How could Steve Ballmer screw up Microsoft's HP partnership?

Somewhere, in an alternate universe, Microsoft did the right thing: Bought Palm instead of cut a deal with Nokia. But in this reality, Microsoft screwed up, not just by letting Palm go but clearing way for HP to make the acquisition. Now HP, Microsoft's strongest OEM partner, is turncoat, planning to put WebOS on every HP PC by 2012. It's simply unthinkable.

Just 11 months ago, HP revealed plans to buy Palm for $1.2 billion -- a pittance if just to get WebOS. Four months earlier I gave "10 reasons why Microsoft should buy Palm now." But Microsoft CEO Steve Ballmer and his top executives let Palm get away. (Hey, I gave good advice -- for free!) Ballmer was willing to spend $44 billion for Yahoo just a few years ago, and Nokia will reportedly receive $1 billion from Microsoft as part of the Windows Phone OS distribution deal. Palm was a garage sale, by comparison.

Palm didn't feel like a good fit for HP in April 2010, and I'm not seeing the love even today. While HP has a thriving consumer business, it's much more an enterprise company. Palm had become consumer, led by a creative management team (Microsoft culture is more analytical). There's something not right in the merged DNA. But it was a shotgun wedding, with HP desperately needing something to jumpstart its sagging mobile strategy. That HP would sell WebOS smartphones or tablets is a no-brainer. But this move into PCs is something else.

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HP isn't replacing Windows -- yet -- but will offer WebOS, too. The plan is for Windows to still be primary operating system. But for how long? There would be many HP business, customer and developer benefits to offering a single platform on multiple devices. Then there is the question "To whom?" Given HP's legacy, the enterprise is a more compelling target market than consumers. Microsoft shouldn't want any customer, enterprises in particular, to buy a PC with competing operating system from a company with as reliable brand as HP.

Competitively, Microsoft must exercise caution. The company is still under extended government oversight stemming from its 2001-02 antitrust settlement. Among the complaints in the original lawsuit: Microsoft cutting different deals with OEM partners that rewarded some for their loyalty and punished others for not abiding by Microsoft's rules. In an earlier antitrust case, settled in 1995, Microsoft got into heaps of trouble for charging OEMs for Windows even if they shipped a competing operating system instead. Under terms of the newer settlement, Microsoft must offer all PC partners the same basic licensing deals; there's not much room for charging HP less as incentive to just do Windows or to add on fees for disloyalty. Microsoft's options are limited, if it wants to ever escape from government oversight.

Microsoft has made some colossal mistakes under Steve Ballmer's 11-year tenure as CEO. I predict HP will rank up there with:

  • Screwing up the smartphone OS strategy
  • Losing Microsoft's tablet lead to Apple (soon Android, too)
  • Running aground Cairo and Windows Longhorn development
  • Botching Windows Vista development and launch (there was no "wow")

HP is the world's No. 1 PC manufacturer, based on shipments, according to Gartner and IDC. If HP's WebOS strategy plays out -- and surely that means someday shipping only its OS rather than paying Windows license fees -- Microsoft will lose revenues and its most important strategic partner. Stated differently: An important partner will become a competitor.

Steve Ballmer, how did you let it come to this?

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