In-Depth

Spotlight on the Netbook

While netbooks pose problems for Microsoft and partner business models, most indications show this computing trend is here to stay.

• By Rich Freeman
• July 01, 2009

Has there ever been a hardware craze hotter than the netbook?

The pint-sized, bargain-priced laptops have only been available since October 2007, when ASUSTeK Computer Inc. introduced the ASUS Eee PC, a two-pound device with a seven-inch

screen that listed for $299 and up. Yet in 2008, hardware makers sold 11.2 million netbooks, according to Framingham, Mass.-based analyst firm IDC, which expects that number to jump nearly 90 percent to 21.2 million in 2009. Not bad given that IDC also sees the ravaged economy holding traditional notebook sales down to just 4.3 percent growth this year. Meanwhile, ABI Research Inc., of Oyster Bay, N.Y., predicts that PC manufacturers will ship a staggering 139 million netbooks in 2013.

"The market grew out of nothing pretty quickly," observes Philip Solis, a principal analyst at ABI.

Most of that growth has benefited mainstream retailers so far, but hardware resellers such as EBC Computers LLC, a Gold Certified Partner headquartered in Salt Lake City, are starting to see mounting demand too. EBC first began offering netbooks late in 2008. Today, they account for about 10 percent of its PC sales and are attracting a new class of price-conscious buyer to the company's three stores. At a few hundred dollars each, netbooks bring in less revenue than a conventional notebook or desktop, but company owner Eduardo Bedoya is undeterred. "Everything I can sell is an opportunity," he says.

The picture is murkier for Northern Computer Technologies Inc., however. The Burnsville, Minn.-based system builder and Gold Certified Partner reports surging interest in netbooks, especially in the education market. "The price point is very enticing for schools," notes Northern Computer's Vice President of Marketing Todd Swank. But that momentum is a mixed blessing, he adds, as margins on netbooks are razor thin. "It's a threat to anyone who has made their living selling computers," Swank explains.

So are netbooks the next big thing or a menace to the PC ecosystem? Like it or not, hardware and software makers-including Microsoft-will find out soon enough, as the netbook is here to stay. "It's not a fad," says Swank. "It's a new paradigm."

Good-Enough Computing
Experts credit the netbook's appealing combination of compact size, light weight and low price for its meteoric ascent. Small enough to slip into a backpack or briefcase and usually weighing in at just a few pounds, most netbooks sell for under $500. That puts the advantages of a slim, mobile PC within reach of almost any budget. Moreover, though they generally rely on low-power processors like the Intel Atom, netbooks stand up well to a typical user's needs.

"What do I do 90 percent of the time? E-mail, Web [and] office productivity," observes Bob O'Donnell, IDC's program vice president for clients and displays. Netbooks, he adds, handle all three tasks just fine. "They represent 'good enough' computing for a lot of people," O'Donnell says.

Just the same, O'Donnell expects the netbook's limitations to keep it from dominating mobile computing. With their small displays and cramped keyboards, netbooks make fine travel companions but poor primary machines. As a result, while netbooks should account for 14.2 percent of laptop sales this year and 15.3 percent in 2010, that's about as high as their market share is likely to go, O'Donnell predicts. Users will generally employ them as a lightweight complement to a more powerful desktop or notebook machine, rather than as their sole PC.

What's more, businesses are exhibiting little appetite for netbooks so far. "My sense is there are very few-if any-large-scale deployments," O'Donnell says. Indeed, no more than 15 percent to 20 percent of EBC Computers' netbook sales involve commercial buyers, and many IT providers that specialize in services rather than hardware report even less uptake.

"Among our customers, we've seen absolutely no demand," says Dorothy Fitts, president of Innovatek Microsystems Inc., a small business solution provider and Registered Member of the Microsoft Partner Program in Millerton, N.Y. Same goes for Big Sur Technologies Inc., a Gold Certified IT consultancy in Tampa, Fla. "It's more of a consumer-oriented device at this point," states Don Zurbrick, the company's head of sales and marketing.

That may be a temporary phenomenon, though, according to Rob Enderle, principal analyst at Enderle Group, an IT research organization based in San Jose, Calif. Business buyers will find netbooks more attractive once models equipped with biometric sign-on systems and other heavy-duty security safeguards start appearing later this year, he predicts. What's more, such devices should be perfectly adequate for employees who travel a lot and have basic requirements. "A netbook would probably fit most salespeople very, very well, and in theory you're saving a half to two-thirds of the purchase price," Enderle notes.

The rise of Software as a Service (SaaS) stands to further accelerate corporate netbook adoption. Available from companies such as Salesforce.com Inc. and NetSuite Inc., SaaS solutions are Web-based applications you can run from any device with high-speed Internet access and a Web browser. According to December 2008 data from Gartner Inc., the Stamford, Conn.-based analyst firm, 77 percent of North American companies plan to increase their use of SaaS over the next year. Because most SaaS solutions require little client-side processing power, many observers expect Web-based computing and inexpensive hardware like netbooks to blossom in tandem.

Pain and Gain
That's not entirely good news for hardware vendors. Netbooks may be flying off shelves, but they're holding back PC revenue growth in the process. Thanks largely to netbooks, for example, unit sales of Windows-based computers in the United States jumped 22 percent this February, according to The NPD Group Inc., a market research firm based in Port Washington, N.Y. Yet revenue rose only 6 percent, indicating a steep drop in average selling prices.

Netbooks are bringing Microsoft a mix of pain and gain, too. On the plus side, Microsoft believes netbook sales are extending rather than cannibalizing PC sales. "Microsoft sees the arrival of small notebook PCs in the market as an opportunity for growth, since we're hearing that these are being used as additional PCs in most households," says Don Paterson, director of marketing for Microsoft's Windows Client group.

Furthermore, Microsoft claims that its Windows operating system dominates the netbook market at present. According to internal company data cited in a February 2009 press release, Windows netbook share stands at over 80 percent, up from just 10 percent in February 2008. Even better from Microsoft's perspective, most of that jump appears to have come at the expense of Windows' archrival, Linux. Early netbook models were almost universally Linux-based, thanks to the open source operating system's slim footprint and free pricing. But IDC expects Linux's share of netbook sales to plunge from 24 percent last year into the single digits by the close of 2009. Buyers, O'Donnell says, appear to prefer netbooks that function the same as the computers they use at home and work, most of which run Windows.

Still, the netbook's skyrocketing popularity poses serious problems for Microsoft. For starters, most netbooks lack the horsepower to run Windows Vista, Microsoft's latest Windows release. As a result, Paterson freely concedes, the majority of Windows-based netbooks today run the Home Edition of Vista's lower-priced predecessor, Windows XP. The upshot for Microsoft has been a sharp income drop. In the third quarter of the company's current fiscal year, for example, Windows client revenue sank 16 percent versus the previous year, a dip Microsoft blamed on "PC market weakness ... and a continued shift to netbook PCs."

Furthermore, some observers believe Linux may be poised for a comeback in the netbook space. Several hardware manufacturers, including Hewlett-Packard Co. and ASUSTeK, are evaluating whether to offer netbooks based on Android, Google Inc.'s Linux-based smartphone OS. And U.K.-based chip maker ARM Holdings plc, whose processors power the BlackBerry and Apple's iPhone, predicts that as many as 10 ARM-equipped netbooks running Linux, Android or a similar OS will reach market this year, according to published reports. Priced at around $200, they could prove popular too. Robert Castellano, president of New Tripoli, Pa.-based market research firm The Information Network, expects ARM-based devices to command 55 percent of the netbook market by 2012.

Microsoft is counting on Windows 7, Vista's forthcoming successor, to help it counter that threat while reviving client revenues. The new operating system will offer a smaller footprint and longer battery life, the company claims, enabling any of its six editions to run successfully on a netbook. "Moving forward, Microsoft is committed to making Windows available on every PC, and that includes small notebook PCs," Paterson says.

All well and good, O'Donnell notes, but there's a catch. While Microsoft has yet to announce final pricing for Windows 7, most SKUs are almost certain to cost more than netbook buyers are currently paying for Windows XP. That could dampen sales of Windows 7 netbooks-or drive consumers back to Linux-based devices. Yet cutting those prices to keep Windows netbooks affordable would eat into revenues.

The Starter Edition of Windows 7 may be part of Microsoft's strategy for addressing that dilemma. Expected to be the least-expensive version of the product, it will also offer the fewest features. Customers will have the option of upgrading to a more functionality-rich edition with a few quick clicks, but only if they pay a fee. That could be a tough sell, O'Donnell says. Buyers may balk at paying extra to upgrade a device they purchased mostly for its super-low price, especially because Linux- and Windows XP-based netbooks deliver a complete feature set without extra charges.

No Going Back
To further complicate matters, Microsoft will have to solve its pricing quandary amid continuing change in the mobile computing marketplace. For example, Verizon and AT&T are two of several wireless carriers currently planning to offer netbooks for as little as $50 when purchased with an Internet service plan. Meanwhile, smartphones increasingly offer netbook-like functionality in an even smaller package. Take the iPhone, for example, notes Michael Cherry, a lead analyst at Kirkland, Wash.-based research firm Directions on Microsoft. You can browse the Web and use e-mail on it, there are thousands of applications to choose from, and it's available for a few hundred dollars with a two-year contract. "Not that far from now it's going to be very, very hard to delineate between the smartphone and the netbook," Cherry predicts.

Or between the netbook and the "nettop," others add. ASUSTeK, MSI Computer Corp., Acer Inc. and other hardware manufacturers have recently begun introducing these small, inexpensive devices, which are to the desktop PC what netbooks are to the laptop. Enderle believes budget shoppers may ultimately prefer buying a nettop and a smartphone to shelling out for a full-blown desktop, a netbook and a cell phone. Only time will tell, however. "It may take a decade for us to work this all out," he notes.

In the meantime, Swank knows at least one thing for certain: Whether netbook or nettop, the cut-rate PC isn't going away any time soon. Design trends come and go, but when electronics get cheap they stay that way. "You don't go backward on price," Swank observes.