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Margins are dropping like flies in the laptop market

Consumers are staying away from the higher-priced notebook computers that sold relatively well in years past thanks to the poor global economy. Instead of buying the high-end and expensive notebooks that may have been the choice in 2007 or 2008, consumers are buying low-cost netbooks in droves.

EWeek reports that the massive increase in sales for low margin netbooks is destroying the notebook market and that Microsoft must work with OEMs to stop the crisis. Netbooks are leading the PC market in sales and according to eWeek destroying margins at a "shockingly alarming rate."

Analysts from both IDC and Gartner say that the netbook category is posting strong numbers as sales for notebooks in higher margin luxury segments are dropping. The victim as netbook sales soar according to eWeek is average selling prices (ASP). Gartner analyst Mikako Kitagawa said, "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."

ASPs for notebooks have traditionally been higher than the ASPs in the desktop market. In August, eWeek reports that ASP for Windows desktops was $569 while the ASP for Windows notebooks was $689. By December 2008, ASPs for Windows desktops had dropped to $533 and ASPs for notebooks dropped to $602.

By February of 2009, Windows Desktop ASPs were only $20 more than laptops at $540 for notebooks and $560 for desktops. The decline in ASPs for netbooks reportedly tracks closely with the increase in sales for netbooks, which makes sense considering the netbook is cheaper than the average notebook.

Windows XP is another way to track the impact of netbooks on the computer marketplace. Windows XP was all but gone from the retail marketplace in August 2008. By December of 2008, XP Home machines were second in market share next to Vista Home Premium. Windows XP Home was most commonly sold on netbook computers. EWeek reports that Microsoft loses a massive margin on Vista each time a PC is sold with XP.

The answer to the problem of netbooks cannibalizing notebook sales according to eWeek is twofold. Computer makers need to reduce advertising and separate netbooks from the larger notebook market. Exactly how that would make for higher margins in reality is hard to fathom. Even if you consider netbooks to be their own category, it seems that ASPs for notebooks would only go up on paper.

One route to better margins is by subsidizing the cost of netbooks for consumers by bundling them with mobile broadband contracts. This would allow the consumer to get a netbook for less money up front and would allow netbook makers to reap more profits by locking users into a mobile broadband contract for a two-year period.

EWeek admits that under this plan, ASPs may go down even further, but margins would go up. Requiring a mobile data contract to be wrapped into the purchase of a netbook with a plan like this would undoubtedly affect sales of the low cost netbooks, as most consumers won’t want a mobile broadband contract at $60 to be able to buy a netbook.

HP CEO Mark Hurd talked about netbook cannibalization in February and said that it would be a while before HP had a usable metric regarding netbook cannibalization.

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RE: No
By DASQ on 4/20/2009 11:41:45 AM , Rating: 5
Or, tons of people who are buying netbooks are realizing they don't need a full size 15" to do what they do on a computer (internet, email, music).

RE: No
By tviceman on 4/20/2009 11:54:36 AM , Rating: 2
Or they buy it thinking all they'll want it for is music, internet, and email but find out that when they want to do something else they can't and they'll think it's a piece of junk and feel burned buying it.

RE: No
By DASQ on 4/20/2009 12:05:10 PM , Rating: 4
That goes for just about anything, though. Like those fellows buying $800 laptops for Autocad and finding it's sooooo slow boo hoo.

RE: No
By Smartless on 4/20/2009 2:45:18 PM , Rating: 2
Hehe yeah but I think it can keep up with the user who wants to autocad on a single 17" screen versus having a workstation with dual or quad monitors.

RE: No
By cheetah2k on 4/21/2009 12:06:16 AM , Rating: 2
The new Sony Vaio P netbook has wow factor - aside from the squinting eyes to see the text!

I also have a Netbook MID (viliv S5) and love it (except that it doesnt have native 3G support)

We can all thank the OLPC XO for starting this (r)evolution!

RE: No
By TomZ on 4/20/2009 12:10:07 PM , Rating: 3
80% of people won't ever do anything else. I know lots of extended family members that are not technical users. They are using their computer for all the things you listed, and nothing more.

And I would also add that most general business users I know just add Microsoft Office to the above, that's it. I would think that Office would run just fine on a netbook, although I haven't tried it myself.

The real issue with the industry is that the harware capability far exceeds most peoples' real needs. Sure, there are a lot of us who want/need the higher-end machines, but for the majority of users, even an Atom-based machine will meet their needs.

RE: No
By Suntan on 4/20/2009 4:24:35 PM , Rating: 2
And I would also add that most general business users I know just add Microsoft Office to the above, that's it. I would think that Office would run just fine on a netbook, although I haven't tried it myself.

They run just fine with Office installed on them.

To the guy that thinks only people that wouldn’t buy a laptop would buy a netbook, you’re completely off base.

There are a lot of people that would periodically enjoy the mobility of a laptop (even if it is just to sit on the couch and surf the web while watching TV), but also want the horsepower of a desktop/powerful laptop for other times.

I won’t speak for others, but I am sure I am not alone. I like the portability of a laptop, even if it still stays plugged in while I sit on the couch and watch TV. But I want a big, quality screen with significant horsepower to do digital photo work. Prior to the introduction of netbooks, I compromised with a 17 laptop that had a less than ideal screen (for photo work.)

Before netbooks, it was financially impractical to buy a full laptop *and* a quality workstation. Now I have a netbook for surfing while watching TV and travel (DVDs, emulation, Broadcast HDTV recordings, downloading pictures from the camera, etc.) and I have a desktop with a quality monitor for photo work.

So while I might have compromised with getting another “full laptop” in the past, financially it was pretty much equivalent to buying a much better desktop screen for photo work, a desktop and a netbook. This setup fits my needs much better and (based on the popularity of the market segment) I would guess I’m not alone.

As for the article talking about artificially limiting netbooks by shackling themto data plans… …what a stupid idea. Hey, if you want to stop selling netbooks, just stop selling netbooks. Just don’t be surprised if a competitor comes in and continues offering them to the obvious market that is out there for them (anything more would be considered illegal, anti-competitive behavior.)


RE: No
By dxf2891 on 4/21/2009 9:13:49 AM , Rating: 2
My neice has one and asked me to "trick it out" for her. I loaded office and an internet security suite and all works well. I even went so far as to load Skype and she couldn't be happier. We got her a couple of 16GB thumb drives and she's good-to-go.

RE: No
By mixpix on 4/21/2009 3:06:59 PM , Rating: 2
This is the main reason. I talk to lots of people about my EeePC who just do basic computing and want something smaller.

"We don't know how to make a $500 computer that's not a piece of junk." -- Apple CEO Steve Jobs
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