Is Palm Going to Become HP's Netscape?

Is Palm going to become the equivalent of Netscape for HP? I'll explain in a minute.

I read a comment from HP CEO Mark Hurd, reportedly made at a Bank of America Merrill Lynch technology conference yesterday. According to ZDNet, Hurd said that the company wasn't going to make smartphones but instead would make a range of "connected devices":

We didn't buy Palm to be in the smartphone business. And I tell people that, but it doesn't seem to resonate well. We bought it for the IP. The WebOS is one of the two ground-up pieces of software that is built as a web operating environment...We have tens of millions of HP small form factor web-connected devices...Now imagine that being a web-connected environment where now you can get a common look and feel and a common set of services laid against that environment. That is a very value proposition.

There are a couple of responses to this. The first is that many small, connected devices can easily become phones with Skype. So the distinctions between a small tablet or other comparable device and a smartphone are increasingly less meaningful. 

Hurd might be shrewd and smart, figuring that Palm couldn't build meaningful share in the smartphone market so just avoid that entirely. But it might also be a strategic blunder to not build smartphones. Here's where the Netscape analogy comes in. 

When AOL bought dominant Web browser Netscape in 1998 (for $4.2 billion) it didn't continue to invest (or even use Netscape on its own AOL network) and Netscape essentially languished. Its browser share declined quickly as did the value of the Netscape brand and the investment overall, until there was almost nothing left and AOL turned Netscape into a cheap dial-up ISP. 

Palm still has considerable brand equity and goodwill. But will HP's strategy turn Palm and WebOS into something far less valuable that it is today? 

One could argue that to preserve the value of the investment as well as to fully realize the potential of WebOS HP needs to continue to make smartphones. The Pre failed partly because of the software -- and miscalculations about the importance of apps -- but also because of the hardware. HP (and Palm with hindsight) could fix that in a range of new and interesting smartphones. 

HP could potentially build a number of interesting tablet devices that are a hit with consumers -- maybe -- but the category will be very crowded very quickly. And without the smartphone visibility and distribution to keep app developers interested in WebOS those HP tablets are less likely to compete successfully with the iPad and Android, unless they're dirt cheap. 

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Update: Apparently HP will be making smartphones after all.