Will the Notebook Market Hit a Tipping Point in 07?

By Scott Ferguson  |  Posted 2006-12-19

Will the Notebook Market Hit a Tipping Point in 07?

For the past five years, industry observers and IT professionals watched as notebooks have taken bigger chunks of the PC market, with corporate users and consumers looking for increased mobility and flexibility in their PCs and turning away from the traditional desktops that once permeated the desk and cubicles of enterprises for years.

Still, the desktop remained as a mainstay of enterprises and small businesses as the expense and limited performance of notebooks remained in question.

However, it seems that 2007 could be the year that notebooks, more than desktops, become the bigger revenue generator for major PC makers like Hewlett-Packard, Dell and Lenovo.

The first hints of this sea change in the PC market can be found buried deep in a Merrill Lynch financial report written Dec. 5 by Richard Farmer, a senior analyst for the New York City-based financial firm. Although the report focuses on CIOs and the launch of Microsofts Windows Vista operating system, Farmer delves into the numbers and indicates that, starting in 2007, the percentage of revenue from notebooks will outstrip that of desktops in the PC market place.

By the end of 2006, the estimated percentage of revenue for companies from desktops will be 47 percent, compared to 41.6 percent for notebooks. For 2007, the numbers will nearly flip, with 45.6 percent of revenue coming from notebooks and 43.1 percent from desktops, according to Farmers estimates.

Later, in 2008, notebooks will represent nearly 50 percent of revenue, while desktops will produce only about 40 percent of revenue. By comparison, in 2000, Merrill Lynch reported that notebooks only produced about 25 percent of the revenue in the PC market, with desktops accounting for a solid majority of 64 percent.

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In his report to investors, Farmer does not explain why this is happening, but Richard Shim, an analyst with IDC of Framingham, Mass., agrees that the marketplace has been favoring notebooks—as well as mobility overall—over desktops for some time.

"This is the direction we are headed in," Shim said. "Eventually, shipments of notebooks will be headed that way, too. Its just a matter of time. One thing that will be interesting to see is how far this will go."

Part of the reason for the increase in revenue is due to the margins OEMs can collect on notebooks. According to the Merrill Lynch analysis, the average notebook in 2007 is estimated to cost $1,083, while desktops will cost $767 on average.

Notebooks have also begun to make up a large percentage of the PCs that are shipped and sold. In 2000, notebooks held 18.7 percent of the PC market, according to Merrill Lynch. Now, notebook shipments make up 36 percent of the market and could capture 44 percent by 2008.

For his part, Shim said he does not expect notebooks to take over desktops in terms of shipments until later in 2008 or possibly 2009. Mostly likely, he added, this trend will first start in mature markets such as North America and Western Europe.

The trends that Farmer points to in his report reflect similar studies at research firm Gartner, of Stamford, Conn. Gartners research points to a similar trend of more revenue being generated from notebooks than from desktops, said analyst Leslie Fiering.

Next Page: Buying power.

Buying Power

While the revenue change has much to do with the higher margins and the larger price tags that notebooks carry, Fiering said notebook growth has a lot do with the buying power of the middle class in mature markets like North America, Europe and Australia.

By the end of 2007, Fiering predicts that notebook will start to out-ship desktops in these markets. The rest of the world will continue to buy more desktops, and notebooks will not start to outgrow desktops until at least 2010.

"Notebooks have hit a threshold," Fiering said. "People feel they can afford them and people will continue to buy them over time."

The fact that notebook revenue is poised to overtake desktop revenue can also be seen in several recent financial quarterly reports. When HP, of Palo Alto, Calif., announced its fourth-quarter results, the revenue from desktop sales remained flat, while its notebook revenue soared by 24 percent.

Its the same story at Dell.

The Round Rock, Texas, PC makers third-quarter fiscal numbers showed the company earned $3.9 billion in revenue from the sale of notebooks—a 17 percent increase. Meanwhile, its overall revenue for desktops was higher—$4.7 billion—but the number represented a 5 percent drop compared to the same time last year.

The reasons for the popularity of notebooks and the decline of desktops vary, according to analysts.

Part of the notebook surge is driven by the consumer market, as more and more users seek mobility in their PCs, Shim said. HP has done a good job of focusing in on this market, while Dell—once the leader in consumer PC sales—shifted its model too far toward businesses and lost some momentum in the notebook market, he said.

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Charles King, an analyst at Pund-IT Research, in Hayward, Calif., sees a similar pattern.

"I agree that there has been a real shift toward mobile computing and that shift really started in 2002," King said. "You have had a broadening of wireless Internet hotspots and that there has also been a group of professionals who have really turned to mobile computing. If the 1990s were the decade of the cell phone, then I think we are now in the decade of the notebook. In public spaces, from airports to hockey rinks, you see people typing away."

Additionally, the ability for notebooks to deliver the type of power and performance—especially with the help of a line of notebook processors from Intel and Advanced Micro Devices—have helped close the gap with desktops.

Even with this fundamental shift, Shim, King and other analysts still see significant space for desktops, especially within the enterprise. Although part of the workforce has gone mobile, King said traditional brick-and-mortar companies still have a large segment of the workforce that puts in a 40-hour week at their desk but do not need to take work home or travel for business.

King also believes that when IT administrators are shopping for new PCs, they are not replacing desktops with notebook, but buying a combination of the two as the budget sees fit.

Part of buying trend in the enterprise is also driven by the channel. Fiering said VARs have turned their clients onto notebooks because their average sale price means better margins. Plus, since the average notebook lasts about three years compared to four years for a desktop, VARs can offer maintenance services to users.

Then there is the question of how Microsofts Vista will affect the market. The feeling among analysts has been mixed as to whether the new OS will lead to a refreshment of hardware across the enterprise space. Most businesses do not expect to adopt the business version of Vista, which was released Nov. 30, anytime soon, according to analysts.

The consumer version of Vista is scheduled for release Jan. 30, 2007.

For Shim, the notebook business, with its base in the consumer space, is subject to the whims of the market. A new design trend or a change in the average sale price could shift the market again.

"What happens when notebooks hit 50 percent?" Shim asked. "Are they going to keep going until they hit 100 percent? I dont think so. Desktops will always have a space in the market, and they will continue to be the majority in the commercial market."

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