The TouchPad Lives: What HP Needs to Do Next

With consumers on its side, HP can't waste this opportunity

By Anthony John Agnello, Consumer and Technology Writer

hewlett-packard touchpad hpqApple‘s (NASDAQ:AAPL) iPad has so far beaten all entrants into the tablet PC race — to such an extent that Apple has literally started preventing the sale of competing tablets in countries around the world. But that isn’t stopping hopeful companies from throwing their own products out there hoping to find success.

On Sunday, HTC will release the HTC Jetstream, a 10-inch tablet. Sony (NYSE:SNE) released not one but two tablets — the familiar S1 and the odd clamshell-shaped S2 — on Wednesday in Tokyo and Berlin, with plans to release them around the world through September. All of these devices fall in the $499-to-$599 price window established by Apple. They likely will be outsold by the iPad by a wide enough margin to kill them.

Or maybe not. If Hewlett-Packard (NYSE:HPQ) has proven anything in the past month, it’s that a tablet doesn’t have to die, even when it fails. As of Thursday, the TouchPad is back in production.

The story’s been told often over the past two weeks: The TouchPad tablet, developed by 2010 acquisition Palm and running the proprietary webOS operating system, sold so poorly after releasing in July that HP announced it would exit the tablet and smartphone markets entirely. The company set aside $100 million to compensate miffed retailers like Best Buy (NYSE:BBY) for stocking the device, and said retailers began liquidating existing TouchPad stock at prices less than one-fifth of what it released at. Then something unexpected happened: The TouchPad sold out.

Now hints made by the head of HP’s PC division Todd Bradley that his company was perhaps hasty in announcing its full departure from the tablet business have turned out to be true. HP released a statement that it will be “manufacturing a limited quantity of TouchPads with webOS during our fourth fiscal quarter, which ends October 31.”

Sterne Agee analyst Shaw Wu told All Things Digital on Thursday that his sources within HP’s supply chain indicate the new TouchPad push is less an attempt to seize on consumer interest and more an effort to appease production partners that were expecting to make a whole lot more TouchPads before it crashed and burned at market. “This makes sense as it is not in HP’s interest to alienate the supply chain base and the company may not lose as much money as it is bringing in some revenue as opposed to taking a full write-down on commitments with no revenue,” Wu said.

A cautious business maneuver or not, HP now has momentum with consumers on its side. What should it do now?

Fortunately for HP and its shareholders, it’s already made the necessary first step: keeping the TouchPad brand present. Consumers love an underdog — and that identity, plus the $99 price point, have helped make HP’s tablet a quiet hit at the end of the summer. All HP has to do between now and 2012 is keep extending slight production runs — not flooding the market, just keeping the device’s following alive into 2012.

By early next year, HP needs to find a way to reconfigure its tablet so that it costs much less to produce. If it means taking a hit on the tablet’s specifications — a bit less memory, a slightly slower processor — it will be worth it to keep the list price below $200. HP then needs to show this reconfigured TouchPad off at the Consumer Electronics Show in January and release it by February, just ahead of the time frame Apple is expected to deliver the iPad 3.

It’s rare to get a second lease on life in the technology space. HP would be foolish to waste its opportunity.

As of this writing, Anthony John Agnello did not own a position in any of the stocks named here. Follow him on Twitter at @ajohnagnello and become a fan of InvestorPlace on Facebook.

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