Netbooks, Notebooks and Seismic Shifts

On its FQ209 conference call, Microsoft (MSFT) says software for netbooks has helped offset declines in PC software sales. The company saw a rise from practically zero market share for netbooks to 80% in the quarter, but that's because they had to lower prices dramatically to compete.

The PC market is clearly the key driver of client revenue and it is likely to remain weak over the second half of our fiscal year, with market trends similar to or potentially weaker than the second quarter, especially in the traditional PC market... Offsetting that partially, the netbooks mix of total PCs will likely follow similar trends to Q2, with continued strong Windows attach on netbooks contributing to overall Windows revenue. However, as the economy slows, continued inventory contraction and pressure on tax rate would negatively impact revenue growth in the second half. So overall, we expect client revenue to perform broadly in line with the traditional PC market.

The NY Times says the shift is more fundamental. The move from PCs and notebooks to 'cheap, but reliable' netbooks is a move away from the higher margin businesses that have made the tech titans like Microsoft and Intel what they are today-- or what they were last year.

Microsoft’s valuable Windows franchise appears vulnerable after two decades of dominance. Revenue for the company’s Windows operating system fell for the first time in history in the last quarter of 2008. The popularity of Linux, a free operating system installed on many netbooks instead of Windows, forced Microsoft to lower the prices on its operating system to compete.

Intel’s high-power processors are also under assault: revenue tumbled by 23 percent last quarter, marking the steepest decline since 1985.

Meanwhile, more experimental but lower-cost technologies like netbooks, Internet-based software services (called cloud computing) and virtualization, which lets companies run more software on each physical server, are on the rise.

Ultimately, says AMD on its Q408 conference call, netbooks and notebooks will co-exist. The market will offer a variety of price lines across the mobile computing spectrum:

Notebook is still going to enjoy a higher growth rate in terms of end user consumption throughout next year versus desktop consistent with what we've seen in the past couple of years.

The distinction between what is a netbook versus a notebook is going to go away.

Given the way netbooks are configured today, consumers who want a notebook at those kind of price points have to make a compromise and as a result, don't enjoy a full PC experience, particularly around the graphics and media capability of the machine.

And likewise, people who wanted a really nice thin and light machine had to pay a lot of money, typically well over a $1,000, up to $1,500. And our Yukon platform offers really a full PC experience at really low price points and the market is really reacting positively to that value proposition.

============

Seeking Alpha offers excerpts from our free earnings transcripts every day. To view other excerpts or to add the service to your watchlist, click here.