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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 invidious on 4/20/2009 12:55:35 PM , Rating: 5
I agree. Unfortunately this article is very obtuse and assumes that people are somehow supposed to be supporting the laptop market. It should be (and is) the exact opposite. People are buying what suits their needs, the market supports them. If the laptop form factor is obsolete (and I dont think it is) then it will die as it should.

I do not see how this ASP has anything to do with the real world. The only thing that matters is sales and profits. I would say that if anything cheap netbooks are resulting in overall higher sales than would be expected during a recession. If this causes microsoft to lose money on potential vista sales then that is their own fault for not forseeing the market change and tailoring their OS to support it.

Bottom line is netbooks are a good thing for consumers, so they are here to stay. And M$'s next OS has a version built to support them, so they have a proactive plan. This story is basically a big waste.

RE: No
By dgingeri on 4/20/2009 2:37:16 PM , Rating: 2
I totally agree with you, Invidious. If the laptop makers are finding that their products are not being purchased, it is not up to the competitors to find a way to curtail their market, it is more that those laptop makers must adjust to fit their product to the market.

I have found myself considering buying one of those netbooks, when I have never considered myself has having cause to buy a laptop. Laptops were just too expensive for the limited use I would have, but a netbook has the capacity I would need for the limited use I would have, but not the huge price tag. For me, that's not eating into the market, that is filling a need.

Granted, some people who would have purchased a full laptop are getting a netbook instead. Perhaps they are losing a little bit, but that is not Microsoft's fault.

I'm thinking the crappy laptop market (the ones that cost <$1000, have Intel integrated graphics and celeron processors, can't do anything more than internet and e-mail on them anyway) is being eroded for the netbook market simply because the netbook fills the need better than the crappy laptops do.

There will always be a bigger market for more capable laptops, with discrete video and higher speed hard drives for business purposes. That market will not be eroded by netbooks.

RE: No
By Oregonian2 on 4/20/2009 3:15:33 PM , Rating: 2
I also agree -- but want to point out the pessimistic sort of position the article presents.

One also could just as well said that netbooks have SAVED the laptop business from disaster caused by the world economic collapse. Hallelujah!

"Death Is Very Likely The Single Best Invention Of Life" -- Steve Jobs
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