The economics of netbooks

1 March 2009 - Filed under Tech Notes

Should you, I, or the average consumer buy a new computer in 2009? I’d say hold off on it. That is not just because of the rising prices of imported goods, particularly electronics; there are seismic shifts taking place in the world of computer hardware manufacturers and software developers right now. At the centre of the change is the rise of netbooks, 21.5 million units of which will have been sold globally in 2009.

Consumer, hold that thought
To many consumers who are feeling the pinch of the recession and are determined to get real, the netbook may be the answer; it gives sufficient computing power to handle most of the tasks they do daily at a significantly lower price tag than that of a full-blown PC. A compact, lightweight form factor is a bonus. …Or is it? Is it sensible to pay what still amounts to hundreds if not more of dollars for a computer that inherently lacks horsepower, runs a feature-crippled operating system, and comes with a tiny, dense screen that makes you squint? Netbook or no netbook, here’s my consumerist logic behind not investing in a new computer now or in the coming months:

• New desktop PC’s and laptop PC’s (excluding netbooks) run Windows Vista, which Microsoft will declare an obsolete product soon. In order to get the maximum bang for the buck out of the new machine, I would rather have the much more resource-efficient 8 year-old Windows XP operating system installed, but that is not always easy let alone possible. There are few current models of laptops that officially and cleanly support the Windows XP downgrade. The new Windows 7, on the other hand, is still at least months away, and I’m not sure I will prefer that over Vista, either. To sum up, the whole PC market is in limbo at the moment.
• Apple Macintosh, the elegant alternative to the PC that can do everything the PC does and much more, has become prohibitively expensive thanks to the crazy exchange rates and monopolistically controlled prices. If you choose to stay reasonable, the new aluminium unibody Mac portable is simply out of reach. But that’s how Apple operates and stays profitable as a business.
• As numerous as they are, I regard the current models of netbooks as experimental products barely out of prototype status. When it comes to the OS for a netbook, the choice is between a crippled version of Windows XP and Linux, which in most cases involves a learning curve. To my mind, it is still too early to tell whether netbooks do indeed fill the gap between smart handheld devices and full-fledged portable computers. In any case, the first-generation netbooks that are shipping in early 2009 will evolve rather rapidly in shape and capability over the coming months. Furthermore, whether the attractiveness of the US$400-$600 price range of netbooks can be retained in non-U.S. markets remains a question mark.

Tough time to be a seller
While many consumers choose to wait and see the overall PC market shrink in line with the economy, things are much more complicated if you are a producer of computer hardware or operating system software. There are clear winners, losers, and everything in between behind the push for netbooks.

• Mainstream computer manufacturers like HP and Dell must and will ship tens of millions of netbooks this year because that’s where the market is going. In addition to the absence of market growth in general, however, there is one big problem with the proliferation of netbooks: the shrinking profit margin per unit. Traditionally, ultra-portable laptops meant higher premium. But in this age of netbooks, people are actually expecting to pay less for a product with less weight and footprint. Times have changed. Besides, are netbooks really cheaper to manufacture in the first place? If you ask me, computers are computers and the distinction between a netbook and a proper laptop is blurry at best both technology-wise and cost-wise.
• The rise of netbooks is presenting an opportunity to Linux in picking up some real consumer market share for the first time. Compared with Microsoft Windows, Linux costs much less on manufacturers who are then able to pass on the saving to consumers. Already 1/3 of Dell netbooks are shipped with Linux. Next-door neighbours running Linux on their tiny computers – imagine that.
• Netbooks may be good news to some, but not to Microsoft. It boils down to two predicaments: Netbooks are cheap and don’t have the grunt. Cheap means the hidden licensing cost of the Windows operating system must either stick out or be compromised. Not having the grunt means netbooks are not Vista-capable. In order to ship Windows with netbooks, Microsoft is forced to keep loading the legacy Windows XP operating system instead of retiring it. That’s the drive behind hurriedly releasing Windows 7, which is believed to be resilient enough to run on netbooks. Until that eventuates, netbooks remain a threat to Microsoft’s traditional profit model: sell huge numbers of expensive PC’s capable of the latest Windows OS. (Update: Microsoft now says Windows XP for netbooks won’t go away.)
• Being the smarty-pants it always has been, Apple has refused to jump on the netbook bandwagon. And it probably won’t budge in the future, either. That is because inventing cheap Mac portables will do nothing but hurt Apple’s premium products. Unlike other industry players, Apple controls both hardware and software and can simply rise above the chicken game happening in the rest of the market. Besides, Apple has already released ultra-portable gadgets that have sold and will sell loads more than netbooks ever will: the iPhone and the iPod touch. Apple won’t do anything to disrupt its profitable product portfolio. Steve Jobs might release an ultra-portable netbook that carries the Apple logo, but it will have to have a price tag of US$2,000 and not US$500. Oh wait, he has already done that with the MacBook Air.

Choice means old rules don’t apply
Being a consumer of both Microsoft and Apple products myself, it is interesting to observe the market dynamics arising from trends like netbooks. Although I may sound particularly critical of Microsoft, I hope to see its products and technologies continue to thrive partly because my own livelihood largely depends on them. That said, I do think it is time for Microsoft to really establish a sustainable profit model outside the traditional way of selling Windows and Office licences (and I know there are a lot of initiatives). Level playing fields are emerging on all fronts as consumers and corporate customers begin to see real options beyond slavishly keeping up with the latest from Microsoft.

2009-03-01  »  JK