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Has HP Lost Its Marbles?

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Hewlett-Packard (NYSE: 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 (Nasdaq: 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, 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 component suppliers stranded with unsold TouchPad parts. The gadget includes chips from industry giants such as Texas Instruments (NYSE: TXN  ) , Qualcomm (Nasdaq: QCOM  ) , and Maxim Integrated Products (Nasdaq: MXIM  ) , and the LG Display (NYSE: LPL  ) touchscreen is driven by a chipset from Cypress Semiconductor (Nasdaq: 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 ill will 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.

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.

Read/Post Comments (5) | Recommend This Article (6)

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  • Report this Comment On August 31, 2011, at 2:45 PM, makelvin wrote:

    HP might not be as foolish as you might think. There is a few good reasons why HP is making another batch of their TouchPad at $99 even though they are losing at least $200 per tablet. If HP can continue to increase the TouchPad users base, it would help keep its developer's base to not abandon ship right away and increases their potential licensing and/or increase their webOS value for an outright purchase of their webOS to other smartphone OEM manufacturers.

    Also, the last batch of TouchPads were simply to clear out their existing inventory of these TouchPads. Chances are HP also must have a lot of these spare parts in large quantities that they still need to clear out. If the assembly of these parts cost less than the $99 sellout price of the tablet, it would still be a net gain for HP.

  • Report this Comment On August 31, 2011, at 3:15 PM, TMFZahrim wrote:

    Interesting theories, @makelvin, but I'm afraid you're just a touch off base.

    The developers have already left. Even if HP crank out 200,000 extra tablets, that's a drop in the target-device ocean offered by iOS and Android devices. Google activates over 500,000 Androids daily. If you were making a living from writing mobile apps, which platform would you choose -- a vibrant, large, and growing one, or a dead one with a tiny user base and very limited growth prospects?

    As for HP sitting on parts, no it doesn't. There might be a stockpile at third-party builder Inventec in Taiwan, which builds TouchPads for HP. Even so, Inventec would be happy to return unused parts to TI, Cypress and others for a refund if the product was truly canceled, and we'd be back to square one.

    Fool on,


  • Report this Comment On August 31, 2011, at 3:22 PM, cking2020 wrote:

    If they are going to make another 100,000 just to use up already made parts, and the total cost to produce is $306, they are loosing $206 on each tablet. My math says the maximum amount of money lost is going to be $20,600,000. 20.6 million dollars is less than a drop in the bucket for a corporation like HP to keep some goodwill going with these companies.

  • Report this Comment On August 31, 2011, at 4:46 PM, foolshand wrote:

    so with all this said and done , can someone tell me what's happening to CY?, i'm losing a bundle holding this company.

  • Report this Comment On August 31, 2011, at 5:53 PM, makelvin wrote:

    @Anders. "The developers have already left."

    Do you really know that for a fact? the few developers that I have gotten response from is that they seem to want to stick around for a while longer. Apparently they are complaining that Microsoft's offer wasn't really all that great in wooing them. The iOS and Android market is too large for them and they feel like they won't stand-out in such a large crowd. Would you please provide your data showing how ALL of the developers have already left?

    "As for HP sitting on parts, no it doesn't. There might be a stockpile at third-party builder Inventec in Taiwan"

    In order for any company to procure parts at a low-cost, they have to commit themselves to certain quantities. It does not matter where the parts actually sits; once they made the contractual agreement to purchase the parts, they are obligated to purchase them. You really think that all these parts can be simply returned back to companies like TI without any penalties? Once again, where exactly are you getting all your insightful data from? Could you please provide that?

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