Why Palm’s headed for a buyout — by RIM

Palm was king of the handheld screen when it launched its popular Palm Pilot handheld device back in the 1990s. But it’s since been almost forgotten in a flurry of competitors vying for a slice of the smartphone market. And when it recently tried to launch a phone and underlying operating system that rivaled Apple’s iPhone in elegance and ambition, the phones failed to sell. Given its recent earnings and desperate cash position, it’s clear the company is heading for a spectacular failure.

Can Palm turn itself around by raising more cash and tweaking its strategy? I say no. The only promise for Palm’s future is a buyout. And the only buyer that makes sense is BlackBerry maker Research In Motion (I’ll tell you why in a minute).

Many attribute Palm’s failure to bad decisions. There was the WebOS operating system that was open to only a limited number of developers initially. There was the wrong choice of first carrier in Sprint. And there was the bad launch timing of the Palm Pre Plus with Verizon Wireless right after the launch of the Google-powered Droid as well as some manufacturing and design issues.

Whatever the reasons for its failure, its chances of catching up again without an acquisition are slim.

First off, despite its slick design and a promising operating system, Palm does not stand out in any single category. BlackBerry is known as an email and enterprise device, Android is liked for its openness and innovation, and iPhone excels in user experience and abundance of apps. That leaves Palm more closed than Android, not as cool as iPhone, and not nearly as enterprise-focused as BlackBerry.

Second, developers already have their hands full with Android, iPhone OS, BlackBerry, and the upcoming Windows Phone: They don’t want yet another operating system! Without many apps developed for Palm, users are less likely to buy it over competing products, and without a significant user base, developers are less likely to develop for WebOS.

Why is RIM the only logical buyer for Palm? Let’s walk through the others often named by Wall Street as potential acquirers and see why they’re not a fit.

Who will not buy Palm?

Not Apple — at least not at a price investors will stomach. Apple obviously does not need Palm, though it might buy it at a knockdown price to reclaim some of the talent Palm has poached from Apple in recent years, and to scoop up some patents.

One might think that Google could buy Palm to make up for its much-noted lack of hardware expertise, and perhaps then make a phone in-house instead of relying on designer-manufacturers like HTC. That strategy is fraught with flaws: Google, even if it buys Palm, has more reasons to kill WebOS than not; it would alienate its myriad partners, whether mobile operators or device manufacturers, and in the process would hamper the ecosystem it has succeeded in building around Android.

Microsoft could have been a good potential buyer before it invested significantly in its new operating system, Windows Phone, due for release later this year. Even then, Microsoft would have struggled to reconcile Palm’s integrated strategy with its long-standing preference for licensing software to hardware partners.

How about PC manufacturers such as Dell and HP? Supercharged smartphones are becoming replacements for netbooks. And it’s clear PC makers are finding it hard to transition to mobile manufacturing given their lack of expertise and the tremendous competition from newcomers like Google and Apple as well as existing mobile manufacturers. They’d clearly benefit from buying Palm.

Two problems: First, Dell and HP are hardware players who risk alienating partners like Google and Microsoft. Second, even if this strategy makes sense for Dell or HP, it will spell a disaster for Palm as an entity. Palm is meticulous about style and design, neither of which is a forte of Dell or HP. When a larger tech player swallows a smaller one, all too commonly the acquisition becomes a declining asset, with the distinctiveness that made it an attractive purchase swiftly disappearing.

Similar arguments hold true for cell phone manufacturers such as Motorola, HTC, and Samsung: They have invested heavily in other mobile operating systems, especially Android, and would risk angering their partners and spreading their R&D resources thin if they do buy Palm. Nokia and Sony could benefit from acquiring Palm, but I don’t think they’re good strategic complements for Palm: Nokia has recently invested in Meego, a new OS developed in partnership with Intel. And Sony is simply too big and fragmented, with its mobile assets stuck in a joint venture with Ericsson.

Why RIM and Palm would be a powerful combination

RIM was the undisputed leader in the smartphone market a couple of years ago. It now faces significant threats from iPhone and Android. Its touchscreen models like the Storm paled in comparison to Apple’s iPhone and Google’s Nexus One. Despite being an integrated solution, RIM has allowed its devices and OS to become fragmented. Developers not only have to account for several different versions of hardware (keyboard, touchscreen, different sizes etc.), but they also face the challenge of making sure their apps run on most or all different OS versions. As a result, BlackBerry’s applications marketplace is struggling to compete with Apple’s App Store or Google’s Android Market. And RIM’s hopes of modernizing its OS are weakening day by day.

Despite its weaknesses, RIM is still in a strong position, and it’s not too late to stop the downward trend. It still leads market share in the smartphone market (see table below). Its push email system is still unrivaled in the marketplace, and it is the phone of choice for many working executives and companies. Crucially, it has a strong revenue stream from software and services installed in tandem with the deployment of its phones in businesses.

Integrating Palm with RIM does not come without risks. The variety of RIM’s devices means its platform is fragmented, and it’s not clear how WebOS can fix that. In the short term, there will be two disparate operating systems, and therefore different app stores. It will be critical for RIM to phase out the BlackBerry OS quickly while integrating Palm’s WebOS with its push-email servers and services.

In the long run, when WebOS and BlackBerry devices converge, RIM will come across as a formidable competitor to iPhone, Windows Phone, and Android. Last but not least, the new company formed from the merger would still be an integrated mobile vendor — the preferred position of both RIM and Palm. They already share a vision. Separately, they lack the means to achieve it. That’s the best possible scenario for making a technology acquisition work.