Netbook Sales: Cannibalizing Notebooks or Incremental?

Is the small form factor netbook an evolution of the notebook computer - or a new product entirely? Here's an interesting moment from Intel's 4Q08 earnings conference call last night, addressing the issue, along with an explanation of notebook vs. PC supply chain (emphasis added):

Glen Yeung - Citigroup

Thanks. I guess I first wanted to just look at the notebook in the fourth quarter that you have just pointed. It was down considerably in your numbers, and yet, when I think about the end market, it wasn't down that much. I wonder if you could address how much of that notebook reduction you guys saw was a function of inventory decline and how much of it you think was cannibalization from netbook.

Paul Otellini - Intel President and CEO

I think very little of it was cannibalization from netbook, Glen. And we've done surveys now of buyers to try to triangulate on that. And while there is some cannibalization, the data suggests that the vast majority of netbook sales are incremental, and by the time we get to the analyst meeting, we'll share that data with you.

On the notebook side, I think what you see is that it takes longer to slow it down. Much of our desktop business is through the channel, which is the configured to order model. And so the channel adapts very rapidly. They have little inventories to begin with. It adapts very rapidly to demand changes, and in fact, if anything, our channel inventories and desktop products are a little light right now as channel sales stabilize in the second half of December.

Notebooks for the most part are assembled in China and Taiwan and then shipped, most recently, in the last six months or so, on boats. So the supply line actually lengthened as people fought to save money on shipping as the air transit prices went up with the gas going up. So, that all started to contract.

And I think that there probably was more inventory contraction in classic notebooks than in desktops as a result. And we'll know a little bit more as we go into the quarter, but that seems to be the picture.

You can find out what all companies are saying about netbooks - or anything else - with a search across earnings call transcripts from our transcripts center.

Comments

[Hedged In:]

Useful excerpt - thank you.

So Intel claims that sales of netbooks won't cannibalize sales of notebooks. But it depends on:

1. Are netbooks a substitute for notebooks, or a totally different product? My guess: they're a substitute.

2. Will the lower price of netbooks expand the total market size in $ terms? My guess: in this economy, they'll shrink the market because netbooks are so much cheaper than notebooks, and the total volume of netbooks/laptops purchased won't rise enough to offset the price impact.

And finally, there's an element of "Well, Intel would say that, wouldn't they?" And remember, Intel just slashed guidance.

Jan 16 09:05 AM

[AdamC:]

Those companies offering netbooks are in denial that they wouldn't eat into the sales of their laptops. Netbooks is all they need when they are on the road and when they are in their offices or homes the desktops will come into play.
Whereas the Mac laptops are different they can function anywhere and they are as fast as the PC desktops. Although they cost 3x more than the netbooks, they can do 10x more and their resale value is fantastic.

Jan 16 01:39 PM

[robinjoe:]

I was in the market for repalcement laptops. I found a netbook with a 160G HD. So it IS replacing a Laptop I would have bought. I stopped buying desktops years ago. External monitors at all work locations allow me to use one computer for everything.

Jan 17 08:49 AM

[donzelion:]

It's very difficult for me to see how a netbook could be anything other than a substitute for a notebook for the vast majority of users out there.

Primary use of notebook computers for 98% of the buyers out there? Word processing, email, browsing.

Primary uses of netbooks?
Word processing, email, browsing

Perhaps someone can point out the distinction in those use patterns...I guess a notebook can launch Word a bit faster than a netbook, but really, a half second or so won't make that much difference to the average user...

Jan 17 12:32 PM

[Misha:]

Continuing the thread of using person experience to answer this question, I cannot see how a netbook is anything but a new category. In my family (two working adults and two little kids) we have 3 notebooks. First two are my and my wife’s work notebooks (business models that are a compromise between mobility and performance), plus one of those high-performance 17” entertainment laptops (never leaves home) for girls to play, and for me to use at home for minor work stuff or editing home movies, photos and such. When shopping for a new work notebook last year, I briefly considered a netbook and quickly decided that I may buy one strictly to travel and carry around to make presentations. I could not see how I can even run Adobe Pro without irritation, not to mention problem with running multiple applications and limited real estate to see what I am doing. Relatively poor display quality and its size (becomes more and more important for my aging eyes) is another critical limitation of netbooks. The bottom line for me: I will never consider a netbook as anything other than a mobile device. I will buy it when they become available with DVD players so that I don’t need have DVD player with me when traveling with kids. I can only see netbooks as a poor-man’s notebook replacement (thus some cannibalization). Otherwise, it is a new category, somewhere between smart phones and notebooks.

Jan 17 03:21 PM

[M-P:]

Per the comments, for the ordinary person - not the business or home power user - a netbook is more than sufficient. I think it will cannibalize for some segments and not others. Frankly, notebooks have come down in price a bit (esp. lower end) so I don't see a major price distinction on the hardware side - the software, on the other hand - thinking MSFT - has not come down that much unless you have a way to buy it at a discount. I understand why there is so much pirating of software in some countries. Software cost / Median Income = Large %.

Jan 17 04:13 PM

[Joe Public:]

Anectodal: Our story is that I bought a netbook for my wife for Christmas. It was an incremental purchase, and I was attracted by the $300 price point. I would NOT have bought a notebook PC. She wanted something small and convenient for web surfing - something smaller than a notebook. I think the notebook is partly a new product category and partly cannibalizes notebooks. Good for Microsoft perhaps, but maybe a wash for chip makers and PC makers.

Jan 20 02:34 AM