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HP Buys Palm; Watch Out Microsoft

The real question with Hewlett-Packard's$1.2 billion purchase of Palm is can it do in the marketplace what Palm was unable to do by itself?

Can HP turn the Pre and Pixi into something more than a crumb-eater against Research in Motion and Apple and Microsoft?

HP's executive vice president and president of the $28 billion Personal Systems Group Todd Bradley tells me the Pre and Pixi are but one small part of the Palm story . His quick answers to the above questions are yes, but when you go deeper into the reasoning behind the acquisition, this story gets far more interesting. I just got off the phone with him, moments after the deal was announced, and he says the real focus of this deal should be Palm's webOS operating system and the company's 400 patents.

That webOS becomes intriguing.

Bradley tells me, "Quite frankly we made the decision to acquire Palm to accelerate our growth in the hyper-growing smart phone market." And he believes HP's financial resources, coupled with Palm's innovation, will lead to a winning combination. But it’s the webOS that offers bigger opportunities down the road, especially as netbooks and tablet PCs become even more popular. I asked pointedly if the Palm acquisition means that we can expect to see new mobile devices running webOS from HP, rather than devices running Windows 7 or even Windows Mobile from HP. The answer was yes.

That's significant, especially against the context of Microsoft's CEO Steve Ballmer taking the wraps off an HP slate computer at the Consumer Electronics Show earlier this year. That unveiling, designed to steal a little of the impending thunder that Apple's upcoming iPad would create, led to widespread speculation that Microsoft and HP would be launching a new partnership to market jointly a new family of mobile devices. Bradley tells me, "Let's be crystal clear: Microsoft continues to be a huge strategic partner for HP. As we look at webOS though, it's a natural platform for us to develop products on."

In other words, where Palm failed at market penetration because of limited resources and limited scale, HP may be able to use its resources to incorporate Palm's software in a new crop of devices, and spend the money Palm, Sprint and Verizon were unable or unwilling to. I'm not saying that HP's partnership with Microsoft is dead, but depending on how this works out, and how webOS HP devices are received by consumers and the enterprise, it could see a dramatic re-jiggering over the next few years.

The potential downside for HP?

Integrating Palm into the HP culture will be difficult and take some time. And that could prove to be a distraction as HP tries to compete in arguably a far more important part of its business: Cisco, and servers, and data centers. Competition with IBM in the same. Competition with Dell, Acer and Sony in PCs. HP opens another front in its war against all kinds of tech at a particularly competitive time. Still, HP's a big company and CEO Mark Hurd has proven how well the company can execute. The $1.2 billion acquisition may sound like a big deal, but when you're doing $125 billion in revenue a year, it's tiny. HP should more than be able to absorb this acquisition without distraction. The investment might seem like a flyer, but if it can successfully develop mobile products running webOS, and come up with a viable alternative to Windows, HP might have something here.

Better still, HP avoids having to work with Google, and licensing Android or Chrome, both of which have been widely speculated as powering a new generation of HP portables. Google takes it on the chin with this deal. Not only is the message clear that HP didn't want Google's software, it spent $1.2 billion to avoid it. Ouch. And in the midst of a mobile revolution in advertising, HP is setting itself up nicely to take advantage of it. And I haven't even addressed the licensing opportunities here if HP decides to go that route.

And if it doesn't work out, at a mere $1.2 billion, reward far outweighs risk.

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