News Analysis

HP’s acquisition of Palm will deliver long-term choice, say analysts

Warwick Ashford

Hewlett-Packard's proposed acquisition of Palm for $1.2bn could bring increased choice for consumers and businesses.

PCs are on a collision course with smartphones, so having a position in this sector of the market is vital for all hardware suppliers, says Richard Holway, chairman of research company TechMarketView.

Therefore it is quite logical for HP, as a world leader in hardware, to be moving into smartphones in an attempt to get a serious stake in this part of the market, he says.

HP has made it clear that it intends to use Palm's operating system, webOS, to become a leader in the smartphone market, which it says is worth more than $100bn and is growing at over 20% a year.

"This market presents a significant opportunity for profitable growth," Todd Bradley, executive vice-president of the personal systems group at HP, told analysts in a conference call.

While HP's move into smartphones is logical, Holway says Palm is not an obvious choice because the company and its operating system has a tiny and shrinking share of this market.

Palm's share price is down more than 53% this year and the firm's global market share in smartphones dropped to 1.5% in 2009 from 3.5% in 2005, according to research firm IDC.

Palm's share of the US smartphone market fell to 4.2% in 2009 from 6.5%t in 2008, well behind RIM, whose Blackberry holds 47.8% of the market, and Apple, whose iPhone has about 25%, according to Strategy Analytics.

This week Palm warned that revenue in its current quarter would be between $90m and $100m, which is at least $50m below previous forecasts.

Microsoft would have been a more obvious choice than Palm for HP's mobile strategy, says Holway, given the long-standing partnership between them.

"Logic would say you would use the same OS in a smartphone and a tablet," he says.

However, Chris Hazelton, research director for mobile technologies at the 451 Group, says Palm is a good choice because it will help set HP apart from its rivals.

Once the deal closes, HP will be the only other technology company besides Apple to have its own mobile operating system, he says.

"The others rely on Microsoft and Google and so it is more difficult to differentiate their smartphones," says Hazelton.

Palm's webOS will bring "new energy" to HP's mobile strategy by giving it the same control over hardware and the OS that smartphone leaders Apple and Blackberry maker RIM enjoy, he says.

The most important part of this acquisition for HP is ownership of WebOS and the engineers used to develop it, says Adam Leach, principal analyst at Ovum.

WebOS is a good technology building block for HP to start building out its own managed device platform, he says.

Access to HP's resources will gives Palm the time and financing that will allow it to deliver more mobile devices beyond the smartphone, says Hazelton.

Future generations of HP's tablet computers are likely to exploit webOS technology to deliver an alternative to Apple's iPad, he says.

Acquisitions like this, if effectively manage and integrated, can result in technology and product enhancements, which fosters competition and ultimately gives consumers more choice, says Matt Pollard, director of advisory services at Forsythe Solutions Group.

HP will be able to use the core competencies of Palm to provide more advanced and competitive technologies to the marketplace, he says.

The full benefits to HP, Palm and their customers will be realised only in the longer term, says Carolina Milanesi, research vice-president, mobile devices at Gartner.

It will take time for HP to deliver a portfolio of products, she says.

"The goal and benefit that we see here are long-term, where HP can control the OS and build an ecosystem that allows it to differentiate its offering in both the smartphone but also the PC market with tablets," says Milanesi.

It is too early to say whether HP will concentrate on the enterprise or consumer markets, but considering webOS, it could fit both, she says.


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