HP Drops a Grenade and Google Purchases Patent Protection

Analyzing recent business decisions of HP and Google

I generally like to cover a wide range of topics in this column, but two blockbuster tech industry announcements dominated the headlines this summer and will have ramifications for years to come. So let’s dive right into what can only be described as the most interesting year for tech news in a long while.

HP Drops a Grenade in Room, Runs

PC giant Hewlett-Packard (HP) made several blockbuster revelations in mid-August, and attached them, for some reason, to its otherwise decent quarterly financial results announcement. The firm said it would purchase corporate search software maker Autonomy for $10.3 billion, would stop selling its webOS-based smart phones and TouchPad tablet, and was examining whether to sell or spin off its PC business. HP, in other words, is following in the footsteps of IBM.

Curiously, the webOS piece of the announcement got the most press. But the other two revelations are far more important. HP is attempting to do what IBM did before it, which is to reinvent itself as a purely corporate-focused provider of software and services.

That HP would drop its PC business is, perhaps, the most shocking. At the time of the announcement, HP was the number one PC maker in the world, selling far more units per quarter than its closest rival, Dell. (According to IDC, HP controls 18 percent of the worldwide market for PCs, compared to 11 percent for number-two Dell.)

So why the exit strategy?

HP, like the old General Motors, is a big company that brings a lot of overhead to every physical product it sells. But the PC market is a low-end, cut-rate commodity market, except for Apple, which has nicely established itself as the only high-end PC maker that customers actually consider.

And HP’s strategy to play in Apple’s territory has failed on two counts: Its expensive MacBook Pro knock-offs, the Envy line of PCs, have been ignored by consumers. And its attempt to copy the success of the iPhone and iPad via its blockbuster purchase of Palm a year ago has been even less successful: Smartphones based on Palm webOS fall into the “Other” category in smartphone market share reports and haven’t dented the market in the slightest.

Even Windows Phone looks like a powerhouse by comparison.

Looking just at HP’s PC business, there are heady revenues ($40.7 billion for its previous fiscal year) but relatively tiny profits ($2 billion for the same time frame). And while smaller PC makers like ASUS, Acer, and Samsung may be able to flourish in such a market, this just isn’t HP’s forte.

One wonders if Dell, which today offers a similar mix of PCs and corporate services, is next. Though let’s be honest here: A month ago, few people were wondering about such things. That the top PC maker would simply give up is nothing short of a bombshell.

Which leads naturally to Microsoft. HP wasn’t just Microsoft’s biggest PC maker partner, it was also the software giant’s closest companion, the one company that would follow wherever Microsoft led.

Anytime a Microsoft product came to market, HP was there with the corresponding hardware. It reads like a Who’s-Who list of forgotten Microsoft products, from the Pocket PC and Windows Mobile to Media Center and the Tablet PC. It was corporate co-dependency as its most obvious.

In the finest traditions of Monday morning quarterbacking, however, we should have seen this one coming. HP, of all companies, purchased ailing Palm and promised to unleash its webOS platform not just on smartphones, but on tablets and, get this, even on its PCs.

That’s right: HP’s plan was to deliver PCs to consumers and businesses that would dual-boot between Windows and Palm webOS, offering a choice, yes, but also a not-so-subtle shiv in the side of Microsoft’s decades-long strategy.

This plan seemed curious at the time, but it never came to fruition, seeming more fantastical than real. But we should now see HP’s webOS experiment—failed along with the poor-selling webOS-based TouchPad tablet that no one seemed to want—as the wake-up call that it is.

Here was Microsoft’s biggest and closest partner buying its own platform so it could step out of Microsoft’s shadow and provide complete, HP-based software and hardware solutions to customers. Clearly, the company had been planning something for a long time now, some seismic strategy shift.

That it moved so quickly to kill off both webOS and its PC business—the TouchPad was barely on the market two months—is interesting. HP is clearly serious about remaking itself.

For HP’s customers, there are many questions and few answers. Both webOS and the HP PC business could be spun off, together or separately, or sold to other parties. Samsung allegedly was in talks to purchase the PC business earlier this year, for example.

I expect HP, like IBM, to continue to support its PC products, and like IBM, to resell PCs from whatever company does walk away with this business.

That said, HP’s exit from the PC business and from the broader consumer market changes everything, not just for Microsoft, but for the many other companies that are trying to compete in these markets.

For entrenched successes like Google, with its Android-based products and services, and Apple, with iOS (iPhone, iPad), HP’s exit is confirmation that their focus on “post-PC” products and services is the right one. For other big PC makers—Dell, and possibly Lenovo—HP’s move is perhaps something they’ve considered themselves. And for the smaller PC players, HP is providing them with a chance to make new moves in this post-netbook PC market.

Besides my GM comparison previously, the parallels with the car market are everywhere. Just as today’s Hyundais, Kias, and Smart Cars would have been inconceivable to American car buyers 30 years ago, the notion that the Acers, ASUSes, and Samsungs of the PC world could be major players today would have been inconceivable to buyers of the first PCs. The times they are a-changing.

Google, Android, and Motorola

Previous to the HP late-summer blockbuster, the big tech news of the year involved escalating mobile industry patent skirmishes, which seemed destined to drag Apple, Google, Microsoft, RIM, and other players into full-blown warfare. Then Google simply purchased handset maker Motorola Mobility, not for its phones but its patents.

With that move, the mobile industry suddenly seemed destined for more of a quiet, Cold War–style, barely disguised animosity between these companies.

How we got to this point is convoluted, but the short version goes like this: With the tech industry’s seemingly inevitable move from traditional computers to mobile devices such as smartphones and tablets, those who wish to play in this new market—platform makers like Apple, Google, and Microsoft, but also the hardware makers (HTC, LG, Samsung) that resell those platforms—are jockeying for position.

And as Apple CEO Steve Jobs noted when he announced the first iPhone—“we’ve patented the hell out of it”—the prime bargaining chip that any of these companies has is often the patents that protect their inventions.

These patents are used in different ways, but the most common is cross-licensing, where two companies each license the others’ patents. When companies refuse to license another’s patents, they are threatened then sued.

Oddly, few of these cases have gone to court, and indeed, there’s a subset of the tech punditry that argues (without really knowing one way or the other) that many of these patents could ultimately be found invalid if they were tested in a legal setting.

But such issues, as with a general call for patent reform, are beside the point: Patents are part of the business, so this is the environment in which these companies must compete.

Enter Google: The online giant has a nearly unlimited supply of cash thanks to its successful advertising efforts, which feed off the company’s near-monopoly search engine.

To jumpstart its mobile efforts, Google elected to give away its Android mobile OS rather than charge a per-unit licensing fee as, say, Microsoft does.

This strategy comes with various pros and cons—again, a topic for another discussion—but the result is not debatable: Google now owns 43 percent market share for smartphones, a heady leap over the 17 percent it commanded a year ago. And its lead over Apple and the other smart phone makers is growing day by day.

Some—including yours truly—have argued that Google is following in Microsoft’s antitrust footsteps by using its dominance in one market (in this case, search/advertising) to dump another no-cost product (in this case, Android) in a new market.

More to the point, Google never established a portfolio of patents related to its mobile industry products. Until this year, however, the other companies in the smartphone industry—the companies that would like to license their own technologies to others, like Google—never really threatened Google with patent violation claims, even though Android is clearly infringing on numerous mobile patents.

Instead, these companies went after the smaller companies—like HTC, Motorola, and Samsung—that sell Android-based phones. This makes sense from a strategic sense, since these smaller companies can’t afford to be held up in court for years at a stretch, as Google could.

But it also allowed Google to continue dumping Android and establishing itself, arguably unfairly, as the market leader.

So this year, Google became the target. And when Apple, Microsoft, RIM, and other companies purchased a Nortel patent portfolio for $4.5 billion, Google cried foul, complaining to the US government that this cabal was allying against it and would use those patents as a club in order to get Google to pay.

That was exactly their plan, of course. So in August, Google announced a blockbuster purchase of its own: The company will purchase Motorola Mobility for $12.5 billion, picking up an Android hardware maker (and somewhat souring its relationship with other partners in the process).

But Motorola is most interesting because of its 17,000 patents, many of which are related to the mobile industry.

And with this purchase, Google finally has purchased the patent protection that Android requires. This gives Google the defense it needs when Apple, Microsoft, or other companies come complaining about Android’s patent infringements.

Because it’s highly likely that these companies’ mobile products are themselves infringing on Motorola’s patents. And heck, why go to court when you can simply cross-license?

What this means to potential customers of these devices is that a cloud that once loomed over Android is now removed. Yes, Android has other issues around OS version fragmentation and so on. But it’s now highly unlikely—impossible, really—for Apple to try and block the sale of Android devices generally. (This is a strategy Apple is currently using against Android licensee Samsung in Europe.)

Which means, going forward, Android and iPhone will likely continue to carve up the top 60 percent of the market or so for themselves, leaving the rest of the market to also-rans like RIM BlackBerry and Microsoft/Nokia Windows Phone.

I don’t believe that Google intends to do anything interesting or exciting with Motorola’s handset business or other hardware (the company also makes cable TV set top boxes). That would create too much of a strain on Google’s partners and could lead to a diminished role for Android.

Thus, I expect Google to spin or sell Motorola’s hardware business as soon as possible. (Note that the Motorola sale, if approved by regulators, won’t happen until 2012.)

Check out this Exchange expert's comments on the HP news as well: 
HP Sends webOS to Incubate, and
Reflections on HP's August 18 Announcements,
by Exchange expert Tony Redmond

Paul reflects some more about HP, Google, and the wacky world of technology:
Looking Back On the Most Eventful Month in Tech History
, by Paul Thurrott

A recent addition to the smartphone patent news, adding Microsoft to the mix:
Samsung Signs Patent Cross Licensing Deal with Microsoft
, by Paul Thurrott
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