HP to Buy Palm in Blockbuster $1.2 Billion Deal

HP, the largest PC maker on earth, will buy struggling smartphone maker Palm in a deal valued at a whopping $1.2 billion. That a company with meager sales and dwindling market share could be worth so much money is explained by one thing: The smartphone market is already worth $100 billion in annual revenues, and HP wanted a piece of the action.

Some of the language used by HP executives in the wake of the Palm purchase announcement is interesting, however, and suggests that HP was more interested in the company's software than in the Palm brand. The word "Palm" was barely mentioned in a post-announcement press conference, while webOS—Palm's smartphone OS—was mentioned many times. And HP said explicitly that it would use webOS in a coming generation of slate PCs that will take on Apple's iPad head-to-head. Those PCs were previously going to run Windows 7.

"Palm's innovative operating system provides an ideal platform to expand HP's mobility strategy and create a unique HP experience spanning multiple mobile connected devices," said HP Executive Vice President Todd Bradley. "And Palm possesses significant IP assets and has a highly skilled team. The smartphone market is large, profitable, and rapidly growing, and companies that can provide an integrated device and experience command a higher share. Advances in mobility are offering significant opportunities, and HP intends to be a leader in this market."

Today, HP is anything but a leader in the smartphone market. It currently sells a single smartphone mode, the iPAQ Glisten, that is based on an aging version of Windows Mobile. By contrast, HP is the largest maker of PCs in the world; the company controls about 20 percent of the market by unit sales and sold over 15 million PCs in the first quarter of 2010.

Palm tried to jumpstart its business last year with the release of webOS and the first webOS-based phone, the Palm Pre. Later in 2009, the company added a second webOS device, the Palm Pixi, and in early 2010, it announced updates to each, the Palm Pre Plus and Palm Pixi Plus. But Palm's expensive restart strained the company's resources, and it had to seek outside financial help. That, coupled with its reliance on a small number of wireless partners, hampered Palm's ability to market and sell its products to consumers. In the US, Palm's market share has fallen to the 6-7 percent range.

That number is roughly analogous to the Mac's share of the PC market in this country—according to NPD, Apple controls 7 percent of the US market for PC—but unlike Apple, Palm is on the way down: It had over 10 percent of the market as recently as last year. More important, perhaps, is that whatever share Palm did have was due to older devices, not those based on webOS.

For HP, webOS is a modern and desirable smartphone platform, one that is certainly workable in both smartphones and iPad-like computing devices. Combined with HP's market clout and sales channels, it's possible that Palm and its webOS could be on the road to resurgance. "HP's longstanding culture of innovation, scale, and global operating resources make it the perfect partner to rapidly accelerate the growth of webOS," Palm Chairman and CEO Jon Rubinstein said, noting that he would be staying with HP in an as-yet undisclosed position.

Up in the air is HP's relationship with its number one partner, Microsoft. HP will of course continue to make PCs based on Microsoft's Windows OS, but this deal suggests HP won't be selling any Windows Phone-based smartphones going forward. And when pressed about its upcoming HP Slate device, which was to have run Windows 7, HP had no comment.

TAGS: Windows 8
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