Blurring of Lines Could Hurt Netbook Sales

by Suneet Tuli    May 13, 2009

In August 2008, Gartner predicted that the market for netbooks could
explode to 50 million by 2012.  That would be almost 40% of the
Mobile-PC (notebook) market, and a significant increase from the 11%
level in 2008.  By March 2009, other researchers started forecasting
that netbook penetration would plateau at 18.9%.  Does this signal a
slowing of the netbook market?  To answer this question, we need to
better understand, exactly what a netbook is and evaluate recent trends.

What is this product that, in less than 5 years, is expected to reach
such proportions, exhibiting faster growth than any other product in
the history of consumer electronics.  

In the shape of smaller-sized laptops, the netbook market exploded in
the late 2007 holiday season as consumers swamped to purchase low-cost
devices intended to allow easy access to the internet when mobile. 
These devices were not laptops or mini-laptops; they were positioned as
‘netbooks’ - mobile devices for easy web access.  
Unfortunately, the initial experience has been rather trying, and this
has been exhibited by the high level of returns faced by retailers for
netbooks.  Initially, most netbooks were bundled with only LAN and WiFi
connectivity.  Entry level customers that were drifting toward netbooks
were also looking to avoid the complexity of laptops and traditional
PCs.  

Such customers in most cases did not have existing broadband services,
hence no LAN or WiFi connectivity - and rarely found WiFi hotspots
conveniently while mobile.  Network operators seized this opportunity
and started bundling 3G dongles with netbooks in order to provide them
real mobility.  But in the traditional nature of the operators, this
broader connectivity was provided with exorbitant monthly fees and long
term contracts.  The complexity of connecting and configuring the
dongles, left most netbook customers unsatisfied and unable to fulfill
their requirement for a simple entry-level anytime/anywhere web-access
device.

Despite all its shortcomings, the netbook market continued to grow
exponentially in 2008.  Even Microsoft reported lowered revenue from
Operating System sales due to the wide spread adoption of Linux in the
burgeoning netbook market.  Simultaneously, the industry was looking
for a solution to the high level of returns, but the shift from WiFi to
3G dongles didn’t seem to solve it.  The consumer wanted mobile web
access, but the industry was executing poorly.  

Looking for a solution, manufacturers started to supplement 7" and 8.9"
screen devices with 10" devices, and with Windows XP instead of Linux. 
Some manufacturers are now planning to even release 12" screens for
netbooks.  This evolution is blurring the line between laptops and
netbooks.  The difference in size of 10" or 12" netbooks and 14" entry
level laptops does not offer substantially improved mobility.  The
bigger casualty of this transition has been the price.  Netbooks gained
popularity as they were priced at less than half of what you could buy
an entry level laptop.  The change in operating system resulted in more
expensive processing power and requirements for greater memory. 
Coupled with the larger screens, the cost of these new netbooks reached
the same range as that of entry-level laptops.

Popular British magazine — PC PRO’s April 2009 issue ran a provocative
lead article on its front cover, titled: "Netbook Killers".  It
reviewed a number of entry-level laptops, priced around GBP300, the
same price-level as the new generation of 10"/XP netbooks, and
questioned why one would choose a netbook.  The entry-level laptops ran
a newer version of Windows (VISTA), provided better processing power
and incorporated a DVD drive - why would a consumer choose lower
processing power, skip the DVD drive and use an older operating system,
especially if there was no improved mobility or pricing.

In making its forecast of 50 million netbooks for 2012, Gartner based
its prediction on the cost of netbooks dropping to $100. 
Unfortunately, they have instead risen from the $200 level when Gartner
made its prediction in 2008 to the current average of $450, butting
heads against entry-level laptops.  This provokes magazines to publish
titles proclaiming ‘Netbook Killers’, and updated research to forecast
netbook penetration of the Mobile PC market leveling off at 18.9%,
instead of reaching 40%.

To avoid an early demise, netbooks need to find their soul.  For the
industry to continue its upward trajectory there needs to be focus on
providing simple, inexpensive mobile web access.  Device form-factors
need to provide better mobility than laptops.  The price trend needs to
be downward, not upward.  The upper limit for netbook pricing should be
half of entry-level laptops.  These are the key ingredients that
allowed this product category to take off in the first place, and are
necessary for continued growth.  Manufacturers that focus on the real
reasons for the initial success of netbooks will win, and those that
transform netbooks to notebooks will be pushed out of the market.