With Palm, HP Is Calling Out Apple, Google, RIM and Even Microsoft

By the time Apple (AAPL) launched the iPhone in June 2007, Palm (PALM), the one-time smartphone pioneer, was already in decline. Three years later, after U2 star Bono's firm Elevation Partners spent $460 million to keep the dying Palm on life support, the rock star and his pals will walk away with $485 million cash.

But for Hewlett-Packard (HPQ), the cash-rich Silicon Valley icon, the $1.2 billion buyout of Palm represents a cheap way into the piping-hot mobile hardware and services market. HP's savvy move is a direct challenge aimed at some of the biggest tech companies in the world, including Google (GOOG), Microsoft (MSFT) and Research in Motion (RIMM).

For Top HP Exec Bradley, a Homecoming

"In one fell swoop Hewlett-Packard has slapped Apple, Google and Microsoft upside the head," says Silicon Valley tech analyst Rob Enderle. "Palm's WebOS is the only remaining stand-alone operating system that has an app store, multitouch technology and next-generation user interface. It would take two to three years for HP to build a comparable platform."

HP says it will now focus on using Palm's WebOS -- which is well-regarded, if underutilized -- to power smartphones, netbooks and tablets. "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 Todd Bradley, HP's Personal Systems Group executive vice president.

For Bradley, the Palm deal represents a homecoming: He was Palm's CEO from 2003 to 2005. During a conference call with analysts, Bradley hedged about whether the company would abandon its partnership with Microsoft, which is developing the software for HP's upcoming Slate tablet device, in favor of WebOS. But Enderle thinks that's a possibilty: "HP is no longer dependent on Microsoft, its longtime partner, at least in the mobile space," he says.

All About Intellectual Property

Roger Kay, president of Endpoint Technologies, says Bradley is smart not to prematurely burn bridges with Microsoft, which has long built software for HP devices -- and often frustrated HP with its particular rules and requirements. Despite Bradley's comments, both Enderle and Kay think it's clear that HP has firmly placed its bet on WebOS.

"HP wouldn't spend a billion dollars if they weren't planning to put the wood behind WebOS," Kay says. Referring to HP's new mobile rivals, Kay says: "Microsoft is in the worst position of anyone in this crowd because this pushes them further to the outside."

The deal is also a blow to Google, because HP had been developing mobile products that will use the Android mobile operating system. "Apple's lawsuit against HTC really spooked HP, which now sees that Google has a significant intellectual property problem," says Enderle. In March, Apple launched a proxy legal assault on Android by suing HTC, Google's most important mobile partner, for multiple patent violations.

Enderle suggests that the lawsuit was intended to put hardware manufacturers on notice that Google can't defend its partners against intellectual property claims involving Android.

In fact, intellectual property is at the heart of this deal, Bradley said, because "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."

A Painful End for Palm

For Palm, this is a painful conclusion to CEO Jon Rubinstein's worthy effort to resuscitate the company that first popularized the PDA (personal digital assistant) -- the precursor to the smartphone -- with the Palm Pilot. That very name invoked the sense of computing moving from your desktop to your hand -- a process now taking center stage in the tech world.

"After that, Palm never again reached critical mass," Kay observes. "It really was a spectacular implosion."

Rubinstein is a smart, serious fellow who played a key role in developing the iPhone during an impressive career at Apple. In 2007, Elevation plucked him to revitalize the faltering Palm. But in the end, Rubinstein couldn't tame the monster he helped create.

When I interviewed Rubinstein last fall, he acknowledged that "the original Palm was all about innovation, but something happened. The company lost its way." Rubinstein tried valiantly to right the ship, but it wasn't enough. "We're up against a lot of tough competition," Rubenstein told me then. "But we will be in the top five players in this space."

He maintained that line up until this month, repeating it to analysts and in interviews. In the end though, Palm simply ran out of money. "Palm was going under," says Enderle. "They'd burned through way too much cash with too little to show for it. In the end, the iPhone didn't kill Palm, Palm killed Palm."

No Answer for the iPhone

Palm's collapse represents one of the most stunning downfalls in the history of Silicon Valley. It's amazing to think that as recently as five years ago Palm owned a very solid position in the emerging smartphone market with a popular series of Treo models (I toted a 650 around for over a year).

Then, in June 2007, Steve Jobs introduced the iPhone on AT&T (T) and Palm had no answer, unlike Research in Motion's BlackBerry, which was able to withstand the iPhone onslaught, thanks to its widespread corporate use and superior email technology. Samsung, Nokia, LG and others were able to hobble along with tolerable "feature phones" at lower price points.

"For a bunch of people who came from Apple, they sure didn't learn the key marketing lessons," says Enderle. Referring to the introduction of WebOS, Enderle says Palm executed "one of the worst rollouts I've ever seen in my life. It was like they went down a list of ways to undermine the product, starting with the fact they chose Sprint as their initial partner and not AT&T or Verizon Wireless."

As Kevin Maney wrote presciently this week on DailyFinance, Palm was caught in a death-trap between high-end performance -- which the iPhone achieved -- and ease of use, which low-end handsets ably captured. Palm was left in the mushy middle. Faced with the growing ubiquity of Google's Android mobile operating system, which is now on almost 40 devices, Palm had nowhere to go.

A Smart Bet, Cheaply Had

Although Palm will cease to be an independent company, the outcome could have been worse. The company could have gone bankrupt, which would have wiped out its investors, most notably Elevation Partners. That fund is run by Roger McNamee and Bono, and has been infusing hundreds of millions of dollars into Palm.

Since 2007, Elevation has invested $460 million for a roughly one-third stake. It now expects to receive $485 million on the transaction. Basically enough to keep the lights on. "I'm sure that Roger McNamee was at the table," Kay says with a chuckle. "The number came out so that he just came out ahead on his loan."

For Hewlett-Packard, the Palm purchase is an easy way to instantly gain a foothold in the booming smartphone market. But this is no bold gamble. Rather, it's a very smart bet, cheaply had. HP has a market capitalization of $125 billion and a cash hoard of $14 billion. So, while $1 billion cash isn't exactly chump change, even for a behemoth like HP, it is legitimate spending money. And it clearly sets a tone for tech mergers and acquisitions spending for the rest of the year.

Now, HP can devote its considerable engineering heft to improving upon what Rubinstein has been able to accomplish in the last 18 months. More important, HP has the size and the influence to really put pressure on partners when it comes to mobile deals.

No More Scrimping on Ads

During Palm's most recent conference call, Rubinstein complained that Verizon Wireless gave Motorola's Google-powered Droid a massive push last fall, while giving the Palm Pre and Pixi short-shrift. He suggested that had Verizon stepped up with more marketing, Palm products wouldn't have languished on retail shelves throughout the the holiday season.

HP, which already spends millions on effective TV and print advertising, will be able to push the new mobile products in a way that Palm never could. During a recent interview, Rubinstein said it would be nice to have $1 billion lying around for brand advertising. Well, Palm's got more than that now, but Rubinstein won't be the one to spend it (though he is expected to stay at the company).

For HP, the challenge now is going to be to attract developers to build programs to populate Palm's nascent application ecosystem. And given Apple's and Google's head start, that won't be an easy task.