Netbooks Are Destroying the Laptop Market and Microsoft Needs to Act Now

NEWS ANALYSIS: Netbooks are a cheap narcotic. They bring Windows OEMs a brief sales high, while laying their margins low. Microsoft and its Windows PC partners must get back to basic business fundamentals before netbooks destroy the lifeblood of the laptop market: margins.

A crisis is looming over the global PC market that Microsoft must work with OEMs to stop. If not, the last vestige of palatable margins will be lost. Forever. Netbooks are cannibalizing the mobile PC market, by destroying margins, at a shockingly alarming rate.

Yesterday, Gartner and IDC both released first-quarter PC shipment data. Worldwide, PC manufacturers shipped 67.2 million units, for a 6.5 percent year-over year decline. In the United States, shipments declined 0.3 percent year over year to 15.2 million units. Once again, netbook, or what analysts call mininotebook, sales were strong.

Sales High Lay Margins Low

"Low-priced mobile PCs led market growth in the U.S. Mininotebooks did well in the challenging economic environment where consumers' No. 1 priority was to save money," Mikako Kitagawa, Gartner principal analyst, explained in a statement. "Mininotebooks continued to put pressure on low-priced mobile PCs. This pressure was mainly felt in the consumer market, but it expanded into select professional markets as well, including the education segment."

The pressure is potentially disastrous for average selling prices. Kitagawa predicted that "U.S. mobile PC ASP likely will decline as much as 20 percent year over year in first-quarter 2009. Overall, end-user spending on PCs is likely to have contracted in the upper teens in first-quarter 2009 compared to a year ago."

The forecast's implications are explosive. Typically, laptop ASPs have been much higher than desktops, providing OEMs with much-needed margin cushion. During 2008, U.S. retail Windows desktop ASPs pretty much bottomed out near $500, according to NPD. In August 2008, the ASP for Windows desktops at U.S. retail was $569; $689 for Windows notebooks. By January, Windows desktop PC ASPs had fallen to $533 and notebooks to $602.

In February, Windows desktop ASPs were just $20 more than laptops. Portable ASPs dropped $42 to $560 compared with $540 for desktops. But when looking at all laptop ASPs, not just those with Windows, desktop ASPs were only $13 higher than notebooks.