Daniel Eran Dilger
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Netbooks killing off sickly Windows PC sales

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Prince McLean, AppleInsider

PC sales are in free fall as the weak demand for Windows desktops and full-size notebooks in a poorly performing global economy is being compounded by an influx of low cost netbooks, which are gobbling up the remains of profitability in the PC industry.

Netbooks killing off sickly Windows PC sales
.According to an IDC report issued last week, worldwide PC processor unit shipments in the fourth quarter of 2008 declined –17.0% quarter over quarter and –11.4% year over year. Those tragic numbers were buoyed somewhat by sales of mini-laptop netbooks running low powered processors. Take out Intel’s Atom chips that power netbooks, and processor unit shipments declined by –21.7% over the previous September quarter and –21.6% over last year’s holiday quarter.

Shane Rau, IDC’s director of Semiconductors in Personal Computing research, said the “decline in PC processor unit shipments in the fourth quarter was the worst sequential decline since IDC started tracking processor shipments in 1996. After hinting at a decline last September, the market fell of a cliff in October and November.”

IDC’s report stated that ”the decline of the PC processor market in 4Q08 was due to a precipitous drop in end system demand that quickly moved up the PC supply chain through OEMs and contract manufacturers to the processor vendors.“ In addition to tightening consumer spending, sickly PC sales have also been blamed upon weak interest in Windows Vista, which only runs well on desktops and full powered laptops. Most netbooks run the simpler Windows XP, and about a quarter run Linux.

Netbook erosion

That has hit Microsoft particularly hard, resulting in an 11% drop in profits over its year ago quarter and plans to cut 5,000 jobs over the next year and a half. On the other hand, Apple posted its best quarterly results ever, with 9% growth in its Mac sales over the previous year. How is Apple bucking the collapse of PC sales?

In large measure, Apple is sidestepping the fate of other PC makers because it sells machines differentiated by Mac OS X Leopard. While other PC makers are all diving to the bottom of the barrel to offer the cheapest Windows PCs at unsustainable prices, Apple is selling a product with unique value that isn’t available elsewhere. The company is also leveraging its strong retail presence of 251 stores worldwide, which offer training and support that can’t be found at big box retailers, preventing many Mac buyers from leaving its ecosystem to find a bargain among cheap PCs.

However, another component to Apple’s healthy sales figures is its refusal to sell netbooks. While pundits have insisted that Apple jump on the netbook bandwagon, the company has consistently insisted that it can’t offer any value in the sub-$500 PC market. That strategy has prevented corrosion of the Mac OS X market for desktops and full sized notebooks at the hands of low powered, ultra cheap Mac netbooks.

Apple’s Netbook alternative

Instead, Apple has focused its interests in selling the iPhone and iPod touch to fill the demand for low-end, highly mobile devices in Mac market. The company doesn’t break out iPod touch sales from other iPods, but iPhone sales growth in the fourth quarter exploded by 88% over the year ago quarter. Apple sold 13.6 million iPhones in the last year, well above the 11.3 million netbooks sold in 2008 by all vendors combined.

Pundits say there’s no stopping netbook sales, with 21.5 million expected to be sold in 2009. However, analysts are also predicting incredible growth for the iPhone, with Gene Munster of Piper Jaffray estimating an installed base of roughly 60 million iPhones by the end of 2009. That would require sales of 44 million iPhones this year, well more than twice the number of netbooks expected to be sold worldwide. Additionally, that doesn’t even include Munster’s estimate of 23.4 million iPod touch users by the end of the year.

Rather than losing money to chase a fraction of the netbook market share, Apple is creating its own market for handheld WiFi mobile devices that is not only outpacing the entire netbook market in units sold but also in profitability. Because the iPhone and iPod touch are designed to sync with a computer rather than replace one like a netbook, Apple’s desktop and notebook sales are not being cannibalized by its mobile sales.

Of course, the fear is that PC netbooks running Windows XP or Linux will soon impact Mac notebooks, too, unless Apple scrambles to release its own netbook competitor. While the company said it was keeping a close watch on the market for netbooks, any threat to the Mac might be well off in the future. Around 70% of all netbooks were sold in Europe, many subsidized by a mobile network plan. That makes netbooks more akin to glorified smartphone, and a more direct competitor to Apple’s iPhone and iPod touch.

Macs moving upscale

Apple has migrated away from selling low end, simple Internet browsing computers over the last decade, repositioning the iMac from an appliance PC (it was originally intended to serve as a Network Computer) into a luxury desktop with a big screen aimed directly at higher powered tasks such as editing movies, working with high resolution RAW photography, and making music.

The company has also pushed its notebooks upscale, converting its entry level iBook line into MacBooks closer to the low end of its MacBook Pro models. That has resulted in Apple offering no new notebook models for much less that $1,000, but also taking the lion’s share (66%) of the $1,000 and up notebook market, where most of the profits in notebooks are to be found.

Apple hasn’t just been pushing its products up scale rather than into junk territory by raising its hardware prices; it has also developed software to make use of faster systems, assembling both the iLife suite for consumers and a series of Pro Apps. Netbooks are designed primarily to do text entry and browse the web, making them natural replacements for low end PCs the cost roughly the same and don’t offer to do much more besides take up more space.

That’s killing Microsoft’s model for advancing Windows Vista on the sheer volume of new PC sales, because netbooks are making a large chunk of the low end market for new PCs obsolete, and replacing them with a low powered device that not only can’t run Vista, but can run Linux. If netbooks continue to grow as predicted, they will cause a major erosion of the low end of PC market, forcing Microsoft to either scale down Vista to something closer to Windows XP, or to continue to develop the older XP code base.

Either way, that change will have minimal impact on Apple’s business, the majority of which is well above the floodplain threatened by the promised wave of $400 netbooks. Apple’s Mac business will be no more at risk than Microsoft’s higher-end gamer PC users. However, if netbooks can manage to replace over 20 million low end PCs this year it will have a significant impact on the standing of Windows Vista and its successor due later this year as an increasingly large chunk of the 300 million PCs sold annually won’t need a full desktop operating system.

Meanwhile, Apple is targeting the release of Snow Leopard as being fully 64-bit. In the last nine quarters since Apple transitioned its lowest end MacBooks and iMacs to 64-bit Core 2 Duo CPUs, the company has sold 19 million Macs. Apple’s installed base of Macs running Mac OS X is approaching 30 million. That means that at around two thirds, or 66%, of the entire Mac installed base is 64-bit.

In contrast, the latest Steam survey of around a hundred thousand serious PC gamers’ hardware, representative of the high end of Windows users, revealed that less than ten percent are running a 64-bit version of Windows 2003, XP, or Vista, even though gamers with fancy video cards and an appetite for RAM would benefit most from moving to 64-bit Windows. The majority, 65%, are still using 32-bit Windows XP, with nearly 24.5% using 32-bit Windows Vista, even though nearly all PCs sold in the last two years have shipped with Vista.

  • Ludor

    Sounds all right and proper to me, and it’s exactly the kind of analysis I come to RDM for.

    But… Didn’t you say, some time before Christmas, that the netbooks buzz were mostly just that, and that the segment as a whole would soon end up on the tragic garbage dump of history? Has the situation, or your view upon it, changed during the holiday?

  • Brau

    Personally, I think most of the demand for netbooks is driven by cheapsters who want to believe they can get alot for nothing. The rumors of a cheap $100 chinese laptop have been circling since 2001 and still haven’t materialized. Wishful thinking.

    My guess is that *if* Apple were to enter the netbook category at some point it would be a derivative of the iPhone, both for prime utilization of a small form factor and for differentiation from their laptop line. That said, I still can’t see such a device as a replacement for a full size laptop. When I want portability, the iPhone is as big as I want without becoming a burden, and when I use my laptop I want a big screen and full size keyboard, not some dinky 8″ sub-compact. For my uses, if the iPhone ever gets the ability to import raw video(USB2?), I’ll have no good reason to take my laptop along on any trip. The only time I wish the iPhone was bigger is when gaming/watching movies, and that’s only because my aging eyes grow tired at such a short focal length.

    I do know that as long as MicroSoft is to be everything to a litany of third party makers who are all competing to offer their customers the worst possible user experience, Apple will continue to profit by it.

  • Brau

    (edit:)… as long as MicroSoft is *TRYING* to be everything ….

    (I wish there was as way to edit mistakes)

  • Per

    @Ludor

    I think he meant that the netbook segment isn’t an obvious target for Apple right now.

  • http://www.isights.org/ whmlco

    Personally, I disagree with the entire premise. Netbooks are not eroding PC notebook or desktop sales to any significant degree.

    First, the type of person that is going to buy a netbook for his main computer is probably the same person who would have bought the cheapest notebook or desktop anyway. Machines that already run on the thinnest of margins. After all, does it make a major difference to Dell if they sell you an Inspiron mini 12 ($399) or their cheapest Inspiron 518 desktop ($329)?

    Second, from my perspective a large number of netbook owners are buying them as SECOND machines, argmenting their existing notebook or desktop use with an additional small and light portable device. A use for which they would not have purchased a notebook anyway.

    In which case netbooks are working to expand the market, not shrink it.

  • august

    “an increasingly large chunk of the 300 million PCs sold annually won’t need a full desktop operating system.”

    So XP and Linux aren’t full OS’s?

    [I meant “full” as in “full figured.” I was trying to be nice. – Dan]

  • http://home.comcast.net/~daguy daGUY

    “Apple sold 13.6 million iPhones in the last year, well above the 11.3 million netbooks sold in 2008 by all vendors combined.”

    Funny…I remember pundits insisting that the iPhone was going to be stuck as a “niche” device, yet now they’re claiming Apple’s missing the boat by not offering a netbook.

    I think the iPhone (and iPod Touch) IS Apple’s “netbook.” It’s around the same price point, it performs most of the same tasks, and (in my opinion, at least) it’s *better* at doing those tasks than a netbook is.

  • John E

    Well the other big trends we are seeing, which in combination with the global recession explains the downtown in PC sales much, much more than netbooks, is the ‘maturing’ and ‘saturation’ of the global PC market.

    first, the rapid global expansion of PC ownership that exploded in the 1990’s has now greatly slowed – most buyers that want one have bought a PC by now at last – market “saturation.” second, PC’s made in the last several years and running XP remain ‘good enough’ for the basic needs of a large majority of those users, especially business users that just need a simple workstation – product “maturity.”

    bottom line is, a majority of users do not need to buy a new PC anymore until the one they have now literally stops working, and there aren’t many first-time buyers left either, except youth of course. Combine this new situation with a severe recession when everyone cuts back on spending, and you will get a nosedive in PC sales. 2009 sales will be way down no doubt.

    Netbooks are a sideshow in this equation – a cheap replacement if your old laptop is worn out, or what you buy for youth. the attention they are getting from tech pundits is overdone in terms of their actual market impact, which is only a modest fraction of the big picture.

    Apple’s computer market on the other hand is neither saturated nor mature yet. as a consumer-focused product line there is still a large potential growth market for first-time buyers – switchers – and in terms of performance there is a real incentive to replace still-working PPC Macs with Intel Macs (but keeping the older Mac as an additional household computer). Assuming Apple finally releases updated desktop computers soon, its 2009 sales will likely hold up pretty well, especially in comparison to the PC market.

  • carlo.98

    Sometimes, I think Vista is a significant reason for the netbook phenomenon. It’s the only product left that one can find XP. Not to mention, if one wants to try out Linux cheaply, having one preinstalled skips the hassle of figuring out if your distro can support your hardware.

  • Joel

    If Apple do ever produce a NetBook I suspect it will be like the Sony NetBook, ie, priced a lot higher than every other NetBook. (And cue a thousand pundits telling Apple it should be a lot cheaper…)

  • http://jonnytilney.com Jon T

    With Microsoft innovation driving people to go to last century hardware, the Wintel clonemakers must be very unhappy indeed…

    Microsoft must be accruing some serious ill-will.

  • gus2000

    OH lovely. NPD announced today that iMac sales are down 6% this quarter, despite their inability to get data for online sales (and the retail stores tend to be tight-lipped as well).

    The problem? Apple sells on value, not on price. Apparently they need to provide less value.

  • http://bkpfd.org qka

    Are those laptops in the picture at the top netbooks? Boy, are they FAT!!

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  • http://limulus.wordpress.com/ Limulus

    http://www.theregister.co.uk/2009/03/02/gartner_2009_pc_declines/

    Gartner is making “dismal projections” for the 2009 PC market:

    * worldwide PC shipments will decline by 11.9 per cent to 257 million units, what the company has characterized as the “sharpest unit decline in history”

    But that’s not across the board:

    * “desktops are falling, with shipments expected to be down 31.9 per cent”

    * “mini-notebooks [aka netbooks, will see sales…] up 79.5 per cent” representing “eight per cent of total PC shipments”

    Oh and speaking of netbooks:

    * “Gartner says that the average netbook cost $450 in the United States in the fourth quarter [of 2008], but that will drop to $399 by the end of [2009].”

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