Analyst Angle: Netbooks will win the battle and lose the war

Editor’s Note: Welcome to our weekly feature, Analyst Angle. We’ve collected a group of the industry’s leading analysts to give their outlook on the hot topics in the wireless industry.
Year over year netbook sales grew by almost 270% in the second quarter! (Source: NPD DisplaySearch) Laptop sales are feeling the brunt of the mighty mini. The wave of momentum that netbooks created in the portable PC market is unstoppable, right? Not so fast. There are a variety of trends that will make netbooks a distant memory.
Dissatisfied customers:
Netbook shipments data ignore one key element of the buying experience – returns. According to Yankee Group research many retailers are experiencing netbook return rates of 30%. In May of this year Intel Senior Vice President confirmed the trend. In my more recent discussion with Intel they claimed that return rates have declined. They attributed the high return rates to a lack of market education in regard to product capabilities and the Linux operating systems which were a mystery to many consumers. However, my discussions with retailers paints a different picture – one in which they are still suffering from unacceptably high return rates. The device may work for first time computer users, most of whom live in developing countries, but most of us have become accustomed to much faster processing than netbooks can currently deliver, hence the high return rate.
Competition from above:
Netbooks hit on latent desire for an ultra-mobile device that sits between a smartphone and laptop in terms of size and processing power. However, the suite spot between size and processing power hasn’t been identified as nearly one-third of end-users return their netbook. It’s not a coincidence that each iteration of netbook has more processing power than the last. Despite that trend, the consumers’ need for speed still isn’t quenched. What’s happening here? Netbooks are morphing into mini-laptops. To be fair, it’s not feasible to have laptop capabilities in a netbook form factor today. To get notebook processing speeds a netbooks would need a 15-20 watt processor. The ATOM processor in most netbooks is 2.5 watts. The 10x reduction in wattage means a much smaller processor that enables the small form factor. However, if there is one thing we have all learned about processors over the past 20 years is they become smaller and faster with each iteration. If that trajectory continues we will see netbook-sized devices with notebook processing power. It’s just a matter of time until the ATOM processing power scales up to meet the low end of the notebook market thereby eliminating the distinctions between the markets. In short, netbooks will simply become low-end ultra-mobile laptops.
In the meantime consumers receive the benefit of laptop manufacturers taken off guard by he netbook phenomenon reacting by simply lowering the price on their laptops. Toshiba now sells a chunky 15.6-inch laptop, not a netbook, for as low as $350. A Gateway 10.6-inch laptop is only slightly larger than the average netbook and sells for $400.
Competition from below:
There’s another, albeit less likely scenario, that could also spell the end of the netbook. Those in the smartphone ecosystem are anxious to impinge upon the netbook market by offering larger form factors that leverage a smartphone OS and cellular connectivity. Qualcomm’s smartbook is the prime example. While it lacks the application ecosystem offered by Windows-based products (i.e. netbooks) it offers always on capability, a familiar OS, seamless calendar, contact, messaging integration with your smartphone and ubiquitous connectivity offered by cellular networks. However, the real advantage is the power/performance balance that allows for an always-on device with a much longer battery life than available from netbooks. This scenario is less likely given Intel’s brilliant job heading off this threat by launching its small, low-power ATOM chip, which enabled the netbooks small form factor.
Regardless of the scenario that plays out, the netbook is under intense pressure by notebook OEMs who are offering ever cheaper laptops and consumers who are demanding more processing power. In the end, the netbook will be defanged as notebooks take on similar form factors and similar prices without such a drastic compromise in processing power. In 2010 and beyond we should each thank the netbook pioneers from Acer and Asus for putting a scare into the top-tier notebook manufactures, creating a more consumer friendly device and driving notebook prices through the floor.
Josh Holbrook can be contacted directly at: [email protected].