How HP's Palm buy could crush Apple

HP may just have become the first credible contender to Apple's dominance in the smartphone game.
Written by David Gewirtz, Senior Contributing Editor

Last week, in Palm, a Silicon Valley soap opera, I opined that HP had overspent to the tune of $1,195,000,000 when it bought Palm for $1.2 billion. After reading two fascinating articles and thinking about the deal all weekend, I'm thinking instead that HP may have made a very smart move.

First, let me credit the two writers. The first is our own Jason Perlow, who wrote HP's Slate was an Ugly Baby with Windows 7 and basically claimed that the Slate would never have been a contender running just Windows 7.

The second article was by the wise and very French Jean-Louis Gassée who wrote Very Personal Computing. In it, Jean-Louis contends that the financial gravity of the computing world has shifted to smartphones.

He claims:

The smartphone isn’t just a new genre, it's nothing less than a reboot of personal computing.

I knew Jean-Louis back in the 1980s, when he was the head of the "Paris" project at Apple, the creation of the Mac II -- the first very beige, very boxy, color Macintosh. During Steve Jobs' wilderness years, Jean-Louis provided much of the vision for Apple engineering and in my opinion held Apple together spiritually until Jobs returned.

Next: Lessons from Jean-Louis »

Besides traditional Apple fare, Jean-Louis was heavily involved in the Newton project. Say what you will about the Newton, it broke new ground for handheld computers and got us thinking about what they should (and shouldn't) be. Jean-Louis then went on and founded Be, Inc -- originally a hardware company and then the vendor of a multimedia operating system that was probably 20 years or more ahead of its time.

From starting his career at HP to heading up Apple engineering, to creating the BeOS, which eventually was acquired by Palm to becoming chairman of PalmSource, Inc -- when Gassée talks about the future of smartphones, he knows of what he speaks.

Both Perlow and Gassée describe how Windows wasn't really appropriate for this new class of device -- and how a new operating system answer is needed. When you put Jason's premise that the HP Slate was ugly compared to the iPad up against Jean-Louis's contention that the lion's share of future growth potential lies with smartphones, I began to see the Palm acquisition in new light.

First, there's a historical, cultural, and social fit. Many of Palm's execs came from HP and one of Palm's former CEO's is now an HP senior executive. HP recently bought 3Com, which used to own Palm. And HP itself was one of the earliest producers of handheld technology -- anyone remember HP's completely indestructible and wildly expensive calculators of the late 70s and early 80s?

Next: What makes HP's choice so smart »

HP is a huge organization, with revenues near $115 billion. It's also one of the largest PC vendors on the planet. The problem, as Jean-Louis so eloquently describes it, is that PC's are mature, nearing the very end of their growth opportunities. Smartphones, on the other hand, are going nowhere but up.

PC vendors are becoming major players in the smartphone world, with Exhibit A being Apple. Dell has introduced its round of smartphones, Microsoft has had many incarnations with the latest being the Kin, and, of course, Google has launched a vibrant Android marketplace.

HP could play business as usual and come out with its own smartphones and tablet offerings, licensing the OS as it's done in the past. But that doesn't put it in the driver's seat. HP will always be competing with their OS provider, whether it's Microsoft or Google. HP would provide high-quality, but relatively unexciting -- and undifferentiable -- offerings from everyone else out there.

For a $115 billion company, that's not the way you want to ride the growth curve.

Instead, by buying Palm, HP gets webOS -- a smartphone-centric operating system that, by all reports, is excellent. There was no problem with the webOS -- it's major failing was that it belonged to Palm.

But by acquiring webOS, HP is able to get back into the game -- and compete with a fully-differentiated offering that it completely controls.

If, as Jean-Louis contends, the smartphone is a reboot of personal computing, HP just bought itself a central position. And rather than being forced to rely on partnerships with aggressive predators, HP gains control of its own destiny.

In my Palm article, I made the contention that HP could have waited a few weeks for Palm to implode and picked up the engineers for a song. But if you follow what I've outlined here, had HP waited, someone else might have picked up Palm.

Buying webOS essentially frees HP from partnership jail. To HP, it's less than 1% of the company's yearly income. To HP, buying Palm is about the same level of expense as if you or I bought an iPad.

It'll be interesting to see where all this goes. Personally, I wanted a Windows 7-based Slate. Although HP doesn't have a showman of Jobs' caliber, HP may just have become the first credible contender to Apple's dominance in the smartphone game.

I'm telling you. It pays to listen to Jason and Jean-Louis.

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