Does HP Deserve a Smartphone Do Over?

By Michael Carney , written on September 14, 2012

From The News Desk

HP CEO Meg Whitman announced today that the company would like a second chance to make a first impression with a smartphone.

Whitman told FOX Business News:

“We have to ultimately offer a smartphone because in many countries of the world that is your first computing device. You know, there will be countries around the world where people may never own a tablet, or a PC or a desktop. They will do everything on the smartphone. We’re a computing company; we have to take advantage of that form factor…We did take a detour into smartphones, and we’ve got to get it right this time.”

Well sorry, that’s just not how it works. I half expect an HP smartphone would require me to buy a new SIM card every couple of months at some rip-off price like it does with cartridges for its printers. Nevertheless, whichever course HP chooses — develop its own new OS (extremely time consuming and thus unlikely), resurrect WebOS (challenging, but possible), license an OS (most likely, but still problematic) — the company will forever carry a scarlet letter indicating the abandonment of its mobile hardware division.

Now don’t get me wrong, HP absolutely must develop a smartphone to remain relevant in the “post-PC era” (God I hate that phrase). It’s just that its inability to realize that for the last two years, and its inability to execute on its initial attempt after acquiring Palm doesn’t inspire much confidence in consumers or investors. The company recently hired ex-MeeGo CEO Alberto Torres to run its newly formed mobility division, which at the time of its announcement was to be focused on consumer tablets -- which is another on-again-off-again hardware romance that HP’s entangled itself in. Inspite of the uphill climb that HP faces, this is absolutely the right decision for the company. Whether it can pull off a miracle and sufficiently rehab its image is another story entirely.

Given what I said above about developing its own OS being extremely time-consuming and unlikely, there are really two ways this can go. HP can dust the cobwebs off WebOS, which it paid $1.2 billion to acquire. This seems attractive, given the fact that the OS was praised during its short time in the market, but mobile is already fragmented enough. No one wants to design for iOS, Android, Windows Phone, Blackberry (haha), and now WebOS, no matter how good it may be. They’re just way too late to the party.

That leaves option number two: Partner with an existing mobile OS platform. Given Whitman’s flat rejection of licensing Blackberry’s platform, there are only two real options here, Android and Windows Phone -- and neither is ideal. On its surface, the easy route would go through Android. The OS is finally fully-baked, there are more than half a billion apps, and users are buying its devices. The issue is that everyone with an assembly line is making me-too Android devices and, with the exception of Samsung, none of them are making any money. In Q2 of this year, Apple and Samsung combined to make 108 percent of the handset industry profits, with RIM, Nokia, Motorola, Sony, LG and others all posting losses and only HTC scraping (barely) into the black.

When it finally does reenter the market, HP cannot afford to be one of a dozen comparable Android devices on the market – and that’s generously assuming it can build a device comparable to those at the top of the market. The company could presumably fork its own version of Android, a la Amazon, but this model seems to make sense only for mid-to-low-end devices and alongside an enormous content and services ecosystem from which the company can extract the bulk of its value. Without such an ecosystem, this is an unadvisable and unlikely path for HP.

With OS options falling by the wayside, the last platform standing would be Windows Phone. This one actually makes sense for a number of reasons. First, Microsoft appears to be all in on its commitment to making Windows Phone a success. That means development and marketing resources from the mothership that HP is unlikely to get elsewhere. The developer ecosystem still has a ways to go and Redmond has been slow in releasing updated versions of its OS, but they’re making progress and these growing pains are likely to iron themselves out with increased consumer adoption.

Up to this point, Microsoft has hitched its wagon to the Nokia hardware horse and has yet to get out of the starting blocks (anyone follow that metaphor?). Industry observers have called the last two generations of Nokia Lumia smartphones the company’s last chance to stay relevant and maybe even solvent. With the first failing to deliver and the second drawing flat reviews, it would appear that there’s room for a different company to grab the ball and carry it down the field.

HP doesn’t have much time to waste here, given the precarious position in which Windows Phone sits as the anointed number three mobile OS platform more so for the lack of other challengers than for the threat it currently poses to the market leaders.

If HP can deliver where Nokia did not, it could spell the end of the once dominant Finnish mobile phone maker and the first real relevance of Windows Phone. Surprisingly, the public markets have not reacted much to today’s announcement. HP has been relatively flat, down 0.11 percent at the time of this writing, following a steady six month decline during which 30 percent of the company’s remaining value evaporated. Presumed big winner Microsoft is up a scant 0.89 percent, and likely loser Nokia is being spared any punishment as its shares are actually up 0.11 percent.

As Farhad Manjoo wrote here on PandoDaily, Nokia made the right call in choosing Windows Phone for its resurrection, but it was a gutsy decision that required perfect execution. Nokia’s failure to deliver is HP’s opportunity. But is the Silicon Valley company any better positioned to succeed? As of its most recent quarterly financial statement, reported on July 31 of this year, HP has more than $9.5 billion in cash and cash equivalents. At the same time, Nokia had less than half of that at $4.2 billion. This difference in firepower, and HP’s lesser degree of short term dependence on its mobile hardware division, offers the US company addition flexibility and opportunity to get this one right.

HP has everything going against it re-entering the mobile hardware market. The company’s credibility and brand equity have road rash, the market is as competitive and crowded as it’s ever been, and none of the platform options available are an ideal solution. Whitman, Torres, and the rest of their team have an enormous task ahead of them just to become relevant, let alone becoming a leader in this market. That said, if there were a company not currently in the smartphone space that has any chance of succeeding, HP has the best combination of size and the resources needed to make this happen. Whether they succeed or fail, it’s going to be a bloodbath, and one hell of a show.