Should Microsoft buy Palm?

In a recent MarketWatch article on Microsoft's struggling Zune portable media player, reporter John Letzing got an interesting quote from George Kurian, a vice president at Tradition Capital Management LLC, which owns Microsoft shares.

"Microsoft should abandon Zune and follow Apple's strategy to try to make its presence felt in the high-growth smartphone sector," Kurian said. He then went on to suggest that the easiest way for Microsoft to do that would be to buy Palm.

This is not the first time someone has suggested that Microsoft buy Palm. Back in January of this year, before the Pre was released, Farhad Manjoo wrote an article on Slate entitled, "Forget Yahoo--Buy Palm." The subhead was, "Why Microsoft would be foolish to get into the Web ad business." The core argument behind the piece was that Microsoft should stop worrying about the Web ad business and focus on creating software, which actually represents a much larger opportunity because the overall software market is 10 times that of the overall Web ad market.

"Microsoft might pay tens of billions of dollars for Yahoo; it could pick up Palm instead for just $1 billion or $2 billion and then spend several hundred million more on transforming the Pre's user interface into a mobile OS that can run on phones made by multiple vendors," Manjoo wrote. "Microsoft would also gain a loyal Palm audience--and a base of developers looking to create apps for the device. And then Microsoft would have money left over to buy other software companies--start-ups and established firms that power the next generation of devices, or that are pioneers in the selling online software to companies."

More recently, Gary Marshall over at Techradar.com took a whack at why Microsoft should ante up for Palm. He pointed out that buying Palm "would bring the Pre's designers to Windows Phone, and it would annoy Steve Jobs, too" because the Pre team includes Jon Rubenstein, former vice president of Apple's iPod division, and former Apple developers' champion Chuq Von Rospach. Also, in the same article, Andrew Kitson, senior analyst with Juniper Research, said that a WebOS-powered smartphone would be a nice item to sell in Microsoft's forthcoming retail stores.

What's interesting about this growing cry for Microsoft to buy Palm is that a lot of people seem to be rather dismissive of Microsoft's own smartphone operating system, Windows Mobile. I and plenty of others have written in the past about Windows Mobile's problems, and while the OS certainly has supporters (I still use it myself), critics like Manjoo and Kurian would prefer if Microsoft stopped investing money in fixing Windows Mobile and moved onto to something more promising--and brand new--like Palm's WebOS.

Microsoft is allegedly planning to release a revamped Windows Mobile next year (it's called Windows Mobile 7) and rename the platform Windows Phone. But previous updates, including WM 6.5, have been so disappointing that it's hard to believe that WM 7 will be a game-changer. As I wrote earlier, I do expect it to be better, but the sad fact is it should have been out a year ago. By the time WM 7 hits, all four of its main competitors--Android, iPhone, BlackBerry, and WebOS--will have improved and it's quite possible that Microsoft's mobile offering will still seem behind the times.

It's also important to point out the reason why I won't buy a Windows Mobile phone when my contract is up with Sprint in September (I initially thought it was June, but alas, I'm stuck until September): The phone I buy this fall could very well not be upgradeable to WM 7 when it comes out. I specifically asked the folks at Microsoft if I bought, say, an HTC Touch Pro 2, whether I'd be able to upgrade it to the new OS. They said they didn't know and that it was up to the carrier.

That's absurd. And I don't care if it's Sprint's or Microsoft's issue, it's a really stupid way to run a business--and a real disincentive to have people buy into your platform. With the iPhone, Android phones, and the Pre, I know I'm going to be able to easily upgrade my mobile as new updates come out, and I don't have to worry about potentially having to find some home-brew ROM upgrade for my phone online. I may not get every new feature (i.e., video capture is not available to owners of first- and second-gen iPhones), but I'll have access to some, if not many, of the improvements.

But I digress. The ultimate problem for Microsoft is that it's gradually slipping behind in the smartphone race and it may never recover. In Q4 of 2008 it owned a respectable 12.4 percent market share but that's been dropping and if you look at AdMob's recent mobile metrics for smartphone requests by OS (Web usage), Android has pulled slightly ahead of Windows Mobile (5 percent versus 4 percent), while the iPhone continues to dominate with a 64 percent share worldwide.

At the same time, while the Palm Pre has been widely praised along with the new WebOS, Palm is still facing fierce competition and its future remains uncertain. The question, of course, is whether there's room for five or six major mobile operating systems and the answer is probably no. A lot of it will come down to which platforms software developers end up gravitating toward and where they want to put their resources. Right now, the iPhone is where the money is, though the BlackBerry also looks fairly attractive and Android appears to be on the rise.

Personally, I think a Microsoft-Palm marriage would be a win-win for both companies and that it should happen sooner rather than later. But as it stands, we'll likely have to wait a year or more for things to shake out and for a clearer picture to develop. Toward the end of this year, we may see a beta of Windows Mobile 7, Microsoft will release the Zune HD (some Zune user interface elements may me integrated into WM7 or vice versa), and we'll see what new handsets and carrier relationships Palm has up its sleeve.

In other words, the beat will go on. But someone's going to get beat. And it didn't have to be that way.

Comments?