Netbooks Hardly Mean Doomsday for Apple

The netbooks are coming and Apple (AAPL) should be scared. That was part of the message from Calyon Securities, which downgraded Apple shares on Feb. 24 to Underperform. The Calyon note claimed that Apple's premium PC pricing model would struggle in a tightwad spending environment and that the netbook market, in particularly, would be a tough nut to crack without cannibalizing current lower-end MacBooks.

This has been something of a recurrent theme among analyst who track Apple, and it's a valid topic to address. After all, Intel (INTC) shares have suffered in part due to fears that the lower-priced Atom processor used in netbooks will cannibalize sales of Intel's higher priced processors. And Dell (DELL) and HP (HPQ) have only reluctantly entered the netbook market after Taiwanese maker ASUS started posting serious numbers when it pioneered the simple, small and easy to use Web surfing and light computing appliances.

The particular concerns about Apple and its vulnerabilities are, to my mind, misplaced. Apple should see some diminution of sales revenues and product volumes, which is understandable in an economic slowdown of epic proportions. However, Apple has maintained the most price discipline of any company in the Consumer Electronics space. Go to any reseller store selling Apple products and discounts on offer are never more than a few bucks better than at the Apple branded stores themselves. This takes discipline and Apple has it. What has forged this discipline is the long-term commitment of pricing high and delivering a product people will pay more for. Sure, there will be downward pressure but Apple won't bite.

Regarding Apple cannibalizing its MacBook line with netbooks, I see the arrival of netbooks as a net add. Netbooks are relatively easy to use and operate. And they save on component costs by stripping out the most expensive items, namely, larger hard drives, expensive LCD glass, and memory. This is not a problem for Apple, which already gets among the best component costs in the industry and is legendary for figuring out ways to package cheaper hardware for premium prices. If anything, this hardware downshift plays to Apple's strong suit. Apple has always sold products based on charging a slight premium in exchange for better UI and design. There is no reason to believe Apple can't extend its touch here and still maintain respectable margins and slightly premium prices.

Consider, also, the iPod. When Apple released the device in 2001, no one would have imagined people buying or simultaneously owning two iPods, let alone four or five. Today, as a testament to the superiority of the UI and the stickiness of the product, millions of people own more than one. The case is not a clear analogy, as Apple did not risk cannibalizing any of its own products with the iPod. And some cannibalization will occur, most certainly. That said, from my own anecdotal evidence, Mac households tend to have multiple Macs lying around even at the higher pricepoints. I have no reason to believe an iPod effect won't take hold and people won't simply buy a single Apple netbook for each member of a household.

So while Apple shares continue to fall towards $80 per share, it's hard to argue with $31 per share in cash for Apple, even if FP/E is diminished by slowing sales. The option bulls are buying Apple calls at $90 and $100 price points.

Comments

[Ames Tiedeman:]

How many more iPhones can Apple sell? A lot. They have growth in this space for years and years.

Feb 25 08:07 AM

[offtheobt:]

The analysts are quick and loud on what Apple "should do", but if they are so smart, why aren't they in the business? Much safer to offer advice when you have no investment to risk.

Feb 25 09:21 AM

[dsrtwriter:]

A stylish netbook is going to be a new big winner for Apple. We will buy Macbooks and Macnetbooks, not just one.

Feb 25 09:42 AM

[Constable Odo:]

It's not a matter of doomsday. It's a matter of losing market share. I'm not certain if the people that are buying netbooks would have been buying Macs, anyway. However, they are being offered no Mac alternative to even consider switching. Apple can't match the PC makers dollar for dollar but if a slightly more expensive alternative was offered by Apple MAYBE netbook users would consider it. Apple has a business structure set up that's been working pretty well so far and I'm sure they've studied the situation. I'm sure Apple will launch a netbook counterstrike if necessary. I doubt if Apple needs to change any of it's product roadmaps at this point in time. Apple's not going broke anytime soon. It's just the analysts that are making forecast assumptions to stir up controversy.

Feb 25 12:25 PM

[Zoltan L. K...:]

Apple is making approximately a billion in cash per month. Even if this slows down somewhat for 2009, maybe 2010, the numbers will add up.

Feb 25 01:53 PM

[jmmx:]

IF Apple enters the netbook market, then it will heavily cannibalize the other makers much more than their own MacBooks. If someone who wants a MacBook cannot afford it, they will not buy it now. If someone wants only a netbook because of convenience, they will buy that now. Therefore I believe cannibalization of MacBooks will be minimal.

When they offer a netbook, it will be a far superior product in all ways - i.e. both hardware & software, and will have style as well. In short -another winner that will gobble market share from the others.

Feb 25 02:08 PM

[Michael Lin...:]

Somebody should write an article titled, "Analysts naysaying Apple yet again: Apple feeling upbeat." If they guessed with the toss of a coin, they'd probably be more accurate. How do they keep their jobs?

Nicely said, offtheobt. I wonder how many analysts have ever run a small business, never mind a multi-billion dollar industry leading one.

Feb 25 02:12 PM

[James Katt:]

Netbook = cheap, stripped down, slow laptop, with razor thin profits.

That is not Apple. Obviously, it won't be done.

iPhone Tablet = Tablet-sized iPhone with 4x resolution full-color touch screen, OS X, runs every iPhone application and new high-resolutions ones, complements a Mac, can do anything a netbook can and more, has dual-cameras for video conferencing and photos, Kindle-killer, perfect eBook reader, Playstation-portable killer, fantastic for movies (can now do DVD-resolution movies), can use bluetooth keyboard or on-screen keyboard. Costs $500 with AT&T Subsidy, $900 without subsidy. Very high profit margins. Great for high school and college textbooks. Very elegant, best-in-class OS, Safari 4 with HTML-5 with CSS Animation.

That is much more like Apple.

Feb 25 03:25 PM

[Neil Anderson:]

The other manufacturers have been lucky so far that Apple hasn't thrown a netbook into the ring.

Feb 26 12:18 AM