Dueling Fools: Why HP Won't Rescue Palm

I can't let my friend Rick Munarriz's defense of Hewlett-Packard's (NYSE: HPQ  ) $1.2 billion purchase of Palm (Nasdaq: PALM  ) and its WebOS technology go unanswered. This was and still is a bad deal, because money alone won't fix the one-time head of the handheld computing market.

Developers are Palm's real problem. They won't abandon Apple's (Nasdaq: AAPL  ) iPhone OS -- or, for that matter, BlackBerry or Symbian, which collectively power most of the world's smartphones -- for webOS. The meager installed base of Palm handsets means the opportunity to make money with WebOS is far too small.

Apple, meanwhile, is contributing to the problem, by making it difficult for developers to spend time writing for anything other than its iPhone OS. To attract coders to WebOS, HP would have to either:

  • Geometrically increase the number of smartphones Palm sells, creating an acceptably large installed base.
  • Put WebOS in a new device where competition is still emerging, such as a tablet.
  • Adopt WebOS for products where HP already has a massive installed base, such as PCs and printers.

All three are options, but the second and third are more likely than the first. Were HP to redefine what WebOS is for, it could work to the company's advantage and to investors' delight. But I'm still skeptical. Here's why.

Cry havoc and let slip the tablets of war
HP will find it difficult to compete for tablet customers. Apple has already sold 1 million iPads, including 300,000 3G tablets during its first weekend of release. The message? Consumers want to take the device with them wherever they are, if not as a laptop replacement, then as a gaming platform and library. AT&T (NYSE: T  ) should collect millions in monthly fees from these on-the-go content consumers.

There's also Amazon.com. Say what you will about the Kindle, but it's still one of the market's most popular e-readers. Today's tablets -- even the iPad -- are readers first, platforms second. HP won't convert Kindle purists any more than the iPad did.

Yet over time, developers will become the kingmakers of the tablet market, as they have in the smartphone market. They'll go where the sales are, and that's a huge problem. Apple's iPhone app ecosystem is already feeding the iPad. And Google (Nasdaq: GOOG  ) , if it makes good on rumors to introduce its own Android tablet in concert with Verizon (NYSE: VZ  ) , would also have thousands of apps available to buyers.

HP has a chicken-egg problem in smartphones and tablets. Only a large installed base can attract developers, but only great apps (or a gimmick) can build a substantial installed base.

Bye bye, Mr. Softy?
Hewlett-Packard CEO Mark Hurd said during his last earnings call with analysts that his company has no plans to abandon Windows in its products. But he also said that analysts should watch for unique ways for WebOS to add value to HP's offerings -- even printers, believe it or not.

But the bigger opportunity here lies in PCs and netbooks. Just as Google plans for its forthcoming Chrome OS to power netbooks, HP could create its own line of WebOS-powered models to go along with the Windows versions it already sells.

Even crazier, HP could build WebOS into a full computer operating system. Any such plans would make Microsoft (Nasdaq: MSFT  ) crazy, of course. But HP is the PC market leader. Developers would have no choice but to pay attention. They'd write code for WebOS, if only because failing to do so could mean missing out on selling software to millions of consumers.

But in the end, even HP is limited in the installed-base stimulus it could give WebOS. Windows has such a long history, and is so deeply entrenched as the Operating System of Record for Corporate America, that HP would have to spend most of its time and resources building and selling Windows PCs. And that brings us back to HP smartphones and tablets as the most natural targets for WebOS.

Now for the good news
To be fair. HP has a good history with shepherding operating systems. HP-UX is widely considered one of the better implementations of the Unix operating system, and it persists to this day. What HP does with HP-UX, it can do with WebOS.

But the company will have to be more aggressive than it was when it birthed HP-UX, if only because the computing industry moves faster today than it did when that OS was first released. HP needs to do something dramatic to create a massive installed base of WebOS smartphones and tablets, and soon.

My advice: Give away the Pre. Sign a deal with Verizon in which users, in exchange for a modest activation fee and a two-year contract, would get a free Palm Pre. HP would supply the hardware, which already isn't selling, and developers would get millions of new reasons to write code for WebOS. Better still, HP's own coders would get two years to upgrade the software they'll inherit from Palm.

It's a crazy idea, I know. But in spending $1.2 billion, HP has made what amounts to a crazy all-in bet on WebOS. Dramatic action is the only plan that makes sense.

How would you increase adoption of WebOS if you were Mark Hurd, CEO of Hewlett-Packard? Discuss in the comments box below.

Apple and Amazon.com are Motley Fool Stock Advisor selections. Google is a Motley Fool Rule Breakers recommendation. Microsoft is a Motley Fool Inside Value pick. Motley Fool Options has recommended a diagonal call position on Microsoft. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He had stock and options positions in Apple and a stock position in Google at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. The Fool's disclosure policy would be gobsmacked if it weren't already discombobulated.


Read/Post Comments (4) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 19, 2010, at 6:03 PM, gslusher wrote:

    "Today's tablets -- even the iPad -- are readers first, platforms second."

    Not really. According to Jobs at the iPhone OS 4 announcement, in the first few days, after Apple had sold 450K iPads, iPad users had downloaded over 3.5 million apps--and 600K iBooks. That's 1.5 books per iPad, but about 8 apps/iPad--and that's with only 3,500 iPad-specific apps available. As the library of iPad-specific apps grows, downloads of apps per iPad should accelerate.

    Also, Amazon has never released sales numbers for the Kindle. They claim that it's their best-selling product, but their numbers are skewed by SKUs. Let me explain: Amazon counts every SKU separately. That means every COLOR of the iPod Nano is counted separately. The Kindle has only two SKUs; the latest (5th Generation) iPod Nano has at least 14 SKUs. (There are also 4th Generation iPod Nanos available directly from Amazon.) What would happen if one combined Amazon's numbers for all the iPod Nano SKUs? They might well exceed the Kindle. All told, there are at least 29 SKUs for current iPods.

  • Report this Comment On May 20, 2010, at 1:13 PM, krikus050 wrote:

    I would have to say developers are not the problem as you state it to be. Saying that the problem is developers not willing to leave iphone or blackberry or symbian is not really true. Porting code, especially for webos through the PDK, isn't hard. You can have multiple platforms run your program fairly easily. The real problem is that no developers want to take the time to port their code for a company that was going out of business. I think all HP needs to do is give the phone better hardware and developers will feel at ease writing for webos.

  • Report this Comment On May 20, 2010, at 4:16 PM, TMFMileHigh wrote:

    Thanks for the comments, Fools.

    @gslusher You're right about the downloads, but those numbers don't speak to usage. More recent research I've seen say the iPad is being used to read newspapers and magazines almost as much as books. Users love it as a reader.

    @krikus050 Had you posted this a few months ago, you'd be right. Back then porting wasn't hard. Apple has changed that by requiring iPhone developers to use its tools and specified APIs, and making cross-platform development more difficult as a result.

    Also, I disagree that better hardware by itself is the issue. Software profits are the natural consequence of either (a) a large installed base, or (b) a rich yet small installed base. Developers aren't dumb; they'll go where the money is.

    FWIW and Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On May 20, 2010, at 6:24 PM, foolexaminer wrote:

    IMO, you've got it all wrong. HP is huge! Their current earnings for this quarter topped well over $30 billion dollars. Not only have they recently released 13 different models of netbooks, but they now have solid plans to release a Tablet running webOS and HP Printers running webOS. Recent articles have also revealed that HP will be manufacturing flexible displays that will be used by the military for acquiring and sharing information between soldiers and command centers.

    With all of these capabilities HP has demonstrated, it's very clear that webOS is in very good hands under the support of a big company with strong financial power and well known as the leading technological company worldwide.

    It also seems that HP is aligned with the same strategies Google is eyeing on. Google will soon have Android in Ford, tablets, and TVs. HP will have webOS on tablets, printers, and perhaps many common home appliances as well. Apple can't keep up with competition in hardware technology; iPhone and iPad hardware is inferior compared to their competitors. As a result, consumers are learning that Android smartphones are beginning to look like better deals than iPhones as the rapid movement of Android market share increase much higher than the iPhone.

    By the time iPhone loses it's popularity, HP with webOS and Google Android may remain firm and standing strong.

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