Should Microsoft Buy Palm?

Analyst Andre Kitson at Juniper Research is recommending that now is the right time for Microsoft (NSDQ: MSFT) to buy Palm, giving the huge software company access to Palm's design and engineering team, many of which came from Apple. Does this make sense thought for Microsoft?
Palm and Microsoft have been competitors for years in the mobile device space. Microsoft was a very minor player in the market until they revamped their handheld OS in 2000 and christened it Pocket PC. While it still shared many concepts with Windows, Microsoft was finally beginning to understand that putting a desktop user interface on a 3" screen wasn't the right way to go. It took a few years, but Microsoft ultimately defeated Palm.

Or, should I say, Palm defeated itself? Not to take anything away from Microsoft's efforts, but Palm has had a number of missteps over the years. Palm OS5, the most recent OS from Palm until last Saturday when the first WebOS device shipped, was released in 2002. That was seven years ago, multiple lifetimes in the digital world. They failed to get a single manufacturer to buy OS6. Even Palm didn't build a PDA with OS6 on it. By then, Palm was modeling the software side after Microsoft. Palm would split the company in two. PalmSource would develop and sell the operating system to a number of manufacturers like Sony, Garmin and PalmOne, just like MS does with all of its PC manufacturing customers. PalmOne was, of course, the hardware company and just one of a number of licensees using PalmOS.

To make a long story short, just about all of the licensees for PalmOS either walked away from the venerable OS or got out of mobile devices entirely. PalmSource has since been acquired by a Japanese company, Access, and faded from the memory of gadgets geeks the world over. PalmOne renamed itself Palm again and started working on a new platform. Eventually WebOS was announced and the Pre is now available, assuming the localSprint (NYSE: S) or Best Buy (NYSE: BBY) has one in stock for you.

Why would Microsoft want Palm now? In 2002 it made a lot of sense. Palm had well over 70% of the market share. Today, most of the market share Palm has is actually from phones running Microsoft's Windows Mobile platform. Microsoft doesn't need engineers and device designers. That isn't what Microsoft does. Sure, they have some nice keyboards and mice and they make the Zune and X-Box. The gaming market was an area that Microsoft wasn't really in, so by jumping in with their own platform, they had no existing customers to tick off, and it played right into Microsoft's desire to own the living room. The Zune is an oddity. I am sure Microsoft ticked off a ton of its customers that were using MS's Windows Media Audio codecs and the Plays For Sure DRM encryption scheme, but those customers weren't setting the world on fire with their products and I doubt MS had much licensing revenue to lose. I suspect MS got tired of the iPod dominating the MP3 player market. None of MS's customers could really make a dent in the market and from a consumer standpoint, MS seemed to be to blame when there were DRM/playback issues. It was a lose/lose for MS.

Mr. Kitson is right about one thing - Microsoft does need a cool consumer phone. I am not convinced MS has to build it though. With Windows Mobile 6.5, MS has finally got religion on the consumer side of the equation. WinMo 6.5 will not even be a year old when WinMo 7 comes out in 2010. WinMo 7 is supposed to finally be the OS that really gives the iPhone a serious run for the money.

As it stand now, MS plans to let its OEM partners like HTC build the device and sell it to the carriers. If MS started making their own devices, it would make them a competitor to their own customers, customers that can move over to Android at a moment's notice. It would do more harm than good. This is where the phone market differs from the MP3 player market. With the MP3 player market, none of the hardware/music store combos came anywhere close to what the iPod/iTunes combo is. Microsoft decided to change that. The problem with the phone market for MS isn't their hardware partners, it is Windows Mobile itself. The OS is little changed from 2005. Back then it was ok to use a stylus and have menus flying all over the place. Apple changed that in 2007 with the iPhone and it took time for MS to catch up. They are clearly headed down the right path now. The question is, can they catch Apple? Events coming out of WWDC this week may show the iPhone will make more leaps ahead, and iPhone 3.0 should ship this summer.

And what of Palm? WebOS and the Pre are make-or-break time for Palm. It is either a huge success, or it is over for Palm. I seriously doubt Palm can afford a lukewarm reception to the platform in the coming months, or they will continue to be an also ran. That won't be enough to sustain the stock price it is at today. It has moved from $1.70 in December 2007 to $11-12 today. Investors didn't run the price up for a mediocre seller. It may make sense for someone likeMotorola (NYSE: MOT) or LG to buy Palm for their hardware smarts, but not Microsoft.

BY Ed Hansberry

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