HP's curious acquisition

I’m still not sure why HP spent $1.2 billion to buy Palm, other than it can. Yes, it has a minimal presence in mobile phones and other mobile devices, leading MarketWatch’s Therese Poletti on March 2 to predict an HP purchase of Palm:

Surely numbers-driven Chief Executive Mark Hurd is looking for ways for H-P to take advantage of the boom in smartphones. Buying Palm could be a way for H-P to get into the market for lower cost devices. It might have to abandon Windows, or offer two families of devices. H-P has often juggled competing product lines, diverse chip architectures and operating systems.

With its cash and global reach, HP can certainly do more with Palm’s technology that Palm has been able to do. And yes, Palm was available cheap, losing 73% of its market cap since its recent peak stock price of $17.07 last October.

It was a great victory for Palm and its investors, which despite good technology has been given up for dead for nearly two years. Elevation Partners, which took 25% sake in Palm three years ago, cashed in its (now) $460 million investment for an estimated $485 million — suggesting that it was worried about further deterioration rather than optimistic about a future upside. (Wednesday, Palm revealed Q2 revenues were expected to be 40% below analyst expectations, which would have punished the stock further.)

Obviously HP has been looking forward to the day when smartphones and other devices start to eat away at the Windows-based PCs that account for a nearly a third of the company’s revenues.

HP claimed the acquisition is even about the post-smartphone world:

"Smartphones are a part of this, but this is really about the Web operating system," Shane Robison, HP's chief strategy and technology officer, told Forbes. "It's a change in our business model to a connected device model." HP, he said, is assuming a world in which almost everything needs at least the potential to connect to the Internet.

But by taking on Palm and its webOS, HP is going down path it’s almost completely avoided during its 40+ years as a computer maker — as a sponsor of a proprietary computing platform.

Yes, it sold proprietary 16-bit mini computers in the 1970s, and it also bought two leading proprietary minicomputer companies: Tandem and Digital Equipment (when it bought Compaq).

However, its PCs have been DOS and Windows, and its servers Windows, Unix and Linux. The Unix (HP-UX) had its own development group, but the recent trend by HP and its customers has been away from HP-UX to Linux.

Of the world’s top five PC makers — HP, Dell, Acer, Lenovo and Toshiba — all have made mobile devices based on Windows Mobile (now Windows Phone) and Android. HP now seems to be abandoning this model and casting its lot with the leading proprietary vendors: Apple, Nokia and Research in Motion. (Yes, the operating system Nokia controls is open source, but its competitors are largely ignoring it.)

This also means that HP hopes to use webOS to differentiate its mobile products, rather than merely shave pennies off of operating costs as CEO Mark Hurd loves to do. Perhaps the thought of competing against commodity Taiwanese and Chinese firms in the mobile segment prompted him to do something different.

It’s really too soon to say whether HP will have any luck here. However, in the short-term, I think the biggest negative is for Google. A lot of people have been assuming that Android will take over the world, coalescing all the various carriers, vendors and users into a single platform. Instead, fragmentation of mobile phone platforms — as well as tablets — will continue.

It‘s also bad for Microsoft and Dell. Perhaps this will be the nudge that gets Microsoft out of the handset OS business, or it may cause it to more aggressively ally with Dell (which previously aligned with Android.)

But in a perverse way, I think in the short-term it will be good for the other proprietary platform vendors. Together, Nokia, RIM, Apple and HP will be able to hold off Android, and may cause the other phone makers to reconsider whether they want to hand control of their future to Google.

The one sure thing is that the number of webOS applications is going to explode. The iPhone (nearly 200,000) and Android (around 40,000) application stores are already crowded, while webOS only has a few thousand. Developers looking to get noticed will flock to webOS, hoping to get in on the ground floor now that its survival is no longer an issue.

Because of this demand — and because the webOS tools are very friendly — I predict that HP/Palm will have more than 5,000 apps by the end of the year, and perhaps closer to 10,000 apps.