PC Makers Face Netbook Peril - Barron's

Consumer demand may be slipping as the U.S. and the world face possible recession, but growth is still robust for "netbooks," low-cost limited-function computer notebooks often priced under $500. This is bad news for PC companies, says Barron's, as netbook sales could cannibalize the fatter profit margins attached to regular laptops.

Netbooks were originally targeted at low-income schoolchildren in developing countries, through the revolutionary One Laptop Per Child project. Once the concept was aired of a small, durable, cheaply-priced laptop with basic functionality (surfing the internet, using email, and other routine tasks), the idea spread quickly.

Computer makers Asus and Acer have entered the market aggressively with a slew of low-priced laptops. Intel (INTC) has a netbook called Classmate PC. With seven out of ten of the best-selling laptops on Amazon.com priced under $600 last week, Dell (DELL) and Hewlett-Packard (HPQ) are racing to catch up.

The problem for PC makers is as they push for higher volume netbook sales, they may be cannibalizing sales of their higher-end laptops and cutting into their own profit margins. Consumers may be hard pressed to pay $1,000+ for a laptop when they find most of their needs are satisfied by a cheaper, leaner machine. The downshift to lower-margin netbooks could hurt everyone from PC makers to chip makers, and software producers to disk-drive producers.

Another blow to bottom lines is the emergence of netbooks just as the dollar is spiking against the euro and other currencies. The PC industry generates much of its revenue abroad, and a stronger dollar is hurting exports. Scott Craig, of Bank of America, slashed his estimates for Dell and HP for this reason. He also cut his forecast for 2009 global PC unit growth to 3% from 5%, and believes industry revenue will shrink 11% in 2009.

Comments

[StL Realtor:]

Microsoft is a PC maker?

2008 Nov 02 02:22 PM

[Roger Knights:]

What she meant, I think, is that some of these netbooks ship without Microsoft Windows, or with a cut-down, low cost version of it.

2008 Nov 02 02:28 PM

[Hedged In:]

Perhaps one of the biggest losers from the popularity of netbooks is Apple -- they don't have a low cost laptop to compete in this category.

2008 Nov 02 03:32 PM

[Hedged In:]

To get netbooks really cheap, the vendors will have to cut out Microsoft. The problem is that most PC vendors don't think that Linux is ready yet for mass adoption by consumers.


On Nov 02 02:28 PM Roger Knights wrote:

> What she meant, I think, is that some of these netbooks ship without
> Microsoft Windows, or with a cut-down, low cost version of it.

2008 Nov 02 03:34 PM

[It Figures:]

I think her concerns are excessively negative and much too short term oriented. While the readers of this service probably don't blink at paying $1000+ for a computer, millions in the US, and tens or hundreds of millions around the world, do. This will explode the units sold, albeit at thinner margins, but inteligently managed, should be very profitable. Think Wal-Mart(low margins/big volume) rather than Neiman-Marcus.

This post reminds me of Detroit's decision to stick with producing SUV's and pick-up trucks, with big per unit profits, instead of embracing smaller, more fuel efficient models, due to their thinner margins. The customer decides in the end, and couldn't care less about your "need" for margin.

If DELL and HP fail to join in (DELL is in already, don't know about HP) customers will just buy from someone else. Management's job is to first get the product right, and then get the costs right. This is the right product, for the times and for the world. Hoping the trend goes away is for fools.

2008 Nov 02 07:53 PM

[Raj Sargule:]

May be a boon for SAAS/web services providers?

SAAS providers could offer provide services that compensate for notebooks limited features.
Imagine having all the data in a cloud, accessible from these notebooks, which would be used to save temporary data only.
No more risking losing data through notebook thefts. As more data goes into the cloud, there will be newer security needs. Good news for security vendors!

2008 Nov 02 09:56 PM

[mbr:]

to sargule

SAAS? too difficult to type complete words?
All personal data in a cloud means you don't know where it is, what is done with it. May be you want a big brother. I don't.

2008 Nov 03 03:50 AM

[casey00001:]

The author also failed to mention Lenovo's idea pad S10, currently going for slightly under $400.00. With the size of cheap external thumb drives (32gb) being readily available there is no reason to lug a heavy notebook around. Take out the CD disk drive and substitute portable thumb drive storage and you have the problem solved. This is really the wave of the future. Also small laptops will probably always outweigh blackberry type devices since they are easier to type on. (Just my opinion) Ubuntu linux is free and proven technology, especially in Europe.

2008 Nov 03 11:12 AM

[Josh Thompson:]

Why don't you talk about how the Chevy Chevette is going to eliminate the Corvette because a Chevy Chevette has four wheels, a steering wheel and can go over 55 miles per hour. Or maybe how the Ford Granada will replace the Mercedes Benz because both are a greyish color.

2008 Nov 03 11:28 AM