and delivery personnel. But the relatively sleepy category of tablets was jolted into overdrive by the debut of Apple's iPad earlier this month.

The sleek new tablet launched with access to tens of thousands of applications designed for Apple's iPhone, which essentially shares the same OS. Apple reportedly has sold over half a million iPads already.

Gartner Research Director Ken Dulaney said there's a reason Palm's critically-acclaimed webOS has been limited to smartphones. "I think taking webOS to tablets is an incredibly risky statement," Dulaney said in an e-mail to InternetNews.com. "webOs is not as mature for tablets as was the iPhone OS, which was based on years of investment in [Mac] OS X. By the time they get there, the market will have passed them by.

"Too many people are jumping off the tablet cliff after Apple. Matching Apple will be difficult. It's a bit like HP talking on the MP3 market against Apple. Very risky," Dulaney said.

But HP made it clear it's ready to spend to make Palm successful. A financial analyst on the call said he estimated Palm's R&D spending was running at about $190 million a year. Jim Burns, HP's vice president of investor relations, said the company planned to increase that amount and also invest more in sales and marketing as well as distribution of Palm's smartphones.

What about Microsoft?

That investment on top of the $1.2 billion to acquire Palm had some observers wondering where this leaves HP's longtime smartphone partner Microsoft (NASDAQ: MSFT).

"The wallflower in this particular dance is Microsoft," Roger Kay, analyst with Endpoint Technologies Associates, told InternetNews.com. "If HP is paying this much money, Palm is where it's going to make a serious investment. They've already tried to make it in smartphones with Microsoft and it hasn't worked."

Ironically, Microsoft CEO Steve Ballmer showcased a slick HP prototype tablet running Windows 7 software during his keynote address at the Consumer Electronics Show in January. That device was said to be set for release later this year.

Bradley said HP continues to see Microsoft as an important strategic partner, "but we think there's an opportunity here with Palm across all these connected products," he said.

In Kay's view, HP intends to leverage Palm's technology into a platform it hopes will be as vibrant as Apple's.

"They're hinting at an ecosystem that looks a lot like what Apple's doing," he said. "But that won't be easy and I think a lot of people in Silicon Valley are going to wake up the day after this announcement and ask, 'What the freak are you guys doing?' Apple's already shown it's got a really good ecosystem, good technology, sheer number of applications and customers.

"So HP's made a huge bet with a lot of risk, but they made the merger Compaq work, even if it did take a good five years," said Kay.

Does Palm Give HP a Competitive Advantage?

Analyst Jack Gold noted Bradley was formerly CEO of Palm before joining HP and has a keen understanding of the business. He thinks the move makes sense strategically for HP.

"HP's Windows Mobile phone business is dying a rapid death and HP would have had to totally revamp its product line in order to stay in the smartphone business," Gold, principal analyst of J. Gold Associates, said in an e-mail to clients. "It could have designed new devices with Android or Windows Phone 7, either of which would have taken time and would be expensive. Palm brings HP a modern and competitive platform that is already designed, implemented, and in production. This saves HP many R&D dollars as well as dramatically accelerates time to market."

Gold also agreed with Bradley's assessment that HP gains substantial intellectual property and patents from the acquisition that could prove to be a competitive advantage.

The patents could be used "as a defensive threat against the competition (especially Apple, but potentially HTC and Google as well)," said Gold. "This is not a trivial issue, as many legal battles lie ahead in the smartphone and mobile/portable device marketplace. A strong IP portfolio that is defensible is important. Indeed, the IP may even eventually result in license revenues to HP from some of its competitors."

HP said it expects the Palm acquisition to clear regulatory approval by July 31 of this year. Bradley said Palm will operate as its own division within HP. HP's shares closed down about half a percent to $53 in after-hours trading.

David Needle is the West Coast bureau chief at InternetNews.com, the news service of Internet.com, the network for technology professionals.