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Hindsight View: How HP Could Have Succeeded With the TouchPad

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I realize you are probably little bored about articles on the HP TouchPad. If that's the case, I've got some good news. I think I'm down to only two final ideas for TouchPad articles left in the hopper and this is one of them.

If you are wondering why I keep writing about the TouchPad, it's simply because I think it's the most interesting business story in the last ten years. You rarely have a nearly universally critically acclaimed product fail at two companies for entirely different reasons... only to watch it become so extremely popular after it being discontinued, that consumers can't find it in stock anywhere. People snap up art and music (Nirvana and Michael Jackson come to mind) after the artist dies, but that doesn't happen with technology very often. Usually, it's the opposite reaction, if the technology won't be continued, because don't want to invest in it.

In fact, the demand has been so strong that earlier today, Reuters had an article with the following quote: "[HP's Personal Systems Group head Todd Bradley] said the company could resurrect HP's short-lived TouchPad tablet computer, which was introduced on July 1 before being terminated only about six weeks later."

That was followed up by HP announcing it will "produce one last run of TouchPads to meet unfulfilled demand". Of course their next sentence was, "We don’t know exactly when these units will be available or how many we’ll get, and we can’t promise we’ll have enough for everyone." That leads me to wonder if HP understands the meaning of the phrase "meet unfulfilled demand."

I got in a conversation with Kosmo from The Soap Boxers about what I thought HP should have done in hindsight with the TouchPad. (By the way, you should read his article on the HP TouchPad Chaos.) I proposed that they should have released the device with the following sales plan:

  • Sell the first million at $99 (16GB) and $149 (32GB). That's a combined one million - so 400,000 of one and 600,000 of another for example.
  • Sell the 2 million at $149 and $199.
  • Sell the 3 and 4th million at $199 and $249.
  • Sell the 4 through 6th million at $249 and $299.
  • After that it hits full retail price of $299 and $349. There is also an option for an accessory bundle
    (like a Touchstone and a case) or $75 app store credit sold in the $349 and $399 range.

Kosmo correctly pointed out that consumers probably wouldn't like the constantly raising prices. HP would have to reverse the pricing and say that it starts at $299, but those who act quickly can get it with an instant rebate of $200. That instant rebate would just keeps diminishing as product is sold.

Sure some consumers might not like the idea of paying more because they bought it later. I know I'd wouldn't. It rubs me the wrong way to pay more than I could have. However, I like to think that I'm a little odd in that I run a personal finance blog. I like to think that most people would think the following:

"I'm in the market for a tablet. There are these cheap ones from HP that have gotten a lot of media attention due to them launching with a $99 price. I know there's are a couple of million out there so this is a platform that people are going to be interested in it. I could pay $199 for this now, or double that for Android tablet, or even more for an Apple iPad2. Gizmodo says, "The TouchPad is the second best tablet you can buy, at any pricepoint." It seems to be the value for my money.

At this point, you have probably already had the thought, "It's easy for you to say to sell these at those prices, you aren't HP losing millions of dollars." That's a fair criticism. Let's look at what the cost to HP would have been in terms of hardware alone. (We can presume there are other costs such as development of the operating system and such, but in HP's conference call they specifically cited the hardware as being the big cost driving the decision. There's also the retailer's margins to consider.) Fortunately, we have details from iSuppli about how much the TouchPad costs to make. Their estimates are $296 for the 16GB and $318 for the 32GB. Using those numbers, I opened up Excel and crunched my estimated numbers. Here's what it looks like (assuming that consumers buy equal numbers of 16GB and 32GB):

The top of the spreadsheet illustrates how as the promotion sells, the discounts get fewer and fewer. After selling 3 million of the 16GB and 3 million of the 32GB TouchPads (6 million total), HP would have lost a whopping $548 million dollars. Is that number so large though? They paid 1.2 billion for Palm. The day HP announced they were getting out the hardware market, their stock dropped $12 billion dollars. That same day they bought Autonomy for what was between 7 and 10 billion dollars.

The most interesting thing to me is the next line after the losses. This is the line when the product sells at the retail price of $299 and $349. At this price point, HP actually makes $34 per device sold. It's not big money, especially considering the other costs (software development, retailers, etc.) that we glanced over. In fact, they are probably still losing money at these points.

However, what they've done is got the device in 6 million people's hands. They would have been able to do with very little advertising costs. The of the $99 tablet is still keeping it in the market. Also at a price point of $299 and $349, it would still be the second best tablet (Gizmodo's words) at a price that is just over half of the best tablet. The 6 million people are going to want accessories (cases, keyboards, Touchstones) and apps, both of which are higher margin products. They aren't going to sell enough to make it profitable. It's a failure right?

No, at this point, HP would unleash the secret weapon, the TouchPad 2 (or TouchPad Pro, or whatever). The IPad 2 cost of materials back in March was around $325. Presumably HP could do something similar for around $310, presuming component costs go down a little in the last 5-6 months and sell at a $399. This may be asking a little much and I'm guessing that those who bought $99 TouchPads aren't going to quickly upgrade to a $399 tablet. To justify the $399 price, I think you give people something they want, but Apple won't give them - an SD slot so that they can add as many movies as they want without having to buy a whole new device. You'd have to give them something else, like a faster processor while making it thinner and lighter. This device should hopefully make around $80 a sale, which would likely give HP a profitable product.

I think one of HP's biggest mistakes was thinking that it walk into the tablet market and just compete with Apple and Google when those two companies have a large installed base, years of advertising, and a ton of buzz. HP needed to get that mind-share, and I think putting aside a billion or two should have been budgeted right from the beginning to accomplish the task.

Let me know what you think of this idea in the comments. In the meantime, I've got a FedEx truck to stalk. My TouchPads should be just outside any minute now...

[Update: I was joking about stalking the FedEx truck, but it came ten minutes after publishing this post. Well played, FedEx. Well played.]

Posted on August 30, 2011.

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9 Responses to “Hindsight View: How HP Could Have Succeeded With the TouchPad”

  1. I’ll point out the fact that your profitability calculations are assuming zero costs for marketing and distribution – just the raw costs. At the least, you have shipment on a slow boat from China, Bob in the warehouse shoving Touchpads into a box, Visa taking 3% off the top, etc. At worst, you’re paying another store (Best Buy, etc) to sell the TP for you.

    Having said that, I think there’s validity in your idea. While you and I attacked the problem in slightly different ways, wee were both aiming for the same situation – the early adopters getting the best idea.

    My thought was to have a “Bonus accessory bundle worth $150 included FREE. Limited time only!” for the earliest adopters and then slowly whittle down the value of the accessory package. The later adopter can’t complain about a higher price, because everyone is paying the same amount of money. Sure, the early adopters got a accessory bundled, but this wasn’t part of the core product – it was a bonus. And even better, the accessories would cost you far less than $150, so it’s much better than simply slashing $150 off the price. I’m pretty sure I stole the accessory idea from you.

  2. Here’s some info on HP’s announcement that they will make more TouchPads:
    http://www.computerworld.com/s/article/9219615/HP_to_make_more_TouchPads

    It’s uncertain that this will be priced at $99 or a higher price point. The price on the secondary market seems to be settling around $200, with the possibility of going lower as pent up demand is satisfied (and as the possibility of $99 units from HP make some people wait).

    So I’m not sure how HP is going to sell any units at a profitable price. They could earn a lot of goodwill by selling some for $99, but how does that help them financially?

    Or they could offer the unit for $99 with the purchase of an HP laptop and a higher price a la carte.

    • Lazy Man says:

      Kosmo,

      Good points on the bundle. I just don’t think it gets the buzz that the $99 price gets. I bet a lot of buy iPads thinking that they won’t need any accessories and then end up getting them later as impulse buys or gifts. If true, some people would put diminished value on the bundled accessories because it’s something they weren’t planning on anyway.

      It would be interesting if HP ups the price now. Does that smooth things over as they can still get a great value on a tablet or upset people that they didn’t get the very best deal? Tough call, but I’m thinking the later.

  3. Brad says:

    Economics aside, I think the tiered/delayed rate structure would have led to some serious brand damage at HP. Introducing the tablet at the $99 price, there would have been tons of buyers that would have waited for positive reviews to roll in first before taking the plunge – but they would have locked in on that price point while considering whether or not to buy it in the future. Assuming all went well for HP on the first million, a subsequent rate increase would have wreaked havoc on HP customer service department, and perhaps even forced HP to honor the lower rate should media scrutiny and consumer outrcy grow loud enough. Market psychology matters, and customers have long memories. HP already has a fragile reputation in the market place right now, given how Sony and Apple have pounded them hard over the last ten years, and even Dell has given them fits. So a PR nightmare is the last thing HPs needs, particularly with leading edge technology.

  4. Lazy Man says:

    That is why it is billed as an instant rebate that gets lowered over time instead of a rising price.  People are usually okay with introductory prices and missing out on instant rebates.

    Also, I think all the tech gurus (Mossberg, Pogue, etc.) would have reviews out the day the product goes on sale as they have review units in advance.

  5. Big-D says:

    Funny – This was brought up in my MBA class a couple days ago. Basically we all confirmed that HP might be doing some strategic marketing and price setting, but this whole thing reeks of the “Coke Classic” type bait and switch. Do something, then over react, and then normalize the market after all the buzz starts to die down. They could be doing the MS strategy with the original XBox. Make a technologically superior product, sell it at a loss, and get the brand out there, and then come out with another cheaper product and sell it at that price point, and make money on the software channel.

    The thing that I think is on the outside of this is the software channel. Apple reigns supreme because they have a million apps. Android is following close behind. WEBos does not, and people are not as ravenous for the product. Make people want the product somehow (marketing mentioned above) and then guess what – you get developers and product out there to make the market what you want, and then the sales channel works itself out.

    • Lazy Man says:

      I couldn’t agree more, except that I think HP didn’t plan for it to work out that way.

      Apple has the number of apps because of the extension of the iPod/iTunes store to the iPhone and then to the iPad. Android has the apps because there hundreds of different types of phones out there. WebOS didn’t have the backing of a big carrier or either of the aforementioned advantages of iOS or Android. Blackberry isn’t doing well with it’s Playbook and it has a great audience with its phones.

      HP had to do what you said and go with the Microsoft/Xbox strategy and take their lumps to solve the chicken and the egg problem (people don’t buy devices without apps, developers don’t create apps without device sales). That’s why I proposed the ever-shrinking instant rebate. As the sales grow, developers will come in and there’s less of a need to lose $200 on each one.

      People have asked why would anyone be interested in something that failed twice. I would look at it this way. Both of those investments brought it pretty close to the finish line. The OS is more mature and with the fire sale a good consumer base is in place. The tough problems are solved for the buyer looking to come in. If it was someone like Samsung, they’d get the patent-protection from Apple as well.

  6. Collymitch says:

    What HP didn’t realise was that the tablet effect does not exist, it’s actually the apple effect (the buzz as you called it). To expect a customer to choose HP as a newly introducted touchpad against an already established ipad (with iphone and ipod before that), at a very similar price point was just ludicrous. You pay not just for the technical spec but the brand. HP may have a good brand in the PC world but it did not accept the fact that it was a new-comer to the mobile market. It should have done what all new-comers must do – either come up with a product that is superior, or much cheaper than the market leader. It did neither. Not until the firesale did it do the latter.

    It’s clear that the desktop market is a lot different than the mobile market. Desktop market pace is essentially dictated by intel & co – not HP or any other PC builder, and they are forewarned years in advance. The pace of design and innovation in the mobile market is dictated by market forces and unless you are willing to invest in getting ahead of the game you should do what exactly what HP did and step aside.

    • Lazy Man says:

      It’s worth noting that only the TouchPad hardware was a new entry – the webOS software on the TouchPad has been in use for more than two years now.

      HP found that at the right price, the tablet effect does exist. Having owned a TouchPad for about 3-4 days now, I do about 40% of my computing there, which is several hours a day.

      Before the firesale, HP priced the device at $399, which was cheaper than the market leader. One of the problems was that the advertising wasn’t up with what Apple had. Perhaps more important, the device out of the box is probably only 1/5 as good as what I’ve had with a few adjustments from the community.

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