Even with Palm, Hewlett Packard Faces Uphill Battle in Consumer Electronics

After it was made public that smart-phone maker Palm (PALM) had put itself up for sale, most every rumored suitor was an Asian hardware firm such as HTC or Lenovo. The logic was that Palm had a strong set of assets that would be a good fit for a foreign company looking to make a splash in the U.S. phone market without having to build the business from scratch. When Hewlett Packard (HPQ) surprised the Street this week with an agreement to buy Palm for about $1 billion, some praised the deal while others expressed their doubts. To me, it makes sense that HP would buy Palm as a way to more quickly enter the market for mobile devices, but I really doubt that we will look back two or three years from now and say buying Palm really paid off for HP.

There is no doubt that HP is getting a large patent portfolio, a strong team of engineers, and a proprietary operating system in Palm webOS, and it is reasonable to assume that HP did not have other ways to acquire such assets for less than the price it is paying for Palm. However, the question really is whether HP can gain traction in an already crowded market for smart-phones and tablet PCs. Large hardware makers always seem eager to compete with the market leaders when new hot products come about but I do not think there is room for everyone.

Dell, for instance, is another computer maker that is developing both a cell phone and a tablet PC. HP is widely known to be developing a tablet and now with Palm it will be able to easily enter the cell phone market as well. Owning the operating system will make these products easier to control and produce than they were for HP before the deal (having to use Microsoft’s mobile operating system in their products raises HP’s costs due to licensing fees and gives them less flexibility in the design of the product), but companies like HP and Dell still face the challenge of bringing to market a product that people want more than a Blackberry, iPhone, or iPad.

The track record of large computer-focused firms trying to invade leading innovators’ turf is poor. Both HP and Dell have been trying for a long time to break into other consumer electronics but really have not been successful. Many companies were convinced that they could grab a chunk of the MP3 player market, even with Apple’s iPod as the best in class product, but companies like SanDisk (with their Sansa players) failed to gain much ground. Why would this trend change this time around? Do we really think a tablet PC from HP or Dell will be better than the iPad and therefore really hurt Apple? Can Barnes and Noble or Sony really take a bite out of the e-book reader market by dethroning the iPad or the Kindle?

It is highly unlikely that companies, no matter how large, can come along later with a me-too product and succeed. As a result, while we all can understand why HP buying Palm for $1 billion makes sense if their goal is to go after these markets, it is a lot harder to have confidence that such an endeavor will prove even remotely successful. For only $1 billion, which is mere pennies for a company as large as HP, they probably do not think it is a large risk to take. And they are probably right, on that front at least.

Full Disclosure: No position in HP or Palm at the time of writing, but positions may change at any time