

Profit Profit Profit - shawndumas
http://daringfireball.net/linked/2011/08/23/arrington

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lotharbot
Not everyone needs to be Apple, or to do things the Apple way. Apple makes big
margins on their $500 hardware. Why can't HP or some other company be
profitable by making small margins on $200 hardware, moving a lot of units,
and taking a cut of app sales?

~~~
tptacek
HPQ's top line is $31Bn/quarter. Cuts on app sales are a rounding error.
Meanwhile, they're selling tablets at cost, devaluing the space they're
competing for, and they remain at a structural disadvantage to Apple and
Samsung, both of whom are handheld supply chain giants.

How does this work out well for HP?

It's easy to see how it works out well for Hacker News: there's a third viable
tablet platform! Yay! But HPQ can't make decisions to maximize hacker morale;
they are legally obligated to serve HPQ's bottom line.

Incidentally, your comment addresses only half of Gruber's point; the other
half is that a $500->$100 discount's success doesn't prove demand either for a
$200 price point or for a product with a $200 BOM.

~~~
lotharbot
Spending $195 to deliver a $200 platform, and then making an additional $5-10
per customer on app sales, is not a terrible spot for a business to be in.
It's not Apple territory, and maybe it's not worth the risk or opportunity
cost for HP given their profitability in other spaces. But one need not be a
"big dummy" to think there might be room for a profitable player to use that
model.

Incidentally, I only addressed the part of Gruber's post I thought needed
responding to. He's right that the fire sale doesn't prove anything about
market viability for an at-cost device.

~~~
tptacek
First, HP makes $3Bn/quarter in gross profit. The tablet business you propose
is a major strategic initiative that, EVEN IF it pulled neck and neck with the
prohibitive market leader, makes only $23mm/quarter†. That's a disaster.

Second, when you're making $15 per customer and the prohibitive market leader
is making $200 per customer, your business exists at the pleasure of the
market leader; they can cut their prices by 10% and put you out of business;
the can plow an order of magnitude more money into marketing and product
development and still beat you easily on the numbers.

† _And even that assumes that the money from the app store is pure profit,
which it isn't for Apple._

~~~
lotharbot
I don't understand where you're getting the $23mm/quarter number. The last
quarterly numbers I saw for Apple were just under 10 million iPads sold; using
the $200/tablet and $15 profit numbers I gave before, that'd be $150mm profit
on $2Bn revenue. Those aren't "blow your socks off" numbers, but they're not
"disaster" numbers either (whereas what actually happened with the TouchPad
_was_ a disaster.) Numbers like that are at least viable for a major strategic
initiative for a company like HP, provided there's sufficient _motivation_ for
such an initiative.

With the market leader making $200/unit and you making $15/unit, they could
put you out of business _if_ they're at a comparable price point. But if the
competition's $600 iPad cuts its price to $550 or even $500, it's not going to
pull a lot of customers away from your $200 hPad; you're serving very
different segments of the market. Similarly, a 10% price cut by Maserati
wouldn't threaten Cooper Mini sales.

I'm not saying HP necessarily made the wrong move here. I'm just saying, I
don't think you have to be a "big dummy" to think there's room for a low cost,
low margin tablet that makes some profit from software.

~~~
tptacek
You're forgetting that those 10 million iPads were sold over many quarters.
Re-do your math.

There is absolutely room for a low-margin low-cost tablet. The Kindle is one
of them. But there isn't room for the HP Touchpad at HP. I kind of doubt
there's room for the HP Touchpad anywhere, because it's intrinsically
positioned against a superior product sold by an extremely competent company.

~~~
lotharbot
> _"You're forgetting that those 10 million iPads were sold over many
> quarters."_

"Apple sold 9.25 million iPads during the quarter" --
[http://www.apple.com/pr/library/2011/07/19Apple-Reports-
Thir...](http://www.apple.com/pr/library/2011/07/19Apple-Reports-Third-
Quarter-Results.html)

My math is fine.

> _"there isn't room for the HP Touchpad at HP"_

There, I agree. The HP TouchPad is trying to be direct competition for the
iPad, and that's why it was a total disaster.

If instead HP made the WeakerPad, with higher capability than the kindle but
lower than the iPad, and targeted the $200 price point (where their main
competition is a bunch of 7" Android 1.5 tablets with resistive touchscreens),
they _might_ find a sweet spot in the market.

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joebadmo
I also disagree with Arrington on the Touchpad, but Gruber and other Apple
acolytes' disregard for high-volume low-margin markets seems misplaced. Yes,
Apple makes a lot of money by tailoring devices for high profit margin
markets. That's clearly a lucrative way to do things, if you can pull it off.
But, obviously, not everyone can. Surely there's room in the market at large
for both models? And surely it's good for everyone to see competition at all
levels?

~~~
tptacek
There is no room in the market for selling products at a loss, and without a
clearly lucrative business model behind it, there's also no room in the market
for selling products at cost. Those aren't pundit opinions; they're laws of
physics.

There's a back and forth to be had about the value of the app market for HP,
but the best available evidence suggests that by itself it is nowhere nearly
large enough to justify a strategic investment in tablets.

So if you want to make the point that there are other strategies besides
Apple's, sure. Nobody can argue with that; it's not falsifiable. To make your
comment useful, propose a way for HP to make real money on those tablets.

~~~
tghw
The Xbox is sold at a loss but overall is a profitable division for Microsoft.
There is room in the market for loss-leaders, it's just a question of where to
build a revenue model from.

Unlike Android, HP could have run an end-to-end product, controlling the
hardware, software, and app ecosystem, but could have tried doing it at a
lower price. There's no guarantee the market would have supported it, but
seeing how eagerly people snatched up the fire-sale tablets, it's kind of
disappointing not to even see them try.

~~~
tptacek
The Xbox is only useful in tandem with its consumable $30 games. It's a prime
candidate for a razor/blades strategy.

In comparison:

(a) Tablets are useful without buying a single app.

(b) The price point on apps is _far_ lower than on Xbox games.

(c) Apps are on the whole less consumable than games, most of which lose much
of their value after just a week or two of use.

(d) The sole use case of the Xbox is to facilitate games, which means that
_everyone_ who owns an Xbox buys them. The key value propositions of a table
are "watch video, browse web, read books", and in each of these three
categories the apps to facilitate them are either built in or free.

I share your disappointment, but don't believe my disappointment rebuts
economic reality.

~~~
swilliams
Don't forget the vast quantities of accessories for consoles. Extra
controllers, Xbox Live, downloadable content, are huge profit centers for the
Xbox division.

------
steveb
I see Amazon and B&N taking a big chunk out of the low-cost tablet market, and
it will be hard for anyone else to compete.

They can sell direct to consumers and capture more revenue. They have a vested
interest in locking customers into their ecosystem, so they can sell at cost.
Finally, they are trusted brands and can use their online stores to promote
product.

A company like HP and Samsung would make most of their profits on the sale of
the device. $200 tablets will never be profitable on their own, so unless you
have another revenue stream, it's not worth doing.

That leaves cheap clone systems probably running Android with crappy build
quality and nonexistent engineering.

You can be sure that Amazon noticed the frenzy over $99 Touchpads and the
strong sales of the Nook color.

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ja27
I tried briefly to find actual numbers on the manufacturing run(s) of the
Touchpad. I wonder how many of these are really out there. Is this just a blip
on the chart compared to iPad numbers?

I'm a bit concerned about what this will do to the real Android tablet market
numbers. How many Touchpad buyers would have otherwise bought a low-end
Android tablet? That market is already fragile enough without HP blowing out
tablets well below cost. (It's not that different than the Borders
liquidations hurting Barnes and Noble's numbers when they're already
struggling.)

Oh, and when does the RIM Playbook fire sale start?

~~~
nazgulnarsil
yeah, even a million touchpads wouldn't be anywhere near apples numbers
AFFAIK. I've heard numbers ranging between 250-350k for touchpad inventory.

------
bitsweet
_I knew Mike Arrington was a dummy...didn’t think he was this big a dummy_

I usually discount any argument that begins with name calling

~~~
arnemart
Well, it IS Michael Arrington he's talking about.

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dkrich
This all goes back to the Jack Welch theory: either be number one or two in
your industry, or find something else to do. What the heck did HP hope to gain
by building a crappy version of the iPad and charging the same price for it?
The lack of innovation at these companies is truly confounding. If I had any
HP stock I would be dumping it with both hands.

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jjm
While I agree with Gruber on HW sales being very profitable must he really
resort to "dummy"? Its one thing to see Jersey Shore say things like this, but
Gruber?

~~~
mattparcher
This is not out of character for him. John has a long tradition of calling out
a "Jackass of the Week," generally awarded for idiotic Apple/tech punditry:
[http://www.google.com/search?q=jackass+site:daringfireball.n...](http://www.google.com/search?q=jackass+site:daringfireball.net)

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kirillzubovsky
Your short rant, on the other hand, is so elaborate, so unique, so daring and
so enlightening!

~~~
tptacek
Do you disagree with it? Why or why not? Or do you just want to share your
emotional response to it?

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patio11
The average iDevice has less than ~$20 of software on it. (Simple math on
earnings call stats.) 30% of $20 is $6. That's, well, rat spit.

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endlessvoid94
Can anyone point me to numbers regarding the app store revenue vs. hardware
revenue?

I'm surprised that the app store revenue would be "just a drop in the bucket"
compared to the hardware revenue.

~~~
joaquin_win
Recently Steve announced 2 billion paid to devs. That makes apple's cut close
to .9 billion. Meanwhile in _a quarter_ Apple has profits of 7billion.

~~~
tptacek
Over what time period? Is that a top line of 30% of $2Bn over 10-12 quarters?
That is a microscopic amount of money for HP.

~~~
joaquin_win
As I understood, thats since the beginning. So basically nothing compared to
HP or even Apple

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Apocryphon
$99 tablets would be quite a boon to consumers. Having a viable competitor to
the iPad would be good for the market. I wanna believe.

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jgh
God tech bloggers are an insufferable bunch.

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cbs
>"I knew Mike Arrington was a dummy"

huh, interested.

>(daringfireball.net)

Oh, nevermind.

