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In the quarterly earnings report for the last quarter, HP announced that the Personal Systems Group suffered from a 5% decline in revenue from the previous quarter. PSG is the division of HP that makes the HP that most people know: desktop and laptop computers (printers are handled by the Imaging and Printing Group). The Palm Global Business Unit, formerly known as Palm, Inc., also falls under the PSG, though we can’t say that revenues from webOS device sales during the quarter ended April 30 impacted HP’s bottom line in any appreciable manner.

So we have to ask, what’s eating into HP’s PC sales? It’s not consumer sentiment towards HP – they’ve been making great strides in improving the quality of their computer hardware and their Envy line of laptops is within striking range of Apple’s unibody MacBook Pro portables in terms of build quality. It’s also not the bloatware that HP pre-installs on its computers, as that’s something that afflicts practically the entire swatch of PC vendors. No, it’s one little 1.3-pound slice of Apple product called the iPad.

Demand for the iPad 2 remains so stratospherically high that more than two months after it launched you still can’t go into a store and be assured your pick of models. Even online purchasers are met with one- to two-week shipping times. The iPad hasn’t diminished demand for HP’s high-end laptops, but the high end has never been HP’s bread-and-butter. The iPad is attacking with a ravenous hunger the bottom end of HP’s portable line-up.

The practical among us might thing, “But the $500 iPad doesn’t do nearly as much as a bottom-line $400 HP laptop!” And you’d be right. But 99% of buyers of either product aren’t going to use it to its fullest capabilities. The average user doesn’t care how much better the $400 HP laptop is at 3D models and World of Warcraft than the $500 iPad – they care about things like web browsing, email, silly time wasting games, how well it slips into their bag, and how long the battery lasts. That’s where the $500 iPad absolutely eats the $400 laptop’s lunch.

There’s not much HP can do to improve the laptop. The form has been evolved, chisled, strengthened, and overall made better and more capable over its 30-or-so years of existence. There will always be a market for the more capable and powerful laptop, just as there will always be a market for the even-more-so desktop, mainframes, and servers. What the iPad has managed to do, however, is start the low-end laptop on the path to obsolescence. It’s already destroyed the netbook segment in less than a year. If the $300 netbook couldn’t compete with the iPad, how can the $400 does-the-same-things-as-a-netbook-but-faster laptop be expected to compete?

All of this is why HP bought Palm last summer. HP, like Apple, has realized that the future is personal mobility (though, in all fairness, Apple realized it years ago and HP’s playing catch-up). HP will likely always be selling laptops and desktops and servers, or at least they will for the foreseeable future, just as Apple’s not going to suddenly stop selling MacBooks and iMacs. As long as there’s still money to be made, they’ll both be in the market. But the importance personal computer is on a downward trajectory, and it’s happening faster than any of us really expected. Look again at that revenue decline suffered by the Personal Systems Group. 5% in a quarter. Sure, the preceding quarter included the holiday buying season, but the division was down even in comparison to the same quarter last year. Over the last year HP’s overall revenue rose by 2.5%. Apple’s up more than 75%, almost entirely thanks to the iPhone and iPad.

Without webOS, and in particular, the TouchPad, HP is risking being left behind in a market that’s exploding faster than anybody could have anticipated. It’s clear that the TouchPad and webOS 3.0 are very much the focus of the Palm Global Business Unit, and all signs point to the launch happening in likely the next month or so.

HP’s future is heading in two directions: the cloud and mobility. The $1.2 billion they spent to buy Palm has likely already been surpassed by the money sunk into developing new devices, updating webOS, securing contracts with carriers, purchasing other companies to support webOS, and what we expect to be a sizable chunk of change set aside for an all-out assault of a marketing campaign.

All that money will likely buy a lot of sales, and right now HP has tech industry hype on its side. What the TouchPad really has to do is deliver the goods. That’s not saying that the tablet needs to ship (which it does), but it needs to ship “complete.” What’s been holding back adoption of Android 3.0 tablets like the Motorola Xoom and Asus Transformer has been the lack of completeness. Compared to the overall breadth of the Android Marketplace and the selection of iPad-optimized apps in the App Store, there are comparatively few Android tablet apps. But at least the Honeycomb tablets can still run regular Android apps. In addition, it’s taken a while for Google to even update their own apps to be 3.0-compatible. For what it’s worth, when the G1 launched on T-Mobile with Android 1.0, it wasn’t a rousing success either. But that’s the Google way: launch, improve, and then dominate. And they may still dominate the tablet market, but unlike with smartphones, Google (and HP) face a competitor that not only dominates the category, but singlehandedly thrust it into the consumer’s mind.

The TouchPad needs to capture the feeling of a complete experience. That complete experience is a number of things, but in essence it needs to work well enough and be cohesive enough that the user doesn’t have to think about what they’re doing. If it can’t do that, then it’s not going to stand a chance against the iPad or Android tablets.

It’s a lot of weight to foist upon the shoulders of a single first-generation webOS tablet, but the TouchPad is the torchbearer for both the cloud-enabled and mobility-minded futures of HP. The PC has done its part in this marathon relay race, and now it’s time for the tablet to take over. The iPad may have the head start on this leg, but it’s the TouchPad’s race to lose.

No pressure.