Aug 22, 2011 1:38 PM

From HP to Amazon, the Tablet Dilemma: Go Big or Go Home

We don't have to appeal to bizarre events like HP's Touchpad sell-off to show that there's a market for a touchscreen tablet besides the iPad. The two winning strategies in the tablet market, exemplified by Apple's iPad and Barnes & Noble's Nook Color, are go big or go home.

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In the tablet market, there's no middle path, no way to build a business by knocking off a dollar or feature here or there. Just ask Hewlett-Packard about its unlikeliest overnight hit.

It started Friday night: Just a day after announcing drowning its Touchpad in the bathtub, HP was selling off the $400 (once $500) discontinued corpses for just $99.

Disclosure: I bought one. After reading and writing so much about HP's transformation, it felt like a duty.

But as the weekend progressed, it increasingly felt like a thing. It's hard to know exactly how many discounted Touchpads have actually been sold. But as waves of retailers picked up the promotion, then sold out of their stock, double-digit curiosity became doubled-down demand. By the end of the weekend, Best Buy employees were reporting tales of stampedes. This morning, the Touchpad topped electronics sales at Amazon.

Even though I bought a Touchpad myself, I didn't see it coming. Maybe it's because I've been soaked in tablet market pessimism, or because I sprung the extra $50 for the 32GB model. As ZDNet's Ricardo Bilton writes, there's something special about $99:

I don’t know what goes on psychologically, but when the average person sees a $99 price tag, something in their brain clicks. Eyes light up with dollar signs and hearts beat with a certain kind of deal-hungry fervor. The same thing happened to me, which is why I found myself biking all around town in search for a device that I didn’t actually want. There was a thrill, and a mostly irrational lust to save money on something I had no intention of buying hours prior.

It's what Apple did with 99-cent songs and Amazon has tried to do with $9.99 ebooks. Drop a digit and businesses that looked crazy start to make a lot more sense.

Besides Touchpad mania (aka webOSia), the discount inspired plenty of reflection on where HP went wrong. Here is a short list of common complaints and responses.

Complaint: HP should have dropped the Touchpad price sooner.
Response: HP did, by $100, almost right away. It didn't much affect sales. But it meant that HP was losing money on every Touchpad it sold. This was a big part of HP CFO Cathie Lesjak's justification for why they had to pull the plug on the webOS device group right away.
Complaint: HP should have sold the Touchpad for $99 or $199 right away. They'd have sold like hotcakes!
Response: See "selling at a loss," above. If you're arguing that HP should have made a completely different tablet, it's a fair point, except that 1) HP wasn't happy with the margins they were getting on any of their consumer computing hardware and 2) even though consumers do seem to want sub-$200 tablets, nobody's yet figured out how to make a tablet of any size that anyone wants for less than $200 and sell it at a profit. (Or even a smartphone, at least without a hefty subsidy.) The discount end of the market was never HP's strong point, or Palm's, even when they had CEOs who believed in it. Best Buy also initially refused to sell HP's tablets at the discounted price, reportedly for fear that they'd cannibalize sales of other tablets. You can't really disrupt an entire business model and also be at the mercy of a retailer who's clinging to what's left of that business model.
Complaint: HP didn't do enough to promote the tablet and the platform.
Response: Actually, HP's teams did quite a bit of promotion. They just didn't do it very well. They tried all the tricks that have always worked with printers and towers: big presence at big box stores, hard-selling enterprise customers, quirky TV spots. Here, tablets and media players truly are different.
Complaint: HP was stupid to even try to make a tablet. There is no tablet market; there is only an iPad market.
Response: That's not quite true. The iPad is the Great Tablet Success Story. And after admitting that "the tablet effect is real," HP's Léo Apotheker was apparently so alarmed that he decided to get out of the consumer computing business altogether. But as Dave Winer writes, "there's a difference between saying HP is incapable of competing with Apple and Apple cannot be competed with." Android has a handful of modestly successful tablets from Samsung and Asus. But besides the iPad market, there's also a Nook Color market.

This is where we leave morbid HP-rubbernecking behind, and the story actually starts getting interesting.

Continue reading for more on Barnes & Noble, Amazon, and the three ways to build and sell a tablet ...

We don't have to appeal to bizarre events like the Touchpad sell-off to show that there's a market for a touchscreen tablet besides the iPad, if only conditions X, Y and Z could somehow be met. We have an actually existing tablet that sells extremely well following a strategy that's significantly different from Apple's.

The two winning strategies in the tablet market, exemplified by Apple's iPad and Barnes & Noble's Nook Color, are Go Big or Go Home.

Go Big with a big screen, big software capabilities, a big app store, big storage, big widescreen media support, a big marketing push and a big investment in design and build quality. If you Go Big, the device can compete with low-end notebooks and other PCs and command a big price.

Apple made Big Tablets famous; Samsung's Galaxy Tab successfully copied the model, becoming Pepsi to the iPad's Coke; and HP's Touchpad unsuccessfully tried to become Dr Pepper. Microsoft's Windows 8 "PC Plus" tablets will try to see if they can win by going even bigger.

The Nook Color shows you can also find success by Going Home: smaller screens, a smaller function set, a more targeted audience. B&N sold its readers' tablet to its own customers first, targeting book and magazine junkies, women and children, and accidentally-on-purpose found an enthusiastic reception with Android fans and home-brew hackers who loved messing around with custom firmware to open up the inexpensive tablet. (The same community is already at work porting Android to run on the Touchpad.)

Barnes & Noble was already going head-to-head with Amazon, Sony, Kobo and others in e-readers. Instead of picking a second fight with Apple, it tried something different, creating a different device with a different market backed by a different ecosystem of apps, books and other media.

The only thing that Barnes & Noble and Apple actually have in common, and which differentiates them from everyone else making tablets today, is that they're retailers. One way that the iPad is a post-PC device (in the same way that the iPhone is a post-smartphone device) is that it's a consumer device first, and only accidentally a business device. (The iPad may be gaining traction in enterprise sales, but that's ironically because it's a popular retail device.) PCs are still wholesale; tablets are retail.

So it's a big help that both Apple and Barnes & Noble have physical stores to showcase their devices and make sales; this is one reason Microsoft wants to participate in physical retail. (Also, Best Buy and its big-box kind cannot hold out forever, and the company needs somewhere to sell PCs and accessories.)

The real foundation, though, is both companies' success in selling digital media and media digitally: music, movies and apps for Apple, books and magazines (and in an earlier time, CDs and DVDs) for Barnes & Noble. Apple and Barnes & Noble were both able to create devices that were first and foremost stores that you carry around with you.

The store ensures that the customer continues to engage and invest in the device after its sale, and that the engagement and investment continue to profit the company who made the device and administer the store. __Size and price are fundamentally secondary to the device's continued retail potential. __

HP could not play this game, at any price or in any form factor. But if not HP, who?

Microsoft, maybe;
Amazon, definitely.

Again, we don't have to point to an imaginary Amazon Unicorn Tablet from the whispers of the indefinite future, because Amazon is *already doing it *with the Kindle.

Since Amazon is already in the business of selling digital apps, games, movies, TV, enhanced books, magazines and so forth, it makes sense to better capitalize on that and counter both Apple and Barnes & Noble by releasing one or more tablets of its own.

The open question for Amazon isn't whether or even when, but how. Will it Go Big, like Apple, for movies and games and richer software and everything else that benefits from a bigger screen and more firepower, or Go Home, like Barnes & Noble, putting out a better e-reader for an easier fight and an easier win? Or will it try to do both?

A fourth possibility: Amazon finds a third way to Go Long — subsidizing Big tablets to sell at a Home-friendly price (or Home-sized tablets for even cheaper) with advertisements, Amazon Prime subscriptions or the sure knowledge of media sales down the road. HP's Touchpad sell-off shows that there's a pent-up market for high-quality tablets well below Apple's price threshold. HP had no way to make that lost money back. Amazon's retail power gives it more than one.

To shamelessly quote *The Wire *once again: "The game is rigged; but you cannot lose if you do not play." That can mean quitting like HP or inventing a different game like B&N. As Patrick Rhone writes, "Stop trying to make iPads. Make markets." Amazon already knows a thing or two about that.

Making markets really means making choices. As companies figure out that they have more than one, and begin making them, consumers will see that they have more choices too.