More Complicated Remedy

 

The other remedy to the netbook crisis is more complicated. OEMs must either fold netbooks into the larger laptop market-make the category disappear-or, better, separate netbooks into a category distinct from laptops. The latter option would simply extend what the international netbook market already has been tacitly doing.

Mininotebook sales first surged in Europe, where many are sold subsidized by carriers. But in the United States, most netbooks are sold unsubsidized. Microsoft should work with OEMs and wireless carriers to offer better-configured mininotebooks that sell for less subsidized than those selling through typical retail channels unsubsidized.

Good products aren't cheap, and they can be even better and more affordable subsidized. A few weeks ago, AT&T started selling unsubsidized, contract-free iPhones for $599 and $699, for 8GB and 16GB capacities, respectively. Subsidized, these phones sell for $199 and $299, respectively. AT&T will soon sell the Nokia E71x for $99 after rebates. Nokia sells the unsubsidized E71 for $359. Subsidy pricing makes a big difference to the buyer. Carriers are used to offering these subsidies for which they reap ongoing data service fees, which typically are higher for computers than cell phones.

By moving netbooks to a fully subsidized model, carriers would benefit from locking customers into lucrative data contracts. Microsoft and Windows OEMs would benefit by reaping richer margins on lower-selling netbooks. Customers paying $99 or $199 for a subsidized netbook could get a better configuration than one selling unsubsidized for more. Overall laptop ASPs would go down, perhaps even more, but margins would go up.

Also, by shifting the market to subsidies, Microsoft and its partners would naturally segment netbooks from other laptops because buyers would commit to mandatory carrier contracts with monthly fees for data services.

Netbooks are a narcotic-a cheap sales high with net margins low. Mininotebooks are easy sales during a recession, which is why buyers and OEMs like them. But OEMs risk overdosing, so to speak, and destroying laptop margins. Microsoft and its Windows PC partners must decide: Shall they continue taking the quick fix or do what's right for the fundamentals of their businesses? It shouldn't even be a choice. There can only be one answer.

Joe Wilcox is editor of Microsoft Watch.