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.]