Elevation's Investment in Palm: So That's What They Were Thinking

Posted by: Peter Burrows on January 11

“It’s going to be a BFD, dude,” Elevation Partners partner and front-man Roger McNamee told me the day before Palm announced its new Pre smart phone and WebOS.

It seems he was right. I wasn’t at CES, but Palm’s intro was the story of the show. Before the company announced its products, most everyone thought Elevation was daffy for investing $425 million in a company that didn’t have a prayer against Apple, RIM and others. That was certainly clear to me when writing this story on the subject a few weeks back. But now, the conventional wisdom is that Palm has at least lifted itself off the deathbed, and most industry watchers seem intrigued at the possibility of a comeback for what used to be one of Silicon Valley’s more beloved companies.

And guess what? Elevation’s daffy investment (more likely $375 million rather than $425 million, since it’s likely big shareholders such as Fidelity and T. Rowe Price will exercise their option to put in half of the $100 million Elevation agreed to invest last month) is already in the black. Elevations’ average cost for its two big investments is around $5.70 a share (It paid $8.50 a share when it bought 27% of the company in 2007, and $2.84 per share in its latest round). With the post-intro run up in the stock, Palm is now trading at $5.96.

McNamee says he’s not counting his winnings, since he thinks Palm’s upside could be huge over time. With the first new OS designed in years for smart mobile devices, he believes the company will be able to crank out devices that others can’t match. These include, he says, faster Net browsing and a greater ability to automate people’s daily digital hassles—like automatically consolidating the many contact lists and calendars most people have around the Web, or anticipating what they’re trying to accomplish as they type (are you trying to call or email someone, buy a product, or read a Wikipedia entry?).

At the moment, McNamee is feeling as lucky as he is smart. He says the fact that Apple didn’t have any blockbuster news at Macworld left plenty of limelight available for Palm. And he says Palm “caught an incredibly lucky break” in that nobody else happened to be working on a hardware design similar to the Pre, which was conceived eighteen months ago. Now, he thinks the Pre’s curvier shape and seemingly intuitive interface will appeal to a large demographic that’s got more to worry about than what song or game to play on their iPhone, or which email to answer on their Blackberry. That market is Moms, who need common sense tools to help them manage their families’ needs and their own as efficiently as possible. “Look, we’re not trying to win the whole market. We’re just trying to have the best product for a part of the market.”

While he believes Apple and RIMM will prosper as well, McNamee argues that they will be hard-pressed to make their older operating systems do the jobs Palm is focusing on. “I’ll defend the Blackberry engineering team to the death” for its ability to add a camera, Web browsing and other multimedia capabilities to products that were designed for character-based computing. “But they’re trying to extend their OS to do things it was never meant to do.” As for Apple, he says the iPhone is built around the MacOS X—“an eight-year-old OS developed to run on a big huge piece of hardware, with no power constraints.”

I pressed him on what I see as the biggest problem facing Palm: getting developers to write for a brand new platform, when all the customers use devices based on software from Apple, Blackberry, Symbian and Microsoft. He believes apps will be less critical in the future, as devices become better at accessing the Web (I think that day will be a long ways off; this mobile Apps trend is just taking off). But he also argues that WebOS will be attractive to developers that want to pull off more difficult engineering feats—ones that might enable them to charge more than the $.99 that all those casual games and simple productivity tools cost on Apple’s App Store (Here's an EnGadget piece on Palm's App Store plans). “The question is whether people will develop for the least-common-denominator, or the highest-common-denominator. A day ago, developers never thought about a device that could automate customers’ needs and bring their blood pressure down. Now, they’ll start.”

Maybe. There are loads of huge ifs remaining in Palm’s story—as McNamee readily admits. Even if the WebOS and Pre work as advertised, the company will still need to sign on more carriers than Sprint. And it will have to weather the counter-attack that’s sure to come if Palm does in fact create sizeable new niches. But while he professes to be surprised that the stock has responded so brightly to the CES news, he admits that Elevation and Palm’s five other big shareholders “are feeling very smart right now.”

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