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Netbooks: The Race to the Bottom Has Begun

Seems everyone’s talking about netbooks these days. So I will, too since I’ve seen so much punditry of late that says Apple can’t charge their usual prices anymore, the economy is in the dumps, netbooks rule, Apple can’t ignore the market, etc. 

Yes, we see a lot of figures going around about millions of netbooks sold, but what’s it mean to the bottom line? Are Acer, HP, Lenovo, etc. showing more profit from these things? These same companies will sell you a notebook that’s supposedly half the price of Apple’s, but that’s not where the money is. It’s cutthroat down there as each vendor tries to shave another penny off the price. They hope to draw you in with the price and up-sell you. 

Of course, netbooks use lower-cost components than cheap laptops, but they’re priced accordingly. If there’s precious little profit in a $699 laptop, I find it hard to believe there’s a lot of money in a netbook priced $250 less. And they’re getting even lower than that.

With the recent HP and Lenovo price cuts, it appears the big guys are shaving what’s left of the netbook’s profits. Won’t Acer, MSI, etc. have to follow suit? Yes. We’ve seen this in the PC industry time after time. What’s the point in this race to the bottom anyway? 

I think netbooks are primarily just the new cheap laptop. I can imagine someone shopping by price believing that $700 is a bit much when they can get something similar for two-thirds of that. After all, we’re talking about a Windows XP machine (sorry, Linux), it’s going to look “the same” to a lot of uninformed buyers. It wouldn’t surprise me if HP and Lenovo would prefer not to even play here, but they have no choice because if they don’t draw in that price-conscious user they can’t up-sell them to something better now or in the future.

However, the same rules don’t apply to Apple. While it’s possible to imagine someone thinking a netbook is “as good” as a cheap laptop, I don’t imagine any user thinking the same when comparing a netbook and a low-end white MacBook. No way. They’re worlds apart. I believe any user allegedly buying a netbook instead of a MacBook was never getting the Mac anyway. Apple knows this. If they get in this game, it will be with a complete product — more expensive than most netbooks — from which they’ll make a reasonable profit and not have to hope for up-selling. 

With the netbook, the PC industry may very well be creating a new monster. It seems likely netbooks will take sales from the low-end laptop market. In other words, all these PC makers are cannibalizing their low-margin product with something just as low-margin, if not more so.

And what if, instead of cannibalization, the netbook has actually created a new category of buyer? Someone who wouldn’t spend $700 on a PC but will spend up to $500. If so, then the PC industry has two razor-thin-margin products. I’m not sure how this is supposed to be a Good Thing™ for them. The PC netbook could be the hardware equivalent of Facebook: millions of users and no way to make money.

This is going to be fun to watch.

66 Responses to “Netbooks: The Race to the Bottom Has Begun”

  1. It’s kind of funny when people cite an article as “proof” of something without reading it:

    “Piper Jaffray’s Mr. Munster said he expects the company to recover in coming months, and said he is maintaining his prediction that Apple next year will increase shipments by 10%, while the rest of the industry falls 5%.

    Shaw Wu, an analyst at Kaufman Brothers, expects Apple to sell 2.7 million computers in the current quarter ending in late December, a 17% increase from a year ago. He expects industry-wide PC shipments this quarter to be about 85 million.

    Despite short-term weakness, analysts expect Apple’s products to remain more profitable than many rivals’ computers. The MacBooks are forecast to deliver close to 20% profit margins, compared with 6% or less for competitors, said Toni Sacconaghi, an analyst at Sanford Bernstein & Co.”

    See that “short-term” phrase? See the comment about margins? See the analysts’ predictions of an uptick in sales next year for Apple, exceeding industry averages?

    Sales of all luxury items drop during more than non-luxury during recessions, but it doesn’t mean that the “smart” thing for Bentley, Rolls Royce, and Mercedes to do is to introduce cars that compete with Hyundai and Kia — which is what the other poster is recommending. Stock in companies that sell luxury items tends to amplify the economy, with economic booms and busts playing more heavily on the stock.

    If Apple were “on the same playing field as Dell, HP, etc.,” then they would long ago have folded. They have unique, luxury products. Show me any HP or Dell notebook that, physically, compares to the paper-thin MacBook Air. I’d pay a premium just for the ability to run OS X (without hacking something together with unsupported patches to run it on non-Apple hardware). So would most other Mac users.

  2. “Finally, for those of you that don’t care if the company makes any money, it’s more money for you, etc. Well, I don’t know where you work for a living, but I hope you have higher expectations of your employer. If they’re barely getting by with a “we lose money on every one but we’ll make it up in volume” strategy, don’t be surprised if you’re bounced to the curb.”

    I think choosing a company and rooting for it like a sports team is so silly. Obviously I hope that the company that I work for does well and I do my best everyday to make that happen. In a more general sense, I also hope that all companies do well, not just for the sake of the board members or stock holders, but also for the well-being of the rank-and-file employees.

    To quibble over profit margins and business models is completely retarded unless you have stake in the company. As a consumer you want to get the best deal you can, and in the netbook market it’s not Dell or Acer or MSI that is winning, it’s the consumer.

  3. One thing I am not seeing here is the point that where the netbook cuts profit margins on hardware, it opens up new opportunities for software as a service. As a mobile user, I have a bigger PC that I don’t like to tote around with me. A netbook, with subscriptions to sites like, etc. is a great solution.

  4. Fun to watch?

    Data showing that your theory is wrong: Apple is not immune

    Mac sales dropped 1% last month vs a growth of 2% for PCs….even with a new line of MacBooks out. The same rules don’t apply to Apple? Please. I know many of you are swimming in Apple’s Koolaid, but realize that they can’t defy gravity. They’ve grown their business model and acquired a larger market share for one simply reason: not because Apple is great, but because everyone else got lazy. Apple took advantage of a lack of innovation for a period of time, but now the sleeping giants have realized that they’ve got to pump out products that consumers want – and they’re doing it.

    Apple is on the same playing field as Dell, HP, etc, whether you want to admit it or not. Luckily for Apple, they know the market they’re playing in. During the last earnings call they cited about a 3-5% reduction in gross margins and even offered lowered guidance for fiscal year 2009. Why do you think their stock has been getting hammered? It’s down 52% since Jan 1, while the Dow is “only” down 35%. Apple is under-performing against the broader market. Why? People know they can’t continue to pull of the same nonsense in the future, at least not in notebooks. If Apple wants a higher margin product, they need to stick to the iPhone and iPod.

    Also, the author makes a silly argument about how the makers of netbooks are operating on reduced profit margins and that this equals an unsustainable business model. Instead of providing proof, he simply goes on what can only be described as a scare tactic and brings up the idea that people working at such companies should be worried about getting “kicked to the curb.” I don’t even know how to respond to that nonsense. Please use concrete examples instead of making vague references to business models you clearly know little about.

  5. Petey Wheatstraw

    I have a small form factor HTPC for watching movies. I have a gaming laptop that I pull out when I want to WoW. And soon I will have a small netbook specifically for checking e-mail and Facebook and so forth. I could have paid twice (or in some cases, three or four times) as much for Apple products to do the same things but I don’t see the point. Speculating as to why Apple should get into the market by offering affordable options is just so much wankery.

  6. Macbooks for a lot of users are a worse choice than a netbook. I know because I own both a macbook and an acer one. The macbook is too big, and too expensive. If it gets stolen or damaged on the road, that’s painful to my wallet. The netbook I’m willing to take the hit on. At the same time, while on the road, the macbook doesn’t do anything the netbook can’t that I really need. The macbook is a fine choice for a desktop replacement, which is why I bought it, but it’s just too big, and too powerful/expensive to use as a true mobile machine.

  7. Luis Alejandro Masanti

    I think it was Wired that yesterday posted an article in “subsidized netbooks”… a.k.a. netbooks+2 years access contract.
    This can open a whole new world!

  8. MyRightEye

    Typing this, in bed, on my Lenovo S10, running, wait for it, Mac OS X 10.5.5.

    I have been needing a laptop this tiny for 10 years. Apple is aware of the demand, but won’t make it. There loss. Lenovo just got the profits Apple could have had. Yes, it’s a piece of noisy plastic junk compared to my MacBook Pro, but I don’t care, because it’s so freaking small that I can take it EVERYWHERE in one hand, and with a 6 hour battery. Now i will admit, if Apple made a machine this size for twice the price, I would sell this and buy it, but they don’t, so I can’t.

    Wake up Steve, if you won’t give us what we demand, we’ll take your OS to someone else.

  9. Dave,

    Apple does not have to play in the commodity computer market — any more than Bang & Olufsen, Krell, Linn, Conrad-Johnson, and Rega have to play in the commodity audio market. You don’t see Rolls Royce and Maybach rushing to make low-cost cars to compete with Hyundai and Kia.

    There are many consumers who are unconcerned about whether a notebook computer costs $600 or $1500. They want to know if it will make them more productive and happier. Being able to get the service and face time with someone who’s several notches above the “Geek Squad” means a lot to those who view the system as a tool with which they do their work. They also recognize that, where money is an issue, the resale on an Apple system means that their total cost of ownership is usually a lot less. Go spend $700 on an HP laptop today and spend $1500 on an Apple laptop. In a year, sell each on ebay and then tell me how much you saved with the HP.

    Apple doesn’t lower prices for several reasons:

    1. Profit. They are a for-profit company and they want to set a price point that maximizes their profit. Want to complain? Complain about the fact that you can get a five-license family pack copy of OS X for under $200 and Microsoft is gouging people that much for one license. Another cost of ownership item to consider.

    2. Supporting expensive retail stores and service centers. Their customers like the walk-in service and support. If they lose that, they lose customers.

    3. Perceived value. Want to lower sales of an expensive perfume? Lower the price. Why should Apple be saying “hey, we’re as cheap as Compaq” and lose the prestige of the Apple brand?

    4. What you get… The iPod outsells every other portable music player made, despite being about the most expensive one. Why? Because it works better. It’s built better. The interfaces, both user and computer, are better thought out. It’s why you can plug your iPod into any number of new cars but can’t do the same with a Zune, Sansa, Archos, etc. (and, no, I’m not talking about an analog cable from the headphone jack — I’m talking full control from the head unit complete with album art, database of music, etc.).

    Oh, and before you accuse me of being a “snob” or “prosumer”, I’m an engineer who’s been in the computer field since before IBM introduced their PC. I’ve built more computers than most people have used. I’ve installed and used every OS from CP/M-80 to BeOS to MS-DOS to Window (1.0 on up). I just bought my first Mac less than two months ago and it is so superior to the Windows stuff I’ve put up with recently that I’m a convert.

    And I may be springing for a $2K+ Mac Pro — because my time is worth something.

  10. Wyatt, I use a zippered portable dvd sleeve/case by bodyglove, it has no handles, you are correct, anything with handles looks like a purse and gets giggles in the boardroom. the larger laptop bags are ok too, cause you can fit other stuff in there with your netbook (lunch, books etc).

  11. “The same rules don’t apply to Apple”, uh.. yes they do. Apple has and always will be a company out to make a profit from the retard, consumer, prosumer, snob or whomever has the bills to hand over. Saying that the same rules do not apply to Apple is nonsense and nothing more than a lowly fanboy attitude.

    Apple need to lower their prices by a hundred or more, not by ten bucks, in order to continue to grow their market share. If they do not, they will slowly sink again into the sub-5% market that they only recently crawled out of.

    If Apple lowered their prices (BEFORE any discounts,) offering a netbook at $300, Mac mini at $350, iMac and Mac Book at $500, Mac Book Air at $800 and Mac Book Pro / Mac Pro at $1000; without a doubt their market share would increase from 8% to 18% within 6 months.

    They CAN afford to do this and they would still profit. So why don’t they?


  12. Some quick comments:

    ** For those of you who think I’m missing the point of netbooks, or don’t understand why people buy them, it doesn’t matter. My article stated it didn’t matter if they stole share from cheap laptops OR if there’s a new category of buyer. The fact remains that a company experiences a cost of designing, manufacturing, marketing, distributing, and supporting these things. In the real world, a company would wish to make all that back and then some. Therein lies my question.

    ** For those of you trying to explain how netbooks have or add value, please find in my article where I argued against the value a netbook could provide. I can certainly see their appeal. But, again, this has nothing to do with turning a reasonable profit.

    ** Finally, for those of you that don’t care if the company makes any money, it’s more money for you, etc. Well, I don’t know where you work for a living, but I hope you have higher expectations of your employer. If they’re barely getting by with a “we lose money on every one but we’ll make it up in volume” strategy, don’t be surprised if you’re bounced to the curb.

    In fact, for those of you that really love netbooks and what they can do, why WOULDN’T you be concerned about whether the business model is sustainable?

  13. Hi,

    I own all macs, but since seeing these really cheap netbooks, I have seriously been considering getting one. I think it would be great to have if I have to send one of my Macs into the shop. In addition, these could be great for traveling. My only problem is that I’m unsure what type of case I should use as a normal laptop bag would be way too big for these little guys. And if I did get a much smaller case, wouldn’t it look like a ladies purse?


    Wyatt Lehmenkuler

  14. Fun to watch?

    #15..I would hope that if you paid $300 (or $400) for an iphone, that it could at least do the same things as a $250 notebook.

    wait a minute…on an iphone, can i…

    view flash-based websites? nope
    edit word docs? nope
    …edit any docs? nope
    copy/paste? nope
    multi task? nope
    install any application i want? nope
    change my background? nope
    delete all the icons on my desktop? nope
    instant message across different networks? (even messaging on single networks suck) nope
    video chat? nope
    connect to bluetooth devices? nope
    replace the battery? nope

    You must be retarded if you think it’s possible to do the same things on an iphone than on a netbook. I have an iphone, and while it’s an excellent smart phone (despite its flaws), I’d shoot myself the day I had to rely on it as a computer. You must also think I’m stupid if you think I consider your post to be a legitimate response instead of a failed attempt at defending the un-defendable.

  15. @Joey

    Maybe it’s because I don’t have huge hands, but I find that I can type about the same as full keyboard speed on my Eee, which is something I can’t do on my ipod touch. The netbook market is not synonymous with the pocket device market.

  16. LeoBatfish

    As a tech consumer (and NOT a tech shareholder), I have little interest in whether or not the manufacturer is making a profit. Over the past three decades, I have seen little correlation between manufacturer profit (or even loss) and product quality. If a company chooses to shave profits, I have no problem with that, because “that much less money in their pocket” = “that much more money in MY pocket”.

    And yes, I agree that the netbooks (or any other comp in that price range) do indeed create “a new category of buyer”. Just like PC makers long ago created a category called “laptops for people who can’t afford $1000”, a category whose buyers add up to a LOT of non-Mac users.

    One of my disappointments since 1984 (when I bought my first Mac) is that the company making the “computer for the rest of us” has always assumed that “the rest of us” are people to whom money is no object. FWIW, I am still mainly a Mac user . . . but the key reason for this is that my employer paid for it. Out of the last ten or so computers that I bought with my own money, only one was a Mac, and that was mainly as a demo unit for my students to use (so that they’d realize that Macs have come a long way since the original “fruity iMacs”, which was all that my classroom had at that time).

    And last, I’ve had bad luck losing things when traveling (which is also the reason why I use $25 SanDisk MP3 players instead of an iPod — that and the fact that I shun proprietary formats for consumer reasons). And I would be MUCH less nervous about toting around a $300-ish netbook than even a white MacBook which cost three times that.

  17. Fun to watch?

    I love speculation…it’s so much fun. If you think this isn’t going to affect Apple then you’re smoking the good stuff. You’re right in one thing though, someone that purchases a netbook was probably never going to get a MacBook anyway. However, you’re ignoring the fact that someone who chooses a netbook over an XPS was probably never seriously considering the XPS in the first place. But that’s not the point…the point is that the netbooks add value, and also provide a product that wasn’t previously available. Dell was recently offering the Dell Mini for $100 if you purchased an XPS notebook over $1000. And here’s where Apple runs into a problem. In the netbook vs macbook match up, there’s little to compare…you’re in apples vs. oranges realm. But when you compare an xps + netbook for $1100 vs a macbook you’re in a completely different ballgame: 2 computers for the price of one. Kind of a no-brainer, eh? And that’s the point – nobody is cannibalizing anything here. It’s about adding value for your customers and providing the best bang for your buck in an environment that demands it. Think about it – mommy and daddy get a new XPS for the house, and get a second notebook for the kiddies for just $100. Or what about the issue or portability? People might decide to pick up a second computer for traveling….again not cannibalism – we’re talking about picking up a second machine (or going w/ a portable netbook for $250 instead of going for the Macbook AIR for 10 times the price.) There’s also the idea of having an extra notebook in the kitchen or living room to hop on, which is why my xmas present to myself this year will be a netbook. Oh, let’s also not forget the 5 billion people on this planet that cannot afford a $1500 laptop. Leave it to someone on a site called to make the argument that providing value and delivering a notebook for $300 is actually a bad idea….HILARIOUS.

  18. I can’t help but think that this article missed the boat. I’d explain more fully, but comments #1 and #3 sum things up nicely.

    We love our Aspire One. I have it set to dual boot Ubuntu 8.10 and Windows XP, as a few websites where my wife likes to watch shows (ABC) don’t support Linux desktops as of yet. I don’t know why “we’re talking about a Windows machine”, since you can’t game on the thing 99% of people wouldn’t functionally notice a difference…except they’d no longer need to worry (or be blissfully ignorant) about Wintel security issues…

  19. You’re missing the point. Most netbook buyers have a full-sized laptop for when they’re really trying to get things done. At the same time, they have a netbook for taking with them when they’re going to the beach, or going out for coffee, etc, where a full-sized notebook starts to get cumbersome. There’s plenty of room for both, especially if Apple were to step up to the plate with a wimax or or hsdpa card. There’s room in Apple’s line for a $400-$500 netbook, and it wouldn’t cannibalize profits

  20. You also forgot to consider the other elements of buying an Apple product – hidden costs:
    – Apple logo tax
    – Steve Job tax
    – Apple smell tax
    – Apple employee smiling tax
    – Apple store decorating / architectural tax

    By then, Apple’s “netbook” is what you have in today’s Macbook!

  21. netbooks own. I’m writing the family christmas letter on my msi wind right now. I’ve been sitting here for 2 hours and still have 3 and a half left in my 6-cell battery. the keyboard is just as comfortable as one in my gigantic, ancient dell laptop or the full-size keyboard i use at work with my imac.

    i don’t know if netbooks are really creating financial problems for pc producers, and frankly, i don’t care. I was able to buy a little laptop that out-cutes all the macbooks down at the coffee shop for less than 500 bucks. if msi or dell go down, i’m sure that plenty more chinese-manufactured laptop makers will swoop in to take their place.

  22. Dave,

    “So what do you think about so many people getting netbooks like the Dell Mini 9 just to turn around and slap OS X on it?”

    So many people? People have bought PCs to “slap OS X on it” for a while. Relatively speaking, it’s a small number; it hasn’t drug Apple into any of those markets, either.

  23. So what do you think about so many people getting netbooks like the Dell Mini 9 just to turn around and slap OS X on it?

    That’s my plan. Seems like tons of others have the same idea.

    What does that do to Apple’s future netbook market when you can get a Dell running Leopard for $349?

  24. Kurt Settles

    I’ve got a MacBook and an Acer AspireOne netbook. After using the netbook regularly on a recent business trip, I returned home pining for my MacBook. Netbooks are not comfortable to use, have tiny screens, underpowered processors, and should not be considered a replacement for any full-power notebook/laptop computer, Apple or not. Mine, while it fits wonderfully, on the seatback tray in front of me while on the plane, has barely enough oomph to play video fullscreen. The standard 3-cell battery won’t power the Acer long enough to play a full-length feature film. For a person that wants to use one exclusively for web surfing (with limited or low-resolution video), email, and light word processing, it will be fine, especially when you add an external monitor and mouse. Otherwise, a person would be better off buying an iPod Touch or iPhone, which is probably as close as any Apple product will come to a netbook.

  25. I like this article. I’ve been debating with myself about whether netbooks are really worth going after for Apple. I think you are right about how low the profit margins would be for these products. I’m sure that we would see the big PC makers issue statements about how this market has grown x % and now tops x millions of units… but how much does it add to the bottom line? That will be interesting.

  26. I am 100% mac, that said, I just ordered up a samsung netbook. I am very excited about it. I used a friends ACER on a recent trip and other than windows, loved it. It did everything I needed.

    It’s about portability and simplicity. It’ll be my reader and used to keep on top of a small network of sites I have.

    Over the last couple of years I had a mini and two macbooks die on me, motherboard, hard drive, now one yet to be determined. “Go to the local macstore” does NO good as I travel out of the US. It’s as if great service options are to make up for frustrating hardware failures.

    I don’t think apple will even touch this area, and think that wise. I would rather see them keep focusing on what they already do, just please pay more attention to quality of components, I am willing to pay for it.