Hewlett Packard plans to stop selling Aplpe's iPod digital media device through its retail distribution channels, The Wall Street Journal reported Friday. The article quotes Apple spokeswoman Katie Cotton as saying HP "decided that reselling iPods doesn't fit with their company's current digital media strategy."

WSJ reporters Nick Wingfield and Pui-Wing Tam said that HP's contribution was "only about 5% of iPod sales." However, they did note that the PC maker plans to continue including copies of iTunes on its computers, and the writers referred to unnamed sources who said that HP "cannot sell a competitive digital music player from another company or begin development of its own player until August of next year," according to the terms of its deal with Apple.

The article, which requires a subscription to the newspaper to view, also said that HP "never profited heavily from selling the iPod and that Apple had more control over the financial terms of the deal," according to their sources. While the terms of the agreement were never public, Jupiter Research analyst Joe Wilcox told The iPod Observer that he agreed that neither company would be seriously hurt by the end of the deal, given how little it contributed to revenue at both firms.

'Never a Good Fit'

"The iPod was never a good fit for HP," Mr. Wilcox commented. "HP was Microsoft's development partner for the Windows Media Center computer, which is central to HP's living room strategy. So, for example, an HP computer owner might buy an HP iPod and then find it's incompatible with the music they've been buying from MusicMatch, which was HP's default music software before iTunes."

Mr. Wilcox was surprised that HP will continue to include iTunes on its computers, noting that "it doesn't fit with the broader strategy." As for the possibility of HP either selling another company's MP3 player or creating its own, he said that Dell licenses the guts of its own Jukebox MP3 player from another company, so HP might follow that route.

American Technology Research analyst Shaw Wu, who said that Dell licensed its MP3 player technology from Creative, agreed with that strategy, noting that HP could even approach SigmaTel, who on Thursday acquired not only the Rio's technology but also its design team. However, Mr. Wu told The iPod Observer, "HP certainly has the capability to create their own MP3 player. Dell doesn't spend as much on R&D as they do." He also noted that Dell used to sell the iPod too, but ceased the relationship to introduce the Jukebox.

A Brief Partnership

Former HP CEO Carly Fiorina joined forces with Apple CEO Steve Jobs to unveil HP's plans to sell the iPod during the Las Vegas Consumer Electronics Show in January 2004. It was originally going to be blue, but when it shipped in August 2004, the HP iPod was virtually indistinguishable from the Apple iPod, aside from the HP logo on the back. HP later added the iPod mini and began selling the iPod shuffle this summer.

Apple sold approximately 6.2 million iPods this past quarter, booking US$1.1 billion in revenue in the process. Mr. Wu estimated that around 500,000 of those were HP iPods. "Apple's distribution channel isn't as big as HP's," he said, "but most people buy iPods through Apple anyway." He agreed that Friday's news won't really hurt either company, except for the "negative headline risk" incurred by Apple.

According to the Wall Street Journal article, HP spokesman Ross Camp confirmed that sales of the HP iPod "met or exceeded our internal expectations," but he wouldn't be specific. Mr. Wilcox noted that "HP is in a fair bit of realignment with layoffs and restructuring, so changing product lines right now would be a normal thing."

So what will HP do with its excess inventory of unsold iPods? Mr. Wu said that Apple has already booked the revenue from those devices, so it doesn't care what HP does with them. He said to expect a fire sale on HP iPods to flush the remaining devices from the channel, "which is what normally happens in situations like this."

AAPL closed lower today at $42.65, down 1.15 (-2.63%) on moderately strong volume of 20.1 million shares trading hands. The stock traded lower for most of Thursday's trading day, but took an additional hit of more than one dollar per share when the HP news broke. It then recovered half of that loss, to close 1.15 lower on the day.

Apple and HP representatives declined to return phone calls and e-mails from The iPod Observer.