Should Amazon buy webOS?

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At what price?

Hewlett-Packard paid $1.2 billion for Palm just over a year ago, and that valuation was based largely on Palm’s patent portfolio, rather than Palm’s existing smartphone business — which hadn’t taken off and which HP didn’t really want. HP’s webOS business lost about $330 million in the last quarter, and the company has already warned financial analysts that its fourth-quarter earnings will include a write-down on Palm assets of about $1 billion. So it’s a good bet that HP is, at a minimum, looking to offset those costs, even though HP’s quickly-aborted TouchPad business is worthless to potential suitors.

However, in the year since HP acquired Palm, the mobile industry has seen an explosion in high-dollar patent acquisitions. In July, a consortium led by Apple and Microsoft spent $4.5 billion on a porfolio of about 6,000 patents and patent applications from Nortel. That same month, Google splurged on over 1,000 patents from IBM — while at virtually the same time decrying how “bogus patents” were being used to attack Android. Add high-stakes litigation between Apple and Samsung to the mix (which hinge on both technical and design patents), and the Palm patent portfolio could very easily be worth more than the $1.2 billion HP paid for it a year ago. HP might even be able to ratchet up the price by playing bidders against each other (and HP’s current chief, former eBay CEO Meg Whitman, knows a thing or two about bidding processes). Amazon has pockets deep enough to invest in webOS, but there’s no telling yet if it’s willing to take the leap.

The case against webOS

All this doesn’t make webOS a slam dunk for Amazon. First, Amazon has already invested significant resources into customizing Android for its Kindle Fire tablet. Although some of that effort could undoubtedly be leveraged if Amazon were to try to produce webOS-based Kindles, the company would definitely have to spend time and engineering effort bringing the Fire experience to webOS. That’s time the company would be spending re-inventing what it’s already done, instead of refining the Fire platform. In the fast-moving mobile world, that’s probably not a good thing.

amazon app storeSecond, Amazon is already a major player in the Android ecosystem, with its own Android marketplace and Kindle apps for Android devices. Amazon can leverage that investment in Android with its own Android devices, but webOS devices would be exempt, potentially making then less valuable to consumers. Right now, most of the buzz about the Kindle Fire isn’t that it enables users to easily tap into the Amazon e-commerce ecosystem and spend lots of money: It’s that it’s a cheap Android tablet. That may change once the Kindle Fire goes on sale November 15. Consumers are notorious for not caring about platforms, and being more concerned with what a device does for them.

Amazon could conceivably launch its own developer network and app store for hypothetical webOS-based devices, but it seems like a long shot. The webOS developer universe is sparsely populated, with existing devs having been burned twice now — once by Palm, once by HP. They may not be willing to take the risk that the third time is a charm. Amazon has demonstrated that it isn’t particularly concerned about the Android ecosystem — after all, it’s only mention to Kindle Fire customers is as a source of email apps — but that might all fall apart with one thing so many mobile device users love: games. Hordes of casual games are available for iOS and Android, and the Kindle Fire tablet will be able to access a heap of Android games. A hypothetical webOS tablet is going to have major trouble attracting development interest from game developers, and that may be a serious impediment to devices intended to provide consumers with content and entertainment.

Finally, there’s the fundamental fact that Amazon is not a hardware company: It’s an online retailer that has built a major digital content business. One of the reasons Apple has been so successful in recent years is that Apple is primarily a hardware company. It sells well-designed hardware at a significant profit, and barely bothers to break out its iTunes content business as a separate item in its financials. Amazon’s Kindle ecosystem is almost the opposite. Amazon’s Kindle e-readers are primarily inexpensive gateways to Amazon’s vast digital content business. In fact, with the Kindle Fire, Amazon appears to be selling hardware at a loss in order to get customers into its ecosystem. Most customers like their Kindles, but aside from their E-Ink displays, the devices don’t get high marks for their design and build quality. With webOS devices, Amazon would likely continue to push towards low prices (and low unit costs), hoping to make up the difference (and most of its profits) by turning customers on to its digital content and retail offerings. That means webOS devices would probably be (at best) inexpensive and feature-limited, and (at worst) cheap and chintzy. At that point, consumers probably don’t care what’s under the hood… and Amazon might not either.

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