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Comment by tptacek | Hacker News Reader

HPQ's top line is $31Bn/quarter. Cuts on app sales are a rounding error. Meanwhile, they're selling tablets at cost, devaluing the space they're competing for, and they remain at a structural disadvantage to Apple and Samsung, both of whom are handheld supply chain giants.

How does this work out well for HP?

It's easy to see how it works out well for Hacker News: there's a third viable tablet platform! Yay! But HPQ can't make decisions to maximize hacker morale; they are legally obligated to serve HPQ's bottom line.

Incidentally, your comment addresses only half of Gruber's point; the other half is that a $500->$100 discount's success doesn't prove demand either for a $200 price point or for a product with a $200 BOM.

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Spending $195 to deliver a $200 platform, and then making an additional $5-10 per customer on app sales, is not a terrible spot for a business to be in. It's not Apple territory, and maybe it's not worth the risk or opportunity cost for HP given their profitability in other spaces. But one need not be a "big dummy" to think there might be room for a profitable player to use that model.

Incidentally, I only addressed the part of Gruber's post I thought needed responding to. He's right that the fire sale doesn't prove anything about market viability for an at-cost device.

First, HP makes $3Bn/quarter in gross profit. The tablet business you propose is a major strategic initiative that, EVEN IF it pulled neck and neck with the prohibitive market leader, makes only $23mm/quarter†. That's a disaster.

Second, when you're making $15 per customer and the prohibitive market leader is making $200 per customer, your business exists at the pleasure of the market leader; they can cut their prices by 10% and put you out of business; the can plow an order of magnitude more money into marketing and product development and still beat you easily on the numbers.

† And even that assumes that the money from the app store is pure profit, which it isn't for Apple.

I don't understand where you're getting the $23mm/quarter number. The last quarterly numbers I saw for Apple were just under 10 million iPads sold; using the $200/tablet and $15 profit numbers I gave before, that'd be $150mm profit on $2Bn revenue. Those aren't "blow your socks off" numbers, but they're not "disaster" numbers either (whereas what actually happened with the TouchPad was a disaster.) Numbers like that are at least viable for a major strategic initiative for a company like HP, provided there's sufficient motivation for such an initiative.

With the market leader making $200/unit and you making $15/unit, they could put you out of business if they're at a comparable price point. But if the competition's $600 iPad cuts its price to $550 or even $500, it's not going to pull a lot of customers away from your $200 hPad; you're serving very different segments of the market. Similarly, a 10% price cut by Maserati wouldn't threaten Cooper Mini sales.

I'm not saying HP necessarily made the wrong move here. I'm just saying, I don't think you have to be a "big dummy" to think there's room for a low cost, low margin tablet that makes some profit from software.

You're forgetting that those 10 million iPads were sold over many quarters. Re-do your math.

There is absolutely room for a low-margin low-cost tablet. The Kindle is one of them. But there isn't room for the HP Touchpad at HP. I kind of doubt there's room for the HP Touchpad anywhere, because it's intrinsically positioned against a superior product sold by an extremely competent company.

> "You're forgetting that those 10 million iPads were sold over many quarters."

"Apple sold 9.25 million iPads during the quarter" -- http://www.apple.com/pr/library/2011/07/19Apple-Reports-Thir...

My math is fine.

> "there isn't room for the HP Touchpad at HP"

There, I agree. The HP TouchPad is trying to be direct competition for the iPad, and that's why it was a total disaster.

If instead HP made the WeakerPad, with higher capability than the kindle but lower than the iPad, and targeted the $200 price point (where their main competition is a bunch of 7" Android 1.5 tablets with resistive touchscreens), they might find a sweet spot in the market.

The tablets are being sold far below cost. BOM cost is ~$300 for the HP touchpad.

Not all of company's products need to be profitable all at the same, especially for the beast like HP. Obviously they need to be in the tablet business as it's direct threat to almost everything else they've got (well, except servers).

So devaluing that space as long as they can thanks to their other businesses might just as well be the only viable tablet strategy for HP while it reinvents itself.

How does it help HP sell servers, printers, PCs, calculators, test instruments, or enterprise software when they burn billions of dollars in an attempt to trash the tablet market?

This just doesn't seem complicated to me: there is no clear path for HP to make money on these tablets at the price points we're talking about. Therefore: they shouldn't sell them.

You don't agree that it is existential for HP to be in tablet business, even if it generates negative or close to zero margin (much like their PC, printer etc. office equipment businesses do now)?

How long do you think will they be able to sell their printer ink (has to be their highest margin business) if they don't compete in tablet space?

edit: so yeah, turns out they're actually spinning off tablets together with PC division as low margin businesses. Doesn't mean that whoever ends up with it (Samsung?) will have to do both.

I'm guessing: for as long as people are still buying printer ink.

I have to admit to being confused by this: what does selling printer ink have to do with selling tablets?

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