Did I Miss A Memo? What Changed? Why would HP quit the Smartphone Biz after buying Palm last year?

Did I miss the memo? Did the world change somehow?

Last I heard, the main business for Hewlett-Packard was making computers, in fact last I heard, HP was clearly the biggest PC maker in the world.

There was the trend of the shrinking computer from mainframes to desktops to laptops to tablets to smartphones. You know, like say, Apple? Did I miss something?

There was also the trend of the increased mobility of computers, from desktops to laptops and tablets, to smartphones. You know, also like say, Apple? Wasn't this happening anymore?

Oh, and I also was under the impression that the computer industry was on a trend to easier use of computers? Started that you had to have a Ph D just to operate one. Then you had to go to specialized classes and courses. Even the original Mac, while so easy you didn't need to take a course, you still needed a full-sized 101 key computer keyboard and a mouse to operate it. By the time smartphones came along, Nokia shrunk the keyboard to one that fit in your palm and dispensed with the mouse. Then Apple came along and gave us the first practical touch-screen interface, what is now considered cutting edge. And yeah, most smartphone makers are still struggling with that transition - at Nokia it was so costly and time-consuming, that new CEO Stephen Elop decided to end the migration project to a touch-based OS. Microsoft found it so hard, they abandoned their established Windows Mobile and started from scratch with Windows Phone. And Blackberry, poor Blackberry, is still struggling to even roll out a user-friendly touch interface. But HP has it! HP 'owns' the future with Palm WebOS. So they have gone through the pain and it should be smooth sailing from here - made ever the more sweet where most rivals have to still go through a lot of the pain just to catch up to where Palm and HP are now (on this trend).

Then I seem to remember that the software OS guys made more money than the hardware guys, say like how much more profits Microsoft earns than HP? And partly why say Apple guards jealously its right to make its own OS.

Then I also kind of recall that in the computer business, the smartphone was the huge growth opportunity as well as the tablet PC? Just like say.. Apple? I mean, smartphones did grow 71% last year. Last YEAR. Grew 71% in one year! And the total global smartphone market is today bigger in units sold, than the total PC market including desktops, laptops, tablet PCs etc. And yes, all analysts agree that smartphones will have another monster year, the smallest forecast for growth this year is about 40% and some think the market will nearly double again. This is THE hottest market! Of ANY technology. Did I miss some memo?

And to win in this space, if you think of Apple as a 'winner' (maybe at HP Headquarters they know better about how to define a winner, who knows) - then Apple's rapid capture of the smartphone space in only four years, is usually attributed to the following factors: iconic design, ultimate ease-of-use, and a strong ecosystem. Well. Many say Palm last year when HP bought it, was the 'next best thing to the iPhone' - some actually said the newest version of the Palm OS was better than that on the iPhone (I am not competent to judge on that) but at least most who know these things, said Palm's phones and user interface and operating system were definitely at least second-best (last year when HP bought Palm for 1.2 Billion dollars). And Palm also had a significant ecosystem with a sizeable portfolio of apps while obviously nothing the size of that of Apple.

If the world's biggest tech company, twice the size of Apple, cannot take the world's second-best smartphone and OS and a good start of its ecosystem (which struggled mostly because of dire lack of funds as Palm had been unprofitable for years), and cannot turn that into a strong contender in a year - what makes you think HP could make the far bigger change from a PC manufacturer to a pure software and services company in the cloud? At least a smartphone is - it really is - a computer, so HP's computer design, manufacturing, sales and after-care would all be relatively easy to adjust to marketing this smaller computer.

And the switch to smartphones did not happen last year - HP has made smartphones (in modest numbers) for much of the past decade and made successful PDA's before it, as did Compaq, a rival that HP bought a few years ago. And now buying the nearest thing to Apple in smarpthones - HP finds that impossible to do - but somehow the HP management then thinks they can execute a far more comprehensive shift away from being a tech manufacturer. Something does not compute in my mind. Maybe its just me..

I mean, come on, Samsung launched a totally new smartphone OS that less than a year from launch is now at 5% market share. Samsung! And nobody dares suggest the Samsung bada OS is nearly as good as Palm's. How can Samsung go from zero to 5% now, in less than a year, but HP somehow - with a history of smartphones already and a far better OS - cannot grow from 1% to something like 3% by now? What memo did I miss?

Is there some strange North American phenomenon to the smarpthone business, that unless your company is run by Steve Jobs, if you are North American and in smarphones, you will fail miserably (I don't know if this could be called a pattern, but look at a few North America based smartphone makers like Palm, Motorola, Danger, HP, RIM, Microsoft - its Kin - Google - its Nexus One - plus who did I forget, oh yeah: Compaq and Dell).

I mean, Apple Computer was a near-bankrupt computer-maker company less than two decades ago. It returned to nice healthy conditions with Steve Jobs back in charge, but its huge sales and profit growth didn't appear until the iPhone. So relevant to Apple in fact, that Apple Computer changed its name to just Apple, and now calls itself a 'mobile' company. Today Apple makes the biggest profits in the world (I am talking this quarter Q3, judging by the trend of Q2, Apple should pass ExxonMobile just about now)

Then there is HP, who makes nearly twice as big revenues out of the computer business, but almost half the profits of Apple. So after 'Apple Computer' switched to focus on smartphones, they have become a company which has nearly four times better profitability than HP, the world's biggest PC maker..

Even in the latest global comparison of the biggest corporations, Fortune Global 500 issue for 2011 - HP has a profitability of 7%, while rival tech companies who have shifted from other businesses to smartphones, RIM (past texting pager-maker) has 17% profitability and Apple (past PC maker) has 21% (that is the last annual results, so today Apple's results are even far better). Both of these make their own smartphone OS and smartphones are their only phone business (compared to Nokia who make most of their business from far less profitable 'dumbphones').

I can understand that a hardware maker might look at diminishing profit margins of the 'box mover' business currently looking at 7% profitability and fear the fate of some of the rivals, like say, Dell making 4% profits or Acer making 2%. I can understand that the new CEO, Leo Apotheker, who came from SAP, is a software guy and believes that in software you can make better profits. Nothing wrong with that. And IBM did it quite successfully after selling their PC business to Lenovo. But compare biggest software maker Microsoft and biggest smartphone maker Apple - no contest.

HP had acquired the best possible tools to 'do an Apple' in smartphones today, and HP's main businesses are far more like those of Apple - in fact, compared to any other rival smartphone maker, HP was THE MOST LIKE APPLE as a company by its types of businesses. Apple makes desktop PCs. So does HP. But Nokia doesn't. RIM doesn't. HTC doesn't. Yes, Samsung does, but Samsung makes so many other things in far bigger volumes that HP doesn't - from plasma screen TVs to microchips - that you can't say HP and Samsung compete in mostly the same businesses. What else does HP make? Laptop computers. So does Apple (neither does Nokia, RIM, HTC, Motorola, SonyEricsson, etc etc etc). What else is there where their businesses overlap? the iPad! Yes, both make tablets. And yes, both make now a smartphone and its operating system.

They are not exactly alike, Apple also makes its own PC operating system, which HP doesn't. And Apple does make a media player (the iPod) which is a business where HP does not compete. But look at the other big PC makers, Dell, Lenovo, Acer and Toshiba. None have a smartphone operating system and only Lenovo and Toshiba have any significant history or presence in smartphones. Of all giant computer makers, HP is the nearest thing to Apple.

And yes, Microsoft. It does make both PC and smartphone operating systems and (used to make) the Zune media player. But Microsoft's other businesses are again big that do not compete with Apple directly, like the Office Suite software and the Xbox. And Microsoft doesn't make desktops, laptops, tablets nor smartphones. Google? Yes, makes its smartphone OS and now as owner of Motorola, is also a smartphone maker, but Google's primary business is in the internet search, services and advertising. Google doesn't make desktops, laptops, tablets nor MP3 players. And while it makes a smartphone OS, it doesn't make an OS for desktop PCs.

No. HP was the company most modelled like Apple in its major focus areas of business. And it clearly was losing to Apple for several years already in the profitability race, as Apple got more involved in smartphones. That is why it seemed the perfect fit for HP last year, to buy Palm and turn the promise into a big hit.

When HP bought Palm, Palm had about 1% market share in smarpthones, and HP's own smartphones a small fraction of that. Together they were a bit bigger than 1%. Apple had about 1% market share three years ago. HP could have put some serious effort to 'do an Apple'. If Apple can get to 18% in three years from that with the most desirable smartphone out there, then surely HP should be able to do at least half that, and get to about 9% in three years - as HP is that much bigger than Apple, that with a good product, they could simply swamp the market and use their size to muscle in. What Microsoft would do, haha..

But no. HP said sayonara to smartphones. Dumb move! This will be seen as one of those strategic moments in time, where a company faced a fork in the road, and selected the wrong path. Just like say AT&T in the USA, who foolishly sold its mobile telecoms arm or BT British Telecom who did the same in the UK. Or like how Vodafone foolishly entered from the highly profitable mobile telecoms traffic business into the lowly profitable fixed landline business (and then a year later was 'surprised' that their profits were shrinking). I said of each of those that they were strategic blunders and was proven right in time. I am saying now, this move by HP is a strategic blunder. They could have sold the PC business (like IBM did) but to abandon the smarpthone business now, in year 2011, by the company who owned Palm's magnificent OS, that is sheer management stupidity.

Yes, I can understand that a 'brave' and 'bold' and 'decisive' and 'visionary' CEO would take a big gamble against the conventional wisdom and all major analysts of the industry - on ONE trend. Not on several concurrent trends going against them all. That is action for the sake of action, and foolhardishness. Sorry, Leo Apotheker (who I do not know and never have met even in his SAP times) that is a big mistake. And or all who worked at Palm, that is cruel irony for all the excellence in the technology, and in the saving angle, that it seemed last year, when HP came in as a white knight to rescue your suffering company. I salute you for your work and now only hope that there can somehow be a second coming for Palm through some divestitures and/or acquisitions.

In my humble opinion. (and for the sake of open disclosure, yes HP is also one of my reference customers ie they have themselves admitted in public that they have bought consulting services from me. So too are other reference customers of mine, mentioned in this blog: BT, Google, IBM, Motorola, Nokia, RIM, SonyEricsson and Vodafone)

Comments

[Brodie]

Incredible pοints. Solid arguments. Keeρ up thе amazing effort.