HP Produces More Of A Discontinued Product

John Gruber questions the point of HP’s decision to do a final run of TouchPad manufacturing. I’ll propose a likely theory:

iSuppli says the Bill of Materials for an iPad 2 (32 GB GSM) is 336.60 when you add in manufacturing. That same iPad retails for $729.00. This is common sense. There’s R&D, marketing, shipping, and of course profit. Keep this in mind. The retail price is not the break even. It’s a profit. HP is selling their Touchpad’s at $99 and $149 I believe, for 16 GB and 32 GB respectively. A loss, but not quite as substantial as comparing to retail pricing would lead you to believe.

Secondly, it’s important to keep in mind that costs aren’t incurred as products are produced. Supply chains often require commitments. HP likely spent considerable funds securing the parts for the Touchpad. They also spent money tooling the factory. This money is already spent. Contracts were signed (they might be able to get out if they pay a penalty + accept some bad will with vendors they may need in the future). Costs that exist regardless of their decision. This is like selling tickets to a sports event you can’t attend at a loss, because it’s better than being stuck with tickets you can’t use and being out 100% of the cost.

I suspect the primary purposes of this last production batch are as follows:

  • HP already incurred the majority of the cost with R&D, parts, etc. Using up the inventory they have is a way to recoup some of these funds, vs. selling back to the vendors or finding other interested parties. Given it’s a mobile device, parts may even have been custom fabricated to meet the specs and confined space.
  • HP wants to preserve it’s relationship with it’s supply chain.
  • HP isn’t giving up on tablets, they are giving up on WebOS tablets. Might as well get some tablets out there and find out how the hardware does in the wild so building v2 with new software can learn from v1. Again, most of the costs were already incurred.
  • HP isn’t (officially) giving up on WebOS, they are just giving up on WebOS tablets. Until they figure out what to do with it, either license to someone, use on other products, spin it off might as well keep the ecosystem alive so it retains some value. HP invested a lot of money in it. HP has almost 600 employees on it. Loosing a little more cash on hardware to keep demand in the ecosystem up for a few months may not be a bad investment.

Overall, it seems surprisingly logical to produce another batch. It costs HP a lot of money to cancel the product so quickly. They are taking the loss regardless. Might as well try and reap some rewards and recoup some cash from it.

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