Editor’s note: Ken Hyers, John Spooner and Ezra Gottheil are analysts with

HAMPTON, N.H. – TBR believes Hewlett-Packard (NYSE: HP) is taking the long-term view with its recent purchase of handset maker Palm (Nasdaq: PALM), with plans for a strong mobile applications business as the fundamental motive. We anticipate that HP’s goal is to use the Palm WebOS, app store and platform development capabilities to turn Palm from a struggling phone maker into a multiplatform vendor of mobile capabilities that range from business e-mail to consumer social networking.

Thanks to Palm, HP gains a near-term advantage in handset shipments over its chief PC competitors, including Acer, Dell and Lenovo – all of which are moving swiftly into the smartphone space TBR estimates the acquisition will boost HP from approximately 200,000 smartphone unit shipments worth about $80 million in annual revenue to approximately 4 million units and $250 million to $300 million annually.

However, even if handset units were to double, driving closer to $500 million in annual revenue, HP-Palm would remain well-behind large rivals such as Research in Motion TBR estimates that RIM sold 10.6 million handsets in 1Q10, driving $15 billion in revenue, most of which came from its 41 million subscriber accounts.


Without a strong application developer community to drive Palm device adoption, software revenue and recurring services revenue, HP will struggle to achieve its goals. Consequently, we anticipate that HP will attempt to drive interest in Palm platforms through the development of WebOS apps. Doing so will position the Palm platform as a tool for businesses and consumers to communicate and collaborate, expanding opportunities for HP.

TBR believes that developing strong application developer support for the platform will be crucial for HP to achieve its objectives with the Palm acquisition, and will better position the company to compete against Research in Motion’s BlackBerry and Apple’s iPhone.

Smartphones and tablets

Palm smartphones help fill an immediate gap for HP, but the tablet PC market was also a key factor in the decision

Palm’s WebOS positions HP to enter into new market segments. TBR believes HP’s decision to purchase Palm was also driven by a medium-term need to fill gaps in its product portfolio, which HP iPAQ smartphones have been unable to do.

TBR believes Palm’s WebOS will provide HP with a platform, and potential differentiator, in the nascent tablet computer space. If anything, Apple’s iPad will drive interest in the form factor, aiding HP’s efforts to deliver a WebOS-based tablet that allows users to monitor e-mail, read the news and access electronic books, as well as provides them the ability to create documents, manage photos, and buy and sell goods online.

Given that no single manufacturer or OS yet dominates the tablet computing space, HP can couple the capabilities offered by WebOS with its own design expertise to become a key player in this emerging market segment. Here too, the acquisition of Palm gives HP the ability to leverage the Palm developer community to create applications and services that make an HP-Palm tablet relevant while fending against the iPad.

However, TBR expects the HP-Palm tablet to face the same fierce competition as Palm handsets, including from Apple, Microsoft and Google, which is positioning its Chrome operating system as a tablet OS.

Palm also a short-term defense move for HP

Palm has received high marks on performance, but its Pre and Pixi handsets have sold poorly in the wake of stiff competition from the iPhone, BlackBerry and a growing number of Android smartphones. TBR believes that, in addition to the potential in tablets, HP’s acquisition of Palm more strongly positions the company against PC competitors.

With both Dell and Lenovo clearly targeting non-PC devices, including smartphones, smartbooks and tablets, the HP acquisition prevents Palm’s extensive smartphone expertise, IP and WebOS from falling into competitors’ hands.

The move is also defensive from the perspective of defining the emerging tablet PC operating system space. As with smartphones, two key companies’ approaches are set to define the market. Apple, with its iPad, is emblematic of a closed system approach – where Apple exerts control over all aspects of the iPad experience, from the hardware and software through to the applications available for the device.

Google, on the other hand, would like to see its Chrome operating system used on tablet PCs much like the Android OS is on smartphones – an open system with open APIs in which third-party developers create various implementations. With WebOS, HP will likely try to stake a middle ground, offering a more robust enterprise-class OS for which customers will have an easy time developing applications.

HP hopes to avoid creating a completely closed system and/or the potential free-for-all that Google’s approach promises. By following this middle path, it aims to create an enterprise-class mobile computing platform that encompasses both the ease-of-use and ease-to-develop that Palm’s software offers.

HP threatens Microsoft’s tablet PC efforts

HP’s purchase of Palm is primarily a software play, giving it a mobile OS superior to the Windows Mobile OS it currently uses, and providing it with a tablet PC OS that will likely be superior to Windows. HP’s current tablet with Microsoft Windows has not been well received by reviewers, and TBR believes the Windows PC operating system does not lend itself to a touchscreen tablet experience.

Microsoft itself is finding the tablet PC market more complicated than expected, and recently ended development efforts on its own tablet, codenamed Courier.

Nevertheless, the decision to acquire Palm does not mean that HP is moving away from Windows across its mobile products. HP is a champion of customer choice and includes multiple processors and multiple operating systems in its lineup, such as Intel/AMD and Windows/Linux. TBR believes WebOS will become yet another choice in HP’s portfolio. From a usability standpoint, however, we believe a WebOS tablet will be better received than a Windows tablet, which may lead to adoption of WebOS tablet PCs in the enterprise.

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