Palm Made Right Call in Shutting Down Windows Mobile

Some analysts and investors have debated whether Palm made the right decision last week when it chose to abandon Microsoft’s Windows Mobile operating system in favor of an exclusive commitment to webOS.

In making the announcement, Palm CEO Jon Rubenstein said the following:

“Due to the importance of webOS to our overall strategy, we’ve made the decision to dedicate all future development resources to the evolution of webOS, which means that going forward, our road map will include only Palm webOS-based devices. . . .

. . . . We are going to be focusing all of our effort in the future on building webOS products. And so while there are still Centros and Treo Pros moving through the (Windows Mobile) channel right now, our future engineering efforts are based around webOS because we are absolutely confident in where we are going with webOS.”

I understand the reasoning put forward by those who questioned Palm’s decision. On a quarterly basis, Palm is suffering from steep declines in year-over-year revenue; and the Palm Pre, in limited release, doesn’t seem to be doing as well as some had expected and hoped it would.

In ending its commitment to the Windows Mobile-based Centros and Treo Pros, Palm has discouraged consumers from purchasing them. Revenue from those products will recede even faster and more severely than would have been the case had Palm chosen to allocate a modest percentage of keep-alive resources to them.

Nonetheless, while I sympathize with the position of Palm critics, I don’t agree with it. Palm had to commit unambiguously and unreservedly to its homegrown mobile OS. It isn’t a big enough company to have one foot planted in Microsoft’s Windows Mobile camp while trying to make meaningful strides with webOS. It would have tripped over its own feet.

Palm isn’t a hedge fund; it’s a technology company. It must have the courage of its convictions or risk becoming irrelevant. Palm might have become just that if it had attempted to juggle resources in a bid to marginally extend a diminishing stream of Windows Mobile revenue.

Now, though, it has a chance at survival, at emerging as a strong alternative to a smartphone market where the long-term winners appeared destined to be Apple in the consumer sphere and RIM in the enterprise realm.

It won’t be easy. An armada of Google Android-based smartphones will hit the market’s high seas before the end of this year. Those much-hyped and eagerly anticipated competitors will gain an inordinate amount of media coverage and industry buzz. Meanwhile, Apple won’t stop innovating, and RIM will continue to do its best to prevent encroachments on its enterprise turf.

Windows Mobile, though, is a spent force. I don’t see how Microsoft can revive it. The Windows Mobile 6.5 release won’t do it, and neither will next year’s Windows Mobile 7.0. The only possible road to redemption for Windows Mobile would be to refocus entirely on enterprise applications and markets and hope to chip away at RIM’s market share.

I will say it again: Microsoft has a lot of expertise and knowledge, and it remains stocked with plenty of smart people, but it doesn’t understand consumer markets. It does poorly in assessing the needs of consumers. Not surprisingly, it does just as poorly in designing and developing products for consumers.

That means Palm’s objective is to position itself as a viable top-three vendor. It has a chance if it can withstand the initial onslaught from the gaggle of Google Android licenses. Much depends, then, on whether on this impending wave of Android-based devices is favorably received. I think the initial buzz for the Android smartphones will be intense, but I wonder about their staying power — and I wonder about Google’s commitment to Android.

I’m probably in the minority, but I’m not persuaded Google will go to the mat to defend a mobile operating system that isn’t essential to its business. Google services don’t have to run on Android, as Google’s application support for the iPhone attests. Google can still generate service and advertising revenue without Android, though it would have more control over the presentation and delivery of those services and advertisements if it owns the mobile platform on which they are delivered.

If Android wobbles — if developers don’t support it with a a sufficient quantity of high-quality applications, if handset manufacturers waver if their first Android handsets don’t reach sales targets — will Google cut or run? I’m not sure of the answer.

Getting back to Palm, it will have to weather an intense storm. It will have to stay the course, it will have to get better at marketing itself and its devices, and — most important of all — it will have to win the hearts and minds of application developers and relevant content creators.

Can it succeed? I’m not Nostradamus, but Palm’s unalloyed commitment to webOS suggests it will at least put up a good fight.

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With Redoubled Consumer Focus and Microsoft Deal, Yahoo Seeks Zimbra Sale

As Yahoo gears up for a major brand-marketing blitz directed at its core consumer market, it is aggressively seeking to divest properties that don’t comfortably fit within that mandate.

One of those properties is Zimbra, an open-source, web-based collaboration company that Yahoo acquired in 2007 for $350 million. To the extent that Yahoo could be said to have been promoting Zimbra, it had been pushing it as a white-label email service.

Interestingly ,that’s not necessarily how Yahoo and the rest of the world saw Zimbra when the acquisition occurred. Back then, Zimbra was perceived as a nascent productivity suite that had the potential to evolve into competition for Google Web Apps and Microsoft’s Office, which is spinning off its own web-based sibling in Microsoft Office Web Apps.

There also were imaginings that Yahoo, returned to the control of then-CEO Jerry Yang, might entertain a revivified emphasis on technological innovation.

Now, though, Yahoo has its eyes firmly fixed on consumers. It has no need for white-label collaborative-messaging offerings directed at SMB and enterprise customers. That’s especially true in light of its chummy search-and-advertising relationship with Microsoft.

As is well known, Microsoft’s Office and its web-based complement represent a powerful entry in the web-based personal-productivity sweepstakes. Notwithstanding Yahoo’s sharpened strategic focus on consumers, Microsoft could not have been thrilled about the ongoing existence of Zimbra within Yahoo. As soon as the Yahoo-Microsoft deal was struck, Zimbra’s days as a Yahoo possession were numbered.

Commentators are wondering about Zimbra’s next destination. Among the potential buyers are Google, Comcast (an early Zimbra customer), and Zimbra’s original venture-capital investors. One of those investors is Redpoint Ventures, the current professional home of Satish Dharmaraj, Zimbra’s founder and CEO.

Whoever buys Zimbra, they are not likely to pay nearly enough to allow Yahoo to realize a financial return on its investment. Like so many of Yahoo’s acquisitions, Yahoo’s purchase of Zimbra was poorly conceived and ineptly executed.

Observations on Dell’s Perot Acquisition

Dell announced this morning that it has pulled the trigger on a $3.9-billion acquisition of Perot Systems. Some observers think Dell is overpaying for Perot, whose revenues have been falling. It’s true: As a standalone entity, judged on earnings per share and business fundamentals, Perot isn’t worth the premium Dell has offered.

Still, it’s important to understand the Perot acquisition as a strategic necessity for Dell. It’s also important to consider that Dell will add incremental product sales through Perot’s accounts. Those product sales will include not only the PCs and servers Dell markets today, but also the products and technologies it will add through further acquisitions.

Strategically, Dell had two broad choices: It could go deeper into consumer products, from which it currently derives approximately 20 percent of its revenue, or it could strengthen its enterprise offerings. It wisely chose the latter.

After it has integrated and digested Perot, Dell will have a real services organization — with a stable of paying customers — that can do more than install and support PCs and servers. At that point, Dell can look at acquiring enterprise-oriented software companies whose products fit Perot’s sales-engagement model and target markets.

So, Perot helps Dell achieve an important objective, though at considerable cost.

Even with the Perot acquisition, Dell’s services division will be significantly smaller than IBM’s or HP’s. Where those organizations can go broad and deep, technologically and in terms of the vertical markets they serve, Dell will take a different approach.

Perot derives nearly half its revenue from the healthcare sector, with another 25 precent coming from the government sector. As part of its stimulus spending, the Obama Administration is pouring money into healthcare to expedite the digitalization of medical records. With Perot in hand, Dell expects to tap into some of that largesse. (The companies already had a healthcare-related partnership pertaining to electronic medical records (EMR). This acquisition could be read as a sign that the partnership was bearing fruit).

Similarly, the Obama Administration has mandated that federal governments update and upgrade their IT infrastructure. Again, Dell hopes to leverage Perot to get at that business.

In acquiring a services company that is positioned to benefit from government-stimulus funds, Dell seems to be acknowledging that following government money is a better near- and intermediate-term strategy than trying to benefit from what might be an invisible recovery in the private sector. Publicly listed companies that have managed to produce earnings this year invariably have done so on cost cuts rather than on revenue growth. Speaking of which, Dell also foresees “efficiencies” deriving from this deal.

Some detractors are criticizing Dell for buying a services firm with such a heavy dependence on two vertical markets. Actually, I think Dell saw the same thing as a positive, not a negative. Dell believes healthcare and government have money to spend, unlike many other industries that are reducing expenditures.

The move also signifies that Dell will not be making a high-profile acquisition in the consumer space. Don’t expect Dell to reach into its pocket to buy, for example. Palm. That’s not likely to happen unless Michael Dell loses his mind.

Instead, you might see Dell follow this acquisition with purchases of companies involved in information management and storage. Healthcare organizations and government departments are bureaucracies that produce copious documentation. Consequently, they have an ongoing need to efficiently manage and store documentation.

Obvious Dell acquisition candidates include CommVault, with which Dell has an OEM partnership, and GlassHouse Technologies, which also partners with Dell. Given the vertical-market orientation of Perot, Dell also might take a serious look at file-virtualization technologies.

Dell will want to push more than PCs and servers into the Perot installed base. Further acquisitions are sure to follow.