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

By Joe Wilcox  |  Posted 2009-04-16

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

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.

Measuring Netbooks Impact


The decline in portable ASPs tracks closely with increasing netbook sales. According to IDC, manufacturers shipped about 5 million mininotebooks in the fourth quarter-or about half the volume for the year. Mininotebooks typically sell for under $400, many for under $300.

Other ways to measure their impact: Windows XP had nearly disappeared from U.S. retail PCs in August. By December, Windows XP Home PCs were second to Vista Home Premium, with 13.7 percent market share, according to NPD. Microsoft loses massive margin on every netbook shipped with Windows XP Home, which is the majority. OEMs pay an estimated $50 to $60 per copy less than a Vista "premium" version. Those numbers are based on analyst estimates; Microsoft doesn't publicly disclose what OEMs pay for Windows.

If the trend Kitagawa predicts continues, laptop ASPs, at least in the United States, will fall below desktops. The sucking sounds you now hear are the margins being pulled from the U.S. notebook market.

The ASPs already have been going down for months. In the seven months to February, Windows laptop ASPs fell $129-from $689 to $560. During the same time period, Mac laptop ASPs declined just $12 from $1,524 to $1,512. Apple doesn't sell netbooks. In the United States, Windows laptop ASPs already have fallen more than 20 percent. Another 20 percent would simply be devastating for Microsoft and, more severely, its OEM partners.

Looking for Answers

There are two immediate actions that Microsoft and Windows OEMs can take to slow margins from bleeding out of the laptop market: advertising and separating netbooks from the greater notebook market.

Microsoft has already embarked on an aggressive and surprisingly successful marketing campaign: "Laptop Hunters." Contrary to the fierce Mac-PC fanboy blog and Twitter debates about pricing, the commercials are about value. In two of the three commercials, shoppers have budgets of $1,500, or nearly $1,000 more than what the average notebook sells for. NPD categorizes PCs selling for above $1,000 as "premium." At U.S. retail, Apple, with its vastly higher ASPs, has about 80 percent market share in the premium segment.

The "Laptop Hunters" commercials are designed to reach buyers with big budgets in a declining economy. Microsoft is taking on Apple in its core market segment: consumers willing to spend $1,000 or more on a new computer. It's a segment where more OEMs need to go, particularly with pricing and margin damage being inflicted by netbooks.

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.


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