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.