HP Tablet Fire Sale Lets Us Put A Price On The Value Of A Strong Development Community

from the apple-and-orange-sales dept

A couple of weeks ago, HP made the significant decision to get out of the consumer hardware business, simultaneously shutting down their PC business and their mobile device business built around the WebOS purchase that came with Palm, Inc. When they abruptly did so, HP also announced they would be clearing out the supply chain by offering their very capable, $500+ TouchPad tablet for $100 (16GB models).

What followed was a mad rush of purchasing, with people clamoring for a cheap, but powerful tablet. This is by no means a bad device: remember that the WebOS was critically acclaimed, and this tablet had a 9.7″ screen, webcam for video chat, lightweight, 1.2GHz dual-core processor and more. These are flagship-grade tablet specs, and although we’ve learned that UX is more important than specs, good hardware is a definite plus. The biggest problem with the device was the lack of developer support for the ecosystem, so there are “thousands” of apps available according to HP, but not the ‘hundreds of thousands’ that work with the iPad.

This fire sale has provided a fairly interesting experiment in the market clearing price for non-iPad tablets. The base iPad sells readily for $500, and is often sold out. This is the high-water mark for tablets, which no other has matched. Other vendors have built competitive hardware and tried to sell it in the same price range (Motorola Xoom, Samsung, Playbook) but were rewarded with lackluster sales. Some of those devices, on paper, are arguably better than the iPad, so the most likely reason Apple can extract a premium is the power of their App developer community. An iPad can do much more than a Xoom partly because of what Apple offers, but mostly because of the ‘whole product’ which includes 400,000+ apps.

Device industry executives must stay up at night wondering how to price their tablet. The HP experiment will prove useful. Now we know that at $500, buyers walk away from the deal. But at $100, they literally rush the store like Walmart on Black Friday. This tells us that the correct price for a good tablet with weak developer support is between $100 and $500. That’s a fairly wide range. I wish HP had set the price higher, to provide a better test. Unfortunately, whenever an OEM company sets the price, what we get is their desired price, but not the market value. For that…we have eBay. Many of the buyers at HP’s firesale were just arbitrageurs looking to flip the tablet to make a quick buck, and those tablets quickly showed up on the auction site. A look at eBay today reveals a high number of TouchPads on offer, and sold for a market price of ~$250.

If the hardware alone is valued at about $250, how does iPad sell for $500? Well, we’ll have to attribute some of the premium to the “cool, sexy” mystique of Apple products. But I wouldn’t go too far with that. The Samsung Tab or HP TouchPad are both very slick looking products. A chunk of the premium has to be allocated to Apple’s excellent and easy UX. The mass market doesn’t want to geek out, they want easy products. But Honeycomb and WebOS aren’t so far behind…

No, the dominant reason that iPad can sell out at $500 (even as sales have tipped well beyond the fanboi segment) is the value brought by apps. Apple is making cake because it has the biggest developer community coding around the OS, and the value of that community is currently worth something on the order of $200-250 per tablet. It’s going to be tough for any other tablet to breach this market, where Apple already has the supply chain dialed in, the developer community, the innovation lead, and the brand. Android may progress bit by bit, but for now Tablets are Apple’s private playground. Competition will heat up if Android tablet versions of the Nook and Kindle go to market around the $325 range (making their profit on books instead). Note that the TouchPad has an estimated $318 Bill of Materials (BoM). In a few years, Moore’s Law and steady Android progress will reduce the cost and app advantage iPad now enjoys.

HP will be emptying the supply chain in a couple of weeks with the final production run of TouchPads. I wish they would bump up the price to see if the market would bear $318 direct from the manufacturer (ostensibly, a more desirable seller than eBay members), but it seems that they will keep the current fire sale price.

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Comments on “HP Tablet Fire Sale Lets Us Put A Price On The Value Of A Strong Development Community”

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62 Comments
mickmel (profile) says:

An iPad can do much more than a Xoom...

Be careful with statements like “An iPad can do much more than a Xoom”. While the iPad is a better choice for most folks, and certainly has more apps, there’s quite a bit that the Xoom can do over the iPad — vastly better Gmail support, Google video chat (even over 3G), widgets, much better customization, etc. While you can argue about the usefulness of widgets on a phone, they’re amazingly useful on a tablet.

I think the iPad is selling better partially because of the apps, but largely because of the cool factor. For many people, tablet = iPad, and that’s the end of the story.

PRMan (profile) says:

Re: An iPad can do much more than a Xoom...

Other things that iPad cannot do (correct me if I am wrong):

Emulators
Programming environments
Playing media from the SD card directly
Connecting to a DLNA home media server
Connecting to Windows shares
Clients for built-in Microsoft Remote Desktop
Playing Angry Birds for free

All these applications are free on Android. In fact, I only paid for one Android app and that’s because my co-worker wrote it.

PlagueSD says:

HP Tablet sales

Now we know that at $500, buyers walk away from the deal. But at $100, they literally rush the store like Walmart on Black Friday. This tells us that the correct price for a good tablet with weak developer support is between $100 and $500. That’s a fairly wide range. I wish HP had set the price higher, to provide a better test.

Just start checking amazon and ebay for HP Tablets. I’m sure that’s where they’re going to all end up. You’ll find the real price there.

CrushU says:

I'm not sure you understand...

“If the hardware alone is valued at about $250, how does iPad sell for $500? Well, we’ll have to attribute some of the premium to the “cool, sexy” mystique of Apple products. But I wouldn’t go too far with that.”

I’m not sure you understand Apple fanboyism… This is a company that puts out computers that cost $400 more than competitors’ computers, and still sells them. (This is from manufacturers, not when building your own.)

There appears to be something that putting the apple logo on it instantly increases the price, without any other aspect being different… Brand Recognition? I’m not an economist, I can’t say for sure.

Thus, if there were a tablet not made by Apple that could access their app store, then you could look at the price difference and see how much the apple logo is worth, and then find the cost of the developer community.

Chosen Reject (profile) says:

Re: I'm not sure you understand...

without any other aspect being different

Wait, what? Has Dell started selling PCs with OS X on it, or does Apple sell devices with Windows 7 now?

I’m not saying OS X is worth that premium (I’m rather OS agnostic). Just pointing out that a computer’s specs (especially to nontechnical people) is not the difference. To them it’s all how the device looks on the outside (including the brand) and the user interface (which in this case is the OS).

Franklin G Ryzzo (profile) says:

Re: I'm not sure you understand...

“I’m not sure you understand Apple fanboyism… This is a company that puts out computers that cost $400 more than competitors’ computers, and still sells them. (This is from manufacturers, not when building your own.)

There appears to be something that putting the apple logo on it instantly increases the price, without any other aspect being different… Brand Recognition? I’m not an economist, I can’t say for sure.”

For the true fanboys it goes well beyond Brand Recognition and crosses into the religious fanaticism territory. The BBC did a documentary with some neurological research that indicates that the brains of Apple’s fanboys light up the same when when seeing an Apple product as does the brain of a religious person upon seeing the image of their deity.

http://www.bbc.co.uk/news/business-13416598

Apple has literally become the golden calf worshiped by the blissfully ignorant masses. Perhaps Amazon will send Moses down from the mount with a tablet that will smite the false gods and their followers, but other than that, I think its a lost cause trying to explain to the average Joe why their iPad is overrated. I can’t find the source, but my favorite description of Apple products is that they are a beautiful garden that can only be viewed after paying the outrageous admission price and then you are trapped behind its razor wire tipped walls and its surrounding army of lawyers riding flying laser armed sharks… or something of that nature.

Michael Long (profile) says:

Re: Re: I'm not sure you understand...

“This is a company that puts out computers that cost $400 more than competitors’ computers, and still sells them. (This is from manufacturers, not when building your own.)”

Odd. Then why did the manufacturers recently try to strong-arm Intel into dropping processor prices so that they could compete in the same price range as the Air?

If there’s an “Apple Tax,” then why is it that HP and Samsung and RIM can’t build an equivalent tablet for significantly less than the iPad?

It’s odd, but it seems that when everyone else attempts to build to the same specs — and to the same quality level — their products are just as expensive.

If not more.

Anonymous Coward says:

Re: I'm not sure you understand...

Hmmm…I believe in what I see.
In the workplace I saw one girl appear with an Android, at first nobody paid attention they all had the superior iPhone, suddenly the girl started appearing with a lot of cool stuff, from face recognition, speech recognition, voice synthesizers, augmented reality social mapping, games, animated wallpapers etc.

What happened a year later?
An iPhone freezone, nobody wants an iPhone they don’t get value out of it like they do with the Android the girl appeared with and they got local support from the girl that became the go to girl about Android related stuff, before they didn’t know how to transfer files from phone to phone now they are using bluetooth and transfer video files with each other something they couldn’t do before because they didn’t had any support.

More importantly they compared features with the iPhone and most agree that video quality is better on the Android.

That explains why Android market share exploded and the iPhone is shrinking dramatically.

The HP move just proved one thing, if you price it right and the community jumps in you can beat Apple, that is how you undermine the number 1, you gather the community around it and price it lower not in equal terms, nobody who bought an Apple device cares about other brands, they want the Apple stuff, the other people the rest of the market don’t care about Apple and will choose the things that are really good there is no brand in that segment so you go there first and let the word spread around that the number 1 is not all that it said it was.

DinDaddy (profile) says:

Re: Re: I'm not sure you understand...

Nobody who bought Apple cares about other brands?

Where I work. we have a strong mix of engineering types, business types and creative types (about 2500 people). As you would expect, virtually all the creative people are have macs and prefer Apple’s stuff. But historically, most of the engineering groups had palms and were Windows guys, and the management had BBs and Windows.

A really high percentage of the latter two, though, have bought iphones and ipads. Probably about 1/3 of the iphone buyers then later switched to android phones. But most of them like their iphones fine, and no one with an ipad I’ve met is even contemplating switching to another tablet.

Anecdotes are fun.

Andrew (profile) says:

Re: I'm not sure you understand...

This is (roughly 🙂 what I was wondering too. Derek argued that a significant chunk of the $250 difference between the iPad’s hardware-only value and its selling price is due to its app ecosystem.

I don’t think many people would argue against Mac hardware being slicker than almost all PC hardware. Many (though by no means all*) people think the UX experience of OS X is nicer than Windows too.

But PCs have a wider range of software than Macs. Most major applications are either available for both (Photoshop, MS Office) or just for the PC (games, principally). So I don’t think the range-of-apps argument works here, but Macs still command a hefty price premium, which presumably then must be attributable to the brand and overall (UX, hardware, shopping) experience.**

* Including me, though there are a lot of ‘legacy’ issues here. 🙂 I also build my own, so I avoid all of the crapware that’s typically bundled with PCs.

** Though the % difference in price is significantly less than the 100% markup over hardware only on the iPad postulated here.

CrushU says:

Re: Re: I'm not sure you understand...

“But PCs have a wider range of software than Macs. Most major applications are either available for both (Photoshop, MS Office) or just for the PC (games, principally). So I don’t think the range-of-apps argument works here, but Macs still command a hefty price premium, which presumably then must be attributable to the brand and overall (UX, hardware, shopping) experience.**”

This. Just this. I’d forgotten about the variety of applications the PC commands, yet the Apple still holds a decent market share in the arena. I believe things have changed recently, but developing for a PC is loads easier and more accessible than developing for a Mac. (www.sourceforge.net Search for Mac projects. Search for PC projects.)

This, by itself, destroys the theory that the price premium is for apps. At least in the PC market. 😉 Given that, however, you can extrapolate a ‘brand-price’ that being a Mac affords a computer.

As for the marketing campaign that Apple has in place, focusing on the apps… What else would they focus on? Name one other thing the i(Noun) family does better than any other comparable product. They’re the only thing they COULD advertise and not run afoul of truth-in-advertising regulations.

Onnala (profile) says:

Re: I'm not sure you understand...

There is one point that I think you miss that really would change the picture about the ipad and that is, in absolute terms, the bigest group of ipad owners, are iphone owners.

So when looking at sales, one of the things that should be looked at is how well the ipad is penetrating the market beyond iphone users and how well the android tablets are doing with the non-iphone users.

BoredSysAdmin (profile) says:

$250-300

I think if HP would have the smarts about it – they should price the first model at these prices, release the SDK and work closely and friendly with developers, Offer better cut – say 80/20 and don’t be greedy and don’t require (or much smaller) cut from content/subscriptions like fruit company did and lost any revenues from them.

Then MAYBE, just MAYBE they had a chance to sell Touchpad 2 at profit. Does HP have the resources to pull this – hell yes, but profit loosing project are not desirable by current HP management…. too bad

Mike42 (profile) says:

Apple UX, aka “Don’t give the user enough rope to hang themselves.” Not the worst strategy obviously, but extremely annoying to a lot of people (myself included.)
What I find exceptionally bizarre about this turn of events is that Apple hated 3rd party developers for soooo many years. To this day, it’s hard to find someone who codes for Mac, much less enjoys it.
Apple has closed the door on the customizable PC, possibly for good. When they say, “Post-PC”, they are really saying, “Web-browsing entertainment appliance.” It’s not a computer, any more than your car is. Yeah, it has chips. That’s about it.

David Liu (profile) says:

Re: Re:

As a maker of consumer products, it’s probably the best strategy.

Let’s be honest. The number of tech-savvy users (and I mean really tech-savvy users) are a small minority in the overall scheme of things.

Being able to do everything and kill yourself while you’re at it is just not a good strategy to take when you’re trying to sell to the largest audience out there.

Anonymous Coward says:

Like a netbook...

$250 is approximately the same price as most netbooks – so I think that’s more likely why the market has settled there.

As a consumer, it’s pretty hard to compare a tablet and a netbook and not draw a parallel – as an owner of both, I would have sprung for the netbook first – but I picked up several touchpads at the < $200 price point because it’s just a damn good deal by comparison.

Anonymous Coward says:

I have had a sprint pre since pretty early on. I was highly satisfied with the UX of webos. Even after getting exposed to a droidx for awhile, there are still details where the “intuitive nature” of webos is better than android. If palm had played things differently, it may have been a better competitor with android. Their hardware wasn’t very durable and obviously wasn’t the exact design people were looking for (of which I would definately agree after having it for 2 years). I think the lack of hardware variation, sprint exclusivity, and the timing (android was compelling right then too) was the reason developer community didn’t build.

Having said all that, the HP execs should have known that they wouldn’t be profitable at th 500 dollar range. I would think its obvious that apple is winning because of developer community. So unless you inject the app catalog with a lot of corporate sponsered, highly compelling applications, I feel you are dead in the water for the same price. The 100 dollar price fire sale is not the experiment, the experiment already happened with the pre (and especially the 2nd gen ones) in my opinion.

Palm died because of the reasons I said. HP bought them and didn’t do a single thing different. Guess what happened to that business?

ervserver (profile) says:

Touchpads

Bought a 16 and a 32 Touchpad and couldn’t be happier. Did a few well known tweaks and am quite happy with the speed of the thing. Have enough apps to do everything I want to do with them. Touchpads aren’t for app hungry people but critics shouldn’t compare them to iPads which are much more expensive. That’s like comparing economy cars to luxury cars, don’t make sense

Anonymous Coward says:

I know someone that bought a TouchPad on Ebay for $220. It went faulty 1 day after buying it. As the item was sold as “12 months warranty” it was the Ebay sellers responsibility to handle the warranty claim. As obviously the buyer is unable to take it to Harvey Norman, as although he had the original receipt as it was sold for $98, if HP decide to refund rather than fix, they’ll only refund $98. The Ebay seller wasn’t happy at all, but if you want to sell an item with 12 months warranty then you have to abide by the law. So the seller could well be out of pocket because he needs to pay for the return postage of the item, and if the money is refunded also refund the initial $20 postage cost.

Transbot9 (user link) says:

A few thoughts...

Apple’s advantage is image – as the one who opened up the market for tablets, they have cemented themselves as the “Brand Name” product maker while the rest are “knock offs.” The Apps help, but the cult of Apple is a powerful thing.

I, for one, and looking forward to Windows 8 – which, if press releases are to be believed, will scale across all devices from the smartphone all the way up to the powerhouse gaming desktop. Add in native HTML5 and Javascript app support and the current Windows developer base, it’ll be potent.

The unfortunate thing is that I may have to kitbash a tablet that’ll do what I want, and that makes me sad.

Anonymous Anonymous Coward says:

Perceived Value

This is a concept we used to sell steaks (for example). We ran a cycle of featured items (special has some negative connotations, like cheap). We mixed the prices of items up (in a planned and controlled fashion), and then watched the impact on volume. The $15 steak unit sales went up about 20% when priced at $25 (prices are examples, the actual price depended upon the individual market, but the effect was the same). The customer perceived that the more expensive steak must have been one hell of a steak. The increase in overall customer counts and repeat customers told us it was.

Apple learned this a long time ago. Their first excuse was their closed hardware model. That experience gave them plenty of data to analyze, and there has been much since. They know what the break price is, before they decide on a price. I think they have earned a lot of their perceived value, though the last Apple product I bought was in the early 80’s.

Michael Long (profile) says:

Since they would still have to pay for the development and engineering team as an ongoing expense, it’s hardly “sunk”.

And you need to use the $328 cost, not the $318 one. (I assume that people want to purchase an assembled tablet, and not a box of parts.) And then there’s the retail markup, which again you kind of glossed over.

Basically, to sell at $250 means $25 or so going to the retailer. Even at $328, and ignoring everything in the COGS equation, that means HP is going to eat $100/unit, or $100 million dollars for every million sold to the public at Best Buy. (More like $200 million.) That’s not pocket change.

All to build up some nebulous idea of “market share”, which buys them what, exactly? How — exactly — is HP going to make money going forward from the deadbeats who only wanted a cheap tablet?

Hope they’ll pay double for the next version? Didn’t happen this time. Raise the price, piss off everyone who wanted the cheap version, and watch sales evaporate, again, just as they already did at $499? Blow through millions more, hoping component prices drop enough for you to make at least a few pennies on the dollar? And hope that people will stay buy when your machine hits the low end of the scale?

(And pray that Apple doesn’t do the same with the existing iPad 2, now at $299.)

One more thing. Manufacturing something and selling below cost is called dumping, and there are one or two laws associated with that practice.

If you want a $250 price point today, look at the Amazon Kindle tablet. 7″ screen, single-core processor, only 6GB of NAND, plastic case, forked version of Android tied to Amazon. And that’s the subsidized price.

Amazon can can afford to to do that, because they’ve got something else to sell: Books. Music. Movies. Magazines. They make their dollars downstream, and they’ve got a roadmap for how to do it.

HP has none.

Lose millions. Make it up in volume. Gotta laugh…

DinDaddy (profile) says:

Price premium?

Why does everyone here think Apple is charging a premium for the ipad?

They have used their cash reserves to lock in huge amounts of components at very favorable pricing, getting the BOM cost way down. Probably the only competitor who could match that is Samsung, since they make a lot of the components.

The evidence for this is front and center for everyone to see. Every major tablet with similar specs from anyone else who is a notable manufacturer, not a lowest-cost-possible chinese company, is priced the same or even higher (HTC Jetstream).

They are pricing them that way for one reason. They have to for there to be ANY profitability. That they are evidently not willing to lose money in the short run to gain soe market share should tell you how much they would be losing.

Michael Long (profile) says:

“When last reported, Apple made between $208 and $499 PROFIT each…”

From your own article:

“…the cost of goods inside Apple’s 16GB Wi-Fi-only iPad totals $270.50. That figure includes a $10 line item dedicated to manufacturing, but doesn’t include another $20 set aside for under-warranty service costs.”

Which doesn’t include $20 set aside for under-warranty service costs. Or retailer markup (even Apple stores have to pay employees, rent, and keep the lights on). Nor does it include a host of other costs which MUST be factored into the product cost before you can determine profit.

You, on the other hand, continually say things like, “When last reported, Apple made between $208 and $499 PROFIT each, depending on the unit.” Or, “You gotta wonder why they didn’t just decide to price the units at cost [sic], $318, and see if they couldn’t seed the market that way.”

Which means that your sole and overly simplistic calculation of profit is retail price – BOM.

Which is, and has been my primary point all along: There’s a lot more to the COGS equation than parts. Subtracting BOM from the retail price and assigning the label “PROFIT” is just, well, wrong.

So, even if HP sold units at $318, they’ed still be losing money hand over fist.

Michael Long (profile) says:

See my other comment I just made, but it’s hard to mistake the following…

“… should do so as an “entry” strategy.’ Show me where I did that…”

Sure. You wrote, “You are confusing the market exit of HP with the market entry strategy [sic] of other tablet makers.”

“Did you manage to find anything I wrote that claims that?”

Yes, “You gotta wonder why they didn’t just decide to price the units at cost [sic], $318, and see if they couldn’t seed the market that way.”

It’s pretty hard to translate that other than selling at BOM costs only, in order to “seed” the market. E.g. Build market share. Which, as I’ve pointed out before, does nothing for them other than lose money.

One other note: while the $1.2B is a sunk cost, shuttering the division and writing it off gives them one hell of a tax break, which they couldn’t take if they continued trying to limp along seeding the market…

Austin (profile) says:

Really?

All of this and the final answer is the quality of apps? Seriously? Not to be rude to th Apple fanatics out there, but I’ll take the selection of apps available on my ASUS EEE Transformer (Android Honeycomb) over those on my mother’s iPad any day of the week. I have a better launcher, better browser, better on screen keyboard, better email client, better maps, better music player, better movie player, better jabber client, and lastly, a better version of solitaire than anything she either has or can even get. Add to that hardware with twice the specs and a $299 price tag and frankly I can’t understand why anyone would spit on an I pad if it was on fire.

Apple sells I pads not because they are any better at all, but simply because they LOOK better. If I slapped a white case and an Apple sticker on this thing and sat it in front of the typical Apple user I could earn $100/hour in lost bets. When you compare what actually matters (processor, memory, storage space, etc.) Android ALWAYS wins. mainly because it doesn’t include a “coolness tax.”

the really sad thing is, Apple used to be the opposite. there was a time when a G3 would outperform a Pentium 4. then, Steve came back and rapidly returned the company to profitability – by sacrificing ACTUAL greatness and substituting PERCIEVED greatness in its place

The masses are sheep. That Apple computer has more cash on hand than the US Government just proves this point.
Anyhow…awful rant, I know, but I had to say it somewhere. Since OP was an editorial I figured why not here.

nasch (profile) says:

Apple is making cake because it has the biggest developer community coding around the OS, and the value of that community is currently worth something on the order of $200-250 per tablet.

You just assigned brand image, support, ecosystem, and the operating system (and any other advantages I’m forgetting or don’t know about) a total value of zero. You sure that’s a good analysis?

Android may progress bit by bit, but for now Tablets are Apple’s private playground.

What about all those other companies selling tablets? Maybe I’m misunderstanding what you mean by “private playground”, but it sounds like you’re saying Apple has the market to themselves. Clearly they have competitors.

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