I think that HP’s (HPQ) acquisition of Palm is a very telling sign for the industry. Namely, the rate of innovation in the mobile space is happening faster than Microsoft (MSFT) can keep up with. In prior years, computer manufacturers like HP and Dell (DELL) had no other options than to install Windows on their computers. As a result, when Windows Vista fell flat, computer manufacturers saw their sales take a hit. It is my belief that HP is not willing to take that chance in the mobile space with Microsoft’s current product portfolio. By acquiring Palm, it is distancing itself from Microsoft both for smartphones and tablets. HP has already made it clear that it plans on rolling out Palm’s webOS to smartphones, tablets, and even high-end printers.
I believe this partnership actually makes sense for a variety of reasons. First and foremost, this gives HP an instant foothold, albeit a shaky one, in the rapidly growing smartphone space. HP paid $1.2 billion for Palm, a sum it can easily afford with over $13 billion in cash on its balance sheet and over $7 billion in revenue in 2009. Second, this enables HP to differentiate their products from others on the market. Much in the same way that Apple’s (AAPL) products are differentiated through Apple’s proprietary operating systems. Finally, much of the failure of Palm as its own entity was a result of financial constraints. When Palm launched webOS with the Palm Pre last June, it was a result of a massive infusion of cash from private equity firm Elevation Partners. Since that infusion, though, Palm continued to lose money until its coffers were almost empty. Despite launching a second model, the Palm Pixi, its hardware sales have been lackluster. Without additional financial help, the company would not have been able to survive on its own. However, with HP’s massive resources behind it, the company will be able to roll out new hardware at an accelerated pace.
HP executives have stated that they are “doubling down on webOS” and I think that is probably fairly accurate. As an acquisition, Palm is a fixer-upper, a company with some intrinsic value but in need of help. Palm’s webOS is a solid mobile operating system with a great deal of potential. However, before HP stepped in, Palm was struggling to survive and couldn’t fix its problems on its own. For the acquisition to be successful, HP will need to act quickly to address all of the problems at Palm. I believe HP’s strength in product design will ultimately help to deliver desirable new devices with better build quality. In recent months, though, Google’s Android has taken much of consumer’s mindshare away from Palm as the best iPhone alternative. To combat this shift, HP needs to quickly bolster the amount of apps available. The best way to accomplish this will be to reignite interest in the brand by delivering desirable new hardware while simultaneously courting mobile developers. Palm’s former CEO Jon Rubinstein has already stated that webOS 2.0 will be released later this year, likely alongside a slate of new devices in time for the holiday shopping season. With an aggressive advertising campaign and a strong portfolio of new devices, HP could push Palm back into the limelight.
The advantage for HP here is that if the acquisition is a success, it will have an array of devices to distinguish itself from the growing number of Android devices on the market from competitors like Dell, Samsung, etc. Further, it gives HP a head start on some of its competitors just now releasing smartphones on the market. If for some reason HP cannot reinvigorate the brand, though, they would take a $1.2 billion loss but other alternatives would still be in development. HP could always adopt Android on some devices or even Windows Phone 7, if there proves to be a market for it. Essentially HP has just purchased a $1.2 billion option on the smartphone market. If they succeed in implementing webOS and addressing its faults, the payoff could be large. However, if they falter they will need to explain a rather large capital loss to investors. The real challenge, though, will be convincing developers to write apps for yet another mobile operating system.
This is a problem that also affects the next company I would like to discuss. Despite having the largest smartphone market share in the US and selling more units worldwide than Apple and Google combined, Research in Motion is still struggling in some key areas.
Research in Motion (BlackBerry OS)
Research in Motion (RIMM) was one of the original smartphone pioneers, launching their first smartphone device back in 2002. Much of BlackBerry’s success over the past decade is due to their incorporation of push email service, which sends new emails directly to the devices when they arrive instead of requiring the user to check for them manually. The combination of the push email service and a full keyboard helped to make the BlackBerry the corporate staple it is today. However, push email service is now standard on all major mobile operating systems. Further, more advanced mobile operating systems have emerged in recent years that are beginning to threaten Research in Motion’s dominance in this market.
The emergence of the touch screen form factor has rendered full keyboard devices more antiquated. By offering a more intuitive input method and roughly twice the screen space, touch screen devices have proven they are simply more versatile. There will certainly be a place for full keyboard devices in the market, but current trends have proven that will be a niche position. As such, Research in Motion has tried to update its lineup with the Storm and subsequent Storm 2. Although Research in Motion does not disclose sales of these devices, reviews and high return rates suggest it is not selling as well as its touch screen competitors.
I believe that the difficulties Research in Motion is facing on the touch screen front stem from the fragmentation of devices discussed earlier in the article. All BlackBerry devices, except for its touch screen models, have a physical keyboard and either a trackball or optical trackpad. While many newer mobile operating systems have been designed solely around touch input, Research in Motion has tried to evolve their older mobile operating system to newer form factors. The result is a user experience that attempts to incorporate too much old technology and is visually unimpressive. I believe this is a fatal mistake and is largely the reason the company has had lackluster success with touch screen devices. This also helps to explain why despite its dominant market position, its software library pales in comparison to touch-only mobile operating systems like iOS and Android.
The relatively small size of the BlackBerry App World helps to showcase a dilemma for developers. While Research in Motion has a very large installed user base, most of those users have non-touch screen devices. As a result, developers must design apps that use a trackpad and a keyboard as their primary input methods, rather than simply touch input. Clearly the market is heading in the direction of touch screen devices, but to reach the majority of Research in Motions current users, the apps must be tailored towards older hardware. Further, Research in Motion’s relative lack of success with touch screen devices means that developers who want to take advantage of cutting-edge hardware are looking to other mobile operating systems. The size of Apple and Google’s software libraries is proof of that.
As if one needed more proof that Apple and Google (GOOG) have the competitive edge on Research in Motion, listen to the results of a recent Crowd Science owner loyalty survey. When current BlackBerry owners were polled about their next smartphone purchase, 40% of current BlackBerry owners said they would prefer an iPhone as their next device. Further, 30% of BlackBerry owners said they would prefer an Android powered smartphone as their next device. The survey claims a margin of error of +/- 10%, but even those numbers should be alarming to Research in Motion. Unsurprisingly, 90% of current iPhone and Android device owners said they were planning to stick with their current platform.
To help combat against the increasing competition, Research in Motion is planning on releasing its new BlackBerry 6 mobile operating system with more of a focus on touch screen devices. The new mobile operating system helps to close the gap between BlackBerry and its competition, adding support for multi-touch throughout as well as an improved browser and media capabilities. There have also been rumors circulating on the web that show a new touch screen device with a slide-out full keyboard. Since BlackBerry is famous for the usability of its keyboards, this may be a good prospect for the company. Much of Research in Motion’s future success will be pinned to the BlackBerry 6 mobile operating system. They will need to deliver some very compelling hardware alongside the new mobile operating system to sway current BlackBerry users from switching platforms. However, headwinds in the market are clearly working against Research in Motion. This is a good opportunity to discuss one of the companies rapidly gaining share in the smartphone market...
Disclosure: Long GOOG, Long AAPL