TouchPad the Nemesis of the iPad? No.

This post is in response to iPad met its match in the TouchPad, by Brooke Crothers. It’s very rare for me to run across an article that’s underlying premise is so flawed, I feel compelled to respond… yet here we are. What’s even more damning is that the piece was written for C|Net, normally a producer of high quality content (though specializing in technology, not business).

Here are the basic points of the Crothers’ article [with my comments]:

  • The sell-off of the TouchPad comes close to rivaling the consumer fixation for the iPad [no, the firesale price point was the fixation]
  • HP had the necessary conditions to make a run at the iPad (vertical technology platform, enormous company resources) [no, they lack a high-quality application development ecosystem- which is currently THE critical value proposition point in this space]
  • Tablets competing with the iPad are generally too expensive for mass adoption at the $499 price point in the US [yes, the price for the iPad is artificially high- it’s not a traditional mark-up price point, but a what-will-the-market-bear price point due to the Cult of Apple marketing phenomenon; Apple’s margin on the iPad is currently around 42%]
  • HP had the resources to use the TouchPad as a loss-leader, and should have [capital resources, yes, should-have, no]

The article, though structurally well-written (as one would expect from a professional journalist), conveniently ignores the big picture. Not to mention the entire point of selling a product in the first place.

Profit.

Crothers suggests that HP could have toppled the iPad as the dominant tablet product on the market, had it allocated some of its marketing budget for the category launch to subsidizing the price of the TouchPad. That’s an oversimplification based on faulty logic, plainly put. How do we define ‘dominance’ anyway? The number of devices out there? Brand loyalty? Sales? The big one is sales. Why else are terms like ‘revenue’, ‘market share’, and ‘earnings call’ so frequently used in business journalism, if sales isn’t the gold standard of success metrics? An extension of sales, naturally, is profit.

How do you turn a profit when you’re selling a product for less than what it costs to manufacture? That’s what Crothers’ tells us HP should have done when he suggested that the company could have used it as a loss-leader. The question is, a loss-leader for what? For a loss-leader to be a winning strategy, it’s imperative that you have something in your arsenal to sell which adds value to the product, and that consumers are likely to buy. In the case of tablets, the common ones are hardware accessories (decorative covers, external speakers, screen protectors, etc) and apps (software applications, for the uninitiated). Loss-leaders do work in the tech space, proven time and again by cellular providers who subsidize handset purchases (Bell, Rogers, Telus, or any of the low-rent brands that sell you a cutting edge phone at a fraction of the retail price if you sign up for a two or three year contract). This is ultimately profitable for them because the margins on their recurring services over the two or three year term are astronomical. For instance, some number-crunching by TechCrunch recently revealed that it costs AT&T about 1/100000 of a cent (hard cost of the DCCH control channel, not the opportunity cost of an SMS, which is $0) when you send a text message from your phone, and the a-la carte cost to you is 20 cents. Even with a $10 unlimited monthly texting add-on, you’d have to send one billion text messages in a month before you gobble up AT&T’s profit on execution of that particular service. The scale of execution and margin is similar for the Canadian providers.

Here’s the basic problem for HP/TouchPad “dominance”: there’s no value-added proposition in place to back up a subsidized hardware sale. The marketplace for WebOS apps is virtually non-existent (a few third-party websites list around 7,000 for the platform, but there isn’t anything ‘official’ out there from HP). Though you can find apps for the platform, most of them are free. Taking a 30% commission on app sales (like Apple does) generates no revenue for HP when the apps are free. Don’t get me wrong, the goodwill of consumers (free apps) and developers (no commissions) to your brand is important… but when you’re spending nine figures on a product category launch, it should take a back seat to actually bringing home the bacon so you can recoup some of the costs and keep your operating cash fluid (at least in the short-term).

Could HP have taken on the iPad with the TouchPad? Sure. But not without building the applications marketplace and developer community first- and this is something that they should have been doing with the Palm Pre, long before the TouchPad was a twinkle in the design team’s eye. It’s a relative impossibility now, with three established application ecosystems out there for mobile (Apple’s AppStore, Google’s Android Marketplace, and RIM’s BlackBerry Appworld). Not many developers will take on a fourth OS… many are even abandoning RIM’s, due to poor support for developers and lower profit potential due to the smaller user base.

Personally, I think the demise of the TouchPad is a shame. I had the opportunity to demo it (long before the firesale) on behalf of a client who was negotiating a procurement contract. The UI is clean and efficient, and the hardware snappy and responsive. But without apps, it was really just a glorified eReader to me at quadruple the price. Still, I’m rooting for someone to come along and offer Apple real competition- without some significant ethical changes in Cupertino, I won’t be an Apple customer again.

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