Neil Cybart

Will HP webOS Get Knocked Out Before Entering the Fight?

HP will unveil its revamped webOS platform on February 9th and in the process reveal what has come from its Palm acquisition. There is also an evening event planned for that same day for developers interested in the webOS platform. 

HP faces many challenges as it jumps with both feet, and webOS, into the mobile space. I give the company credit for trying. There is something about attempting the integrated approach of creating the hardware and software that I admire. I think HP is noteworthy as being the second company to give this integrated approach a try in the tablet space (still waiting for RIMM to ship its PlayBook). While iOS and Android are busy eating up mobile phone market share, the tablet market is less than a year old with only a handful of scrawny iPad competitors out there. Yes, I am calling the Samsung Tab scrawny. HP is still somewhat on time for the fight. 

HP faces four major challenges that must be addressed before any new webOS products are shipped. 

1) Lack of third-party developer interest. HP and its revamped webOS will enter the phone and tablet space with little third-party interest, as measured by developers devoting tangible resources to the platform. It’s clear management is aware of this problem, scheduling an event just for developers on the same day of the webOS announcement. Third-party support is crucial. There is also growing anticipation for webOS designed for a tablet, so one would assume developers would at least be interested in the platform. 

But webOS is funny. Judging from tech pundits on the web, webOS is great, fantastic, and amazing. However, developers did not want to create apps for webOS, partially due to the lack of users. The Chicken vs. Egg paradox. When the Palm Pre went on sale in 2009, users were promised that a wide spectrum of great apps were coming and to just hold on. Two years later and Palm Pre users are still holding on.  As I never forget to point out, the Palm Pre was labeled as the first iPhone killer partially due to its “potential” and “possibilities”. Those possibilities never came true. 

For webOS to gain widespread third-party support, developers need to divert resources from iOS (and Android) and focus on a platform that has little to no installed base, no vibrant app economy, and no solid history of consistent developer support. Good luck with that. 

2) Lack of corporate support and direction. HP is a mess right now.  With a new CEO and drastic Board of Directors shakeup, I think it is appropriate to question how the change in leadership will impact HP’s mobile plans.  How did the HP/Palm integration turn out? Decisive leadership is needed to make sure HP positions itself in the shrinking sweet spot required to get a solid footing and advance the HP webOS platform.  The drastic management changes, in addition to the mass exodus of Palm talent, worries me.  

3) Weak Branding. The HP brand has taken a beaten in recent years.  HP laptops are nothing to write home about. There are no HP products to get excited about. Excitement is needed when selling consumer technology products.  Palm may give HP some temporary brand power (and a loyal but small fanboy community), but Palm is not some spotless brand itself.  Don’t forget Palm basically was sold in a fire sale due to running out of cash, and two Palm “smartphones” had hardware that was compared to kitchen utensils.  I do find it interesting that recent HP webOS tablet renderings have the world Palm right under HP on the tablet’s back.  Maybe HP does consider the Palm brand still valuable and is planning on keeping it around, although Palm was removed from the Palm webOS name a few months ago. 

4) Difficult Price Points. At the end of the day, price is maybe one of the biggest factors in determining whether HP webOS products will sell.  Phone pricing has a ceiling of $200 (after carrier subsidy). No phone will sell for more than $200, regardless of its feature set. Unfortunately, even $200 for a smartphone is becoming a rarity these days. Windows Phone 7 units and Android phones are often sold for under $100 and iPhone 3GS is selling for $49. 

Tablet pricing is even scarier for HP.  iPad’s $499 base price serves as a ceiling for the tablet market.  Most companies are showing they have no means of competing with iPad on price.  I can only imagine the number of tablets turned into vapor once iPad’s $499 price was revealed.  Apple’s strategic supplier agreements (and technology) appears to result in attractive component pricing that gives Apple a strong competitive advantage that is difficult to match.  In addition, carrier subsidies are not that popular for tablets as consumers don’t want to sign another multi-year contract in addition to their phone. 

What HP needs to do on February 9th to even have a chance with HP webOS:

1) Have HP webOS phones and tablet available for demo.  HP needs to show they have products that are close to being shipped.  RIMM and Android are failing in this respect, announcing tablets that are no where near ready to be shipped.  More importantly, demo units let users feel how heavy the devices are and test out important aspects of the UI. 

2) A HP webOS tablet needs to be priced at $399 or lower.  Ouch, I know.  A HP webOS tablet can not have a $499 tablet because iPad sells for $499. Even if the HP webOS tablet is better than iPad, it still needs to be priced lower because of Apple’s strong brand and customer awareness. If Apple lowers the price of iPad to $399 once iPad 2 is unveiled, HP webOS tablet will need to be priced $350 or lower (these are unsubsidized prices). 

3) HP needs to announce extensive and enhanced webOS third-party support with demonstrations from a number of leading gaming companies and other popular app makers demonstrating their iOS apps now ported to webOS devices. A new app store with some easy form of monetization would help. 

4) Don’t give these new products silly, long-winded names. I think HP should stick with one version of a phone and one version of a tablet. HP will have more luck creating the required enthusiasm and emotional connection to webOS if all the attention is put on one product and one name. Why spread out your resources on a bunch of mediocre devices when you can release one good device?

Wild Card: HP can unveil some surprises such as completely new form factors or new technologies that Palm was working on before running out of cash. Things that make one go hmmm. 

What I am afraid HP will do on February 9th (I really hope I am wrong, but we will see):

1) Have no demo units (part of me is afraid they might not even show finished units on stage).

2) Pricing will not be released or discussed.

3) The lack of third-party interest will continue to be questioned, in which HP will simply say developers are really interested in the platform and they cant wait until apps start arriving. 

4) HP will announce an extensive line-up of phones and tablets with silly names and useless features. People will forget their names and which product is which a few hours later. 

5) HP wont announce any of this stuff and will simply talk about webOS 3.0. 

HP webOS has potential, but in a mobile phone space where powerhouses like Microsoft are struggling and in a tablet market where Motorola and Samsung are having a hard time matching the right price points, HP will need to have luck in its corner for webOS to have a chance in this hard fight. 

Big M&A Not in Apple's DNA

What will Apple do with its $50 billon cash hoard, which is growing nearly $20 billion annually? On January 6, a Bloomberg article-stating that Apple was shopping around for a new CFO-led some to think that Apple is interested in picking up its M&A pace. In recent months, rumored Apple targets have included Disney ($75 billion), Sony ($40 billion), Netflix ($10 billion), and Twitter ($5 billion). 

Steve Jobs, Apple’s CEO, stated on Apple’s most recent earnings call: 

[Apple] strongly believe[s] that one or more very strategic opportunities may come along that we’re in a unique position to take advantage of because of our strong cash position. And I think we’ve demonstrated a really strong track record of being very disciplined with the use of our cash. We don’t let it burn a hole in our pocket, we don’t allow it to motivate us to do stupid acquisitions. And so I think that we’d like to continue to keep our powder dry because we do feel that there are one or more strategic opportunities in the future. That’s the biggest reason. And there are other reasons as well that we could go into. But that’s the biggest one.

While Steve sure sounded like Apple is looking at a huge M&A deal, I don’t expect Apple to acquire any large companies (which I label as anything with a $3 billion and higher price tag).

Company Culture. It is an understatement to say that Apple’s corporate culture is unique.  Apple managers have roles that are not typical in other companies, with more time spent on actual product development and brainstorming. Apple managers rarely just manage. Former IBM executive Mark Papermaster reportedly left Apple only a few months on the job as SVP Devices Hardware Engineering due to cultural incompatibility. On top of that, Apple had spent months trying to fill the SVP Hardware position before settling on Papermaster. It is tough for Apple to fill its top ranks due to its unique culture. If Apple were to acquire a company with a large workforce, it would be tricky to assimilate these new Apple workers to the culture that has led to so much success. Conflicting company culture is one of the biggest reasons for failed M&A and that rings even truer in Silicon Valley. 

Company Structure.  As I discussed in a previous AAPL Orchard post, Apple’s structure allows decision makers to come in contact with everything that is shipped to the consumer (Macs, iPhones, iPads, etc) and more importantly everyone who is in charge of the product (designers, engineers, marketers, etc.). Ideas are not bounced off of committees. Finished products are not required to get a certain number of approvals. I know of few, if any, large companies with a similar structure. For Apple to acquire and assimilate a company with a management structure reminiscent of a Egyptian pyramid, more than luck and hard work would be needed. 

No Prior History for Large M&A[1]. Apple has never acquired a large company. Apple’s largest acquisition was NeXT in 1997 for $404 million ($540 million inflation adjusted). Recent acquisitions P.A. Semi and Quattro Wireless were $278 million and $275 million, respectively. 

What is the right kind of M&A for Apple?

Peter Oppenheimer, Apple CFO, on Apple’s F1Q10 earnings conference call was pretty clear:

[Apple] occasionally acquire[s] small companies from time to time for their technology and talent. That is why we do it.

Tim Cook, Apple COO, shed more light on Apple’s M&A strategy at an investor conference in 2010. 

[Apple has] always been about making the best product, not having the highest market share or the highest revenue, and so acquiring a company so our revenue gets larger isn’t something that drives us.

I think Tim Cook’s quote is important.  Apple is focused on making the best products, not growing it’s earnings.  Steve Jobs knows great products drives great earnings and Apple will never follow any other rule, or its continued success will be in jeopardy.

As an example, would Apple acquire Twitter? Would Twitter help make Apple’s current product lineup better? I don’t think so. (I am not even considering Twitter’s financials and possible sale price)

So what will Apple do with it’s cash?

1) Acquire talent to plug any holes in Apple’s current team and resources.  I suspect some software team acquisitions may be in the offering as distinguishing software will become even more important for Apple to set itself apart from the competition. Buying smaller teams of outside talent makes company assimilation, from both a culture and company structure viewpoint, easier to accomplish.  A small group of acquired software engineers can be quickly lumped within the iTunes or iOS team without much disruption. 

2) Long-term agreements (aka “strategic opportunities”) for product components. In 2009, Apple paid an up-front cost of $500 million to enter into a long-term agreement with Toshiba for NAND flash chips.  Recent rumors include Apple partnering with Sharp and Toshiba to build LCD factories with a price tag over $1 billion. Apple faces supply constraints whenever a new product is released and I expect Apple to pour billions into its infrastructure, forming new partnerships to guarantee that components are available, and at a good price, when needed. Finally, Apple needs additional investments, such as the $1 billion data center in North Carolina, to support and grow its current product lineup.

3) I don’t expect Apple to buyback its stock or issue stock dividends in the near term.

All of these investments and cash outlays won’t end up costing anywhere near $50 billion, but since when was having a lot of cash that bad of a thing? 

[1] Some will say it is for this reason that Apple is interested in a more experienced CFO. I would respond that Apple’s storied history is a result of no large M&A. For Apple to change course now, especially considering how its team is performing, would be shocking to me and serve as a worrying indicator that something is awry in Cupertino.  I am not ruling out large partnerships or agreements with certain companies that are not in a position to be acquired (Facebook, AT&T, Comcast etc.), but these are a whole other ball game compared to an acquisition.