Why the HP TouchPad is Deader Than a Doornail

Hey, wait, Jim, what about if HP had priced these to sell at non-firesale prices?  I am glad that you asked!  If we assume more reasonable pricing, let’s see the profit potential.  Here, I assume that the 16GB would sell in quantity for $300 and the 32GB for $350, a substantial discount and a price level near where Staples accidentally sold them in the weeks leading to the firesale.

This shows that the flagship tablet product would be a marginal profit opportunity at these prices.  There is simply not a financial incentive to cause HP to re-evaluate the decision to shut down webOS devices.  We can play around with these assumptions; if you assume pricing at $350/$400, you get a $29 million opportunity for the risk that you’ve taken.  Not exactly the $100 million-plus opportunity first envisioned, and it’s not obvious that the market would have cleared at these prices.  It’s just not a big enough profit opportunity to be worth the risk to HP.

Note that HP estimated the total costs from this shutdown to be about $1 billion USD.  Here is what they said in the 10-K filed in early September (see Note 17 for the details):

In August 2011, HP announced that it will discontinue the manufacture and sale of all of its WebOS hardware products, including its WebOS smartphones and the HP TouchPad, and will explore alternatives to optimize the value of the WebOS software. In connection with this decision, HP expects to record a one-time charge in its fourth fiscal quarter of 2011 of approximately $1 billion for restructuring and related shutdown costs. A majority of these charges are expected to be paid in HP’s fourth fiscal quarter.

They’ll likely take more of a hit when they determine the impairment charge to take on their investment in Palm, currently on their balance sheet for $1.2 billion.  Ouch.

In addition, as HP works through alternatives for the WebOS software, which HP acquired in connection with its acquisition of Palm, HP will evaluate the goodwill and other intangible assets related to the Palm acquisition for any potential impairment and, if appropriate, recognize a related non-cash charge in the appropriate period. The carrying value of the goodwill and other intangible assets related to the Palm acquisition was approximately $1.2 billion as of July 31, 2011.

Why Did This Happen?

Why did this product fail to sell at iPad prices?  Well, iPad market share in 2011 is estimated to be 68.3% in Q2 2011.  In trying to compete with a competitor that entrenched, you have a few options:

• Deliver value in excess of the competition to draw share;
• Capture a small share and protect it with minimal costs to support;
• Undercut the competition with price; take a lower margin in exchange for share.

HP went to market against an entrenched first-mover with a me-too product.  In fact, compared to the iPad2, it’s more of a me-too versus generation-one from the competition.  Therefore, no one bought it at the same price point as the iPad2.  HP could not afford to be a niche player and sell a few thousand units, and we can see that the profit potential is minimal for new entrants if they follow the price competition model.  So what is a competitor to do?

The answer here lies in exceeding the value proposition that Apple delivers in its iPad2 products.  If you give the consumer something that is better than the iPad2 and price it a litlle under the iPad2 price point, a competitor should be able to move enough units to be successful.  Of course, absent marketing data that quantifies that sweet spot in pricing, we’ll have to wait and see what transpires to answer the pricing question; looking at the lack of uptake for Android and QNX based tablets, the value/price equation has yet to be solved.  Maybe the upcoming Kindle tablet is the product that unlocks the key to competing with the iPad.  Or maybe if Microsoft can get an ARM tablet that runs Office onto the market, they can give Apple a run for their money.  Only time will tell.

Conclusion

As much as I like the TouchPad, I think it’s clear that this decision by HP to shut down webOS devices is not going to be revisited any time soon.  So enjoy your TouchPad while you can, and wait for the next iteration in the tablet wars against the iPad!