Has HP Lost Its Marbles?
Aug 31st 2011 2:13PM
Updated Aug 31st 2011 2:14PM
Hewlett-Packard (NYS: HPQ) couldn't sell its webOS-based TouchPad tablet for $499 apiece. It wouldn't even move at $385, more than $100 below the pricing benchmark set by Apple (NAS: AAPL) and its iPad 2.
But when the price dropped to $99 (or $149 for the larger-memory model), customers lined up around the block -- even if the entire product line was officially discontinued that very morning. In fact, would-be customers clamored for more when stores sold out of this deep-discount product very quickly.
So what does HP do? Order up another batch of TouchPads, of course!
According to IHS iSuppli, the darn thing costs at least $306 to make. On top of that, HP promises free shipping on second-run orders from its online store. HP is taking a loss on every unit sold at these prices, but hey -- let's make up in volume what we lose on the margins! Whoever made that genius decision, I want some of what they're smoking.
Meanwhile, enthusiasts have cooked up versions of Linux and Android to run on the TouchPad, squeezing a better-supported lifespan out of the doomed product even if webOS itself dies. I guess there's always demand for cheap and reasonably powerful hardware.
All jokes aside, HP might actually have a plausible reason for this head-scratcher. You see, HP was planning to make more of these things, including a smaller 7-inch version, and reportedly ordered up enough parts to build another 100,000 units.
HP may be pulling out of the consumer hardware business, but it would still be a bad idea to leave a large number of parts suppliers stranded with unsold TouchPad parts. The gadget includes chips from industry giants such as Texas Instruments (NYS: TXN) , Qualcomm (NAS: QCOM) , and Maxim Integrated Products (NAS: MXIM) , and the LG Display (NYS: LPL) touchscreen is driven by a chipset from Cypress Semiconductor (NAS: CY) .
It's safe to assume that many of these suppliers also ship parts for HP's as-yet-unsold computer systems division and the all-important printer segment. Ameliorating the negative goodwill from this drastic move is very important to HP, and probably well worth a couple hundred million dollars of unprofitable tablet sales just to make the issue go away.
Will any of the erstwhile iPad killers ever figure out how to build a competitive product cheaply enough to actually threaten the iPad? HP sure couldn't. Samsung stands a better chance than most since it makes many of the required parts in-house and could squeeze the build costs that way -- but that hasn't happened yet. Maybe the next version of the Galaxy Tab could do better? Present your own theories in the comments box below.
At the time this article was published Fool contributor Anders Bylund holds no position in any of the companies discussed here. The Motley Fool owns shares of Qualcomm, Texas Instruments, and Apple. Motley Fool newsletter services have recommended buying shares of Cypress Semiconductor and Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio, follow him on Twitter or Google+, or peruse our Foolish disclosure policy.
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