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By Pat Dorsey, CFA | 04-30-2010 11:22 AM

HP's Palm Purchase Isn't About Smartphones

Morningstar analyst Michael Holt thinks any potential value in HP's purchase of Palm will be in developing unique tablet and netbook devices using Palm's WebOS not in the hypercompetitive smartphone market.

Pat Dorsey: Hi I'm Pat Dorsey, Director of Equity Research at Morningstar. Well, ending months of speculation, HP finally put Palm out of its misery. Well, not really with a gun to its head but with a $1.2 billion all cash deal value in Palm at about $5.70 a share. A good ways above its recent low of two or three bucks, but a long ways below the $15 [laughs] price that Palm was at earlier in the year.

I'm here with Senior Equity Analyst Michael Holt to talk about the Palm acquisition, what it means for HP, and more importantly what it means for both the smartphone and PC markets. Thanks for joining me, Michael.

Michael Holt: Thanks for having me.

Dorsey: So the chatter out there is all about the smartphone business, and now there's this much more viable competitor to Android and RIM and Apple. But you don't think this is a smartphone play.

Holt: Part of this certainly is a smartphone play because they're getting a smartphone business with the webOS. The question is, that's the most valuable asset--the webOS operating system. Right now, it's for phones but how else can it be repurposed, I think is the key question.

So I don't think HP is going into this just to take on Android, Apple, Symbian, and Microsoft, all these entrenched players in the smartphone market. They haven't been a player for a while, and I don't think this would be a big move just to go after hat market.

Dorsey: Especially given that that is a market that really is based on network economics, and Apple's got this poll position lead with all the apps and the apps store. I think the number of Android apps is growing reasonably quickly.

Holt: Definitely.

Dorsey: RIM is fairly entrenched in the enterprise, so you've kind of got a three-player market there. It doesn't seem that likely that webOS would be able to kind of elbow its way in for meaningful market share.

Holt: I absolutely agree. It's a very competitive market. There's lots of players coming into it. Every PC maker is trying to make a move there, but the odds of success are pretty low.

Dorsey: But a few years out what you're thinking is, moving away from the smartphone market, you look at the netbook tablet mobile computing device market. You know, the form factor that's in between smartphone and desktop. There maybe we have three players? We have an Apple OS, a Windows OS, and now possibly webOS as a viable third?

Holt: Absolutely, and I think this is really the main strategic driver behind this deal for HP. My speculation is they have learned their lesson in the PC market, where it's very difficult to differentiate your product when you don't control the IP or the operating system behind it or the chips. So in the PCs...

Dorsey: At the end of the day in PCs, HP is a box maker. They get the intellectual property from Intel on the chips. They get intellectual property from Microsoft on the OS. They put it in a beige box and send it to Best Buy.

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