The Netbook Conundrum

 Most of the PC industry dismissed the ASUS EeePC when it was launched—some considered it a 'toy" laptop. Oops! To their monumental surprise, netbooks struck a chord. But the decision ASUS made to use Linux on its first version was problematic. It didn't meet the expectations of early EeePC buyers because it wasn't compatible with their existing software, printers, cameras, and so on.

So ASUS asked Microsoft for a version of Windows XP that it could use with these small laptops, and Redmond agreed. While this helped the netbook market grow exponentially, it has had an effect on Microsoft's profitability, since the company charges around $15 for XP on a netbook compared with roughly $50 to $70 for various versions of Vista on laptops.

The numbers people say that netbooks saw an 80 percent growth rate in 2009 (compared with laptop growth of around 13 percent). According to Gartner, that means that 21 million netbooks will be sold this year. That sounds like good news. But there's a downside, too, since netbooks have much lower profit margins and, even worse, have cannibalized sales of laptops. They have also reset people's expectations of what portable computers should cost and driven down the average selling price of laptops across the board. Netbooks helped ASUS and especially Acer gain market share and generate much-needed user demand for their products, but those companies still have profit-margin issues to deal with, as well as the sleeping giants they've awakened in the form of, for example, HP and Dell, who have entered the netbook market with a vengeance.

The low-margin issue and the physical limitations associated with netbooks have not gone unnoticed by Apple, which is conspicuously absent in the netbook space. But Apple COO Tim Cook, in the post-earnings analysts call on April 22, made it very clear that Apple is not interested in netbooks, citing the cramped keyboards, small screens, and overall poor experience in these small PCs. Apple is well known for protecting its margins, so it should come as no surprise that the company has no interest in netbooks.

Netbooks won't go away, but Tim Cook's comments about their failings can possibly help the industry turn the corner and move the mobile computer business toward some level of profitability, at least, in mainstream laptops. To do this, the industry has to execute flawlessly on three key issues.

First, the message: Consumers need to see past the value of netbooks to their limitations: their small keyboards and screens and their underpowered processors. And the industry has to offer an alternative that delivers a lot more at similar pricing. Intel and AMD are pushing vendors to deploy ultra-low-voltage (ULV) processors in systems that are more like traditional thin-and-light laptops. I have written in the past about low-cost thin-and-lights as alternatives; since then the industry has started referring to these as ultrathins. Most will be under 0.8 inch thick, sport 11-to13-inch TFT screens, weigh less than 3.5 pounds, and be priced from $599 to $1,099.