How Netbooks Impact Microsoft and Apple

If cheap and "kind of works most of the time" were the only criteria for buying a computer, Apple wouldn't exist. And if netbooks were the only answer, why did Apple laptop sales grow 50% faster in November than Windows, according to NPD's US retail figures?

Moving Boxes

Windows PCs are a commodity business. The drive is always to the lowest price point, because that's where the volume is. For many users, there is little difference between PCs apart from price. Brand name quality means little.

The problem with a commodity market is that it gives PC makers razor-thin margins, so miscalculations quickly lead to losses. In a down market, there is much less room for recovery. Look for more and more PC makers to go out of business.

Most of the recent growth in Windows laptops was in the so-called netbook market, low-cost laptops like those sold by Acer, Asus, and others at less than US$500. Apart from being low cost - with specs to match - netbooks are more portable than standard laptops, providing you don't mind working with a smaller screen.

They all use the low-cost Atom processor, which Intel currently restricts to laptops with screens less than 10.2". According to DigiTimes, "Hewlett-Packard (HP) is in negotiations with Intel seeking a slackening of its current restrictions as HP hopes to use Atom in new mini-note PC models with larger screen sizes." So screen size may not be a restriction for much longer.

Intel supplies all the processors to this market and will want to keep this monopoly going for as long as possible, but agreeing to Atom's use with larger screens will cut into sales of more expensive Intel CPUs. It will also accelerate the move away from desktops, as the laptop premium gets less and less. In any case, AMD, the longtime #2 in the x86 processor market, will find it difficult to regain market share and profitability.

Windows XP Lives

The "netbook market" has another advantage over standard Windows laptops. Windows XP, not Vista, is loaded as standard. Many Windows users are more familiar with XP from work, where it is still the standard in most departments. Some prefer and/or need XP compatibility for ease of use and so they can use exactly the same versions of software at home and work. So buying a cheap laptop - good enough to keep them going until they see what happens with Windows 7 - makes a lot of sense. Also, the $150 that Dell charges for shipping XP on a more powerful laptop goes quite a way towards paying for a netbook.

Users have been conditioned to buy a new computer when they want to upgrade to a new Windows release. While Vista can run reasonably on the minimum specified hardware, you do need to remove all the crapware.

Rather than do this, most seem to prefer buying that new, more powerful computer.

The Windows 7 Future

This gives Microsoft a big problem with Windows 7. Only those who need to or see a compelling advantage from Windows 7 will buy a new computer in a down economy. According to a ZDNet article, Windows 7 Beta 1 Performance - How Does the OS Compare to Vista and XP?, performance of the current beta, tested on two desktops, is better than Vista and XP.

However, until Microsoft can show good Windows 7 performance on netbooks, XP will remain the standard there. This means less revenue for Microsoft as netbooks gain market share from other Windows laptops because of the lower fees for XP.

The widespread use of XP in netbooks and business will slow down the adoption of Windows 7. Until the economy recovers, businesses will try to concentrate IT spending on maintaining current systems and software which gives them a competitive advantage. The cost of migrating current systems to Windows 7 will stop them. This means that Microsoft will probably have to support XP longer than it wants to, and while XP use is widespread (currently used by three times as many users as Vista), it will remain the main target for malware.

Even when Microsoft has Windows 7 running on netbooks, it will have difficulty not supporting XP there or risk a further expensive investigation into it's business practices. Since netbooks are a low cost market, Microsoft may have to sell Windows 7 at costs similar to XP to persuade manufacturers to adopt it.

The other risk is further fragmentation of the Windows market. Microsoft still has to support Windows NT because of how many systems in finance run it. With the amount of red ink around Wall Street, migrating away from NT is not a high priority.

Parallel Markets

Apple suffers from the same "new computer" problem as Microsoft. Unless users feel the need to move on and are willing to look at a new computer and OS, few will look at the advantages of OS X. Although Apple has a base of enthusiastic Mac users, they too will have less money to spend until the economy recovers, and the size of the base means that Apple needs a constant stream of converts if Mac sales are to stay at the same level.

In this sense, Windows and OS X are two parallel markets. Once you have decided to use OS X, there are few who are prepared to seriously consider moving back to Windows, but even now few Windows users are willing to spend the time to move to Macs unless they see immediate advantages. Most of the potential buyers of an Apple netbook would otherwise buy a MacBook.

Perceived Value

Provided Apple can keep the perceived value of MacBooks high enough, it will continue to grow market share.

While some suggest that Apple should sell a netbook because "we live in a Wal-Mart kind of world", just because Walmart is adding sales volume doesn't mean that everyone shops there - or even wants to shop there. Provided Apple can keep the perceived value of MacBooks high enough, it will continue to grow market share. The recently released Unibody MacBooks essentially delivered MacBook Pros at a much cheaper price, if you can live with a 13" screen.

According to an NPD study of US retail, Apple had 66% market share for the above $1,000 price category - and 14% overall. In an August 2008 NPD study, Apple's market share for the previous 12 months in the above $1,500 price segment was 69%, up from 41% in the August 2007 survey. In other words, although HP etc. offer similarly spec'd laptops at a similar price, Windows systems aren't worth as much for most retail customers.

In November, US retail market share was slightly lower because Apple sold 38% fewer desktops. Since many are looking for a refresh of the iMacs in the January-March quarter, a drop there shouldn't be too surprising.

The Education Market

However, the education market is at risk, particularly the school market, where Apple is the largest supplier. With US governors busy cutting every budget they can, there will be few, if any, large computer contracts available until the economy recovers. Indeed, many schools will find it difficult to replace the computers they have, so the longer useful life of Macs may put Apple in a strong position when the recovery comes.

For Apple, an alternative approach to the netbook is to build around the iPod touch and iPhone. Make a good, lightweight USB keyboard with a stand for holding the iPod touch at a good viewing angle. This makes it easy to type notes in classes, write long emails etc. It is also much easier to use than the usual laptop on planes when you travel in coach. The advantage of this approach is that it adds to the value of the iPhone OS platform and moves it even further towards becoming the handheld computing platform of choice.

What could also work well for Apple is a MacBook Air with a smaller screen as an ultimate portable. Many owners have a strong attachment to their 12" G4 PowerBooks. With a 10.2" organic LED (OLED) screen, a smaller battery could be used to reduce the weight yet still offer the same life.

Samsung is the #1 OLED manufacturer, so it should be interested in working with Apple and giving a substantial discount to build the market. However OLEDs are expensive at present, so the "ultimate portable" certainly won't be priced at $500.