Netbooks: A blessing or curse for resellers?

Despite the economy, a few areas are still thriving – in spite of, or perhaps because of, market conditions. Netbooks, as a product category, continue to grow, even though many organizations are holding off on PC refresh cycles. But with super-slim margins on an almost disposable device, is this really a good thing for the channel?

For consumers, it’s great, but not so much for resellers and vendors, says Mark Tauschek, senior research analyst with Info-Tech Research Group. “It’s tough, because the margins are going to be super-slim,” he says. “I would guess it might be a couple of per cent.”

But the situation isn’t any better for the vendors. At one point, some vendors, such as Toshiba, were seriously considering whether it was worth designing and manufacturing a product with such slim margins.

Clearly, they’ve all jumped onboard, but they’re not making a lot of money, and neither are their resellers. “If margins were slim on a higher-cost item, you might be able to justify it,” says Tauschek, “but at $300 a pop, if you’re making two per cent, you’re making $6 on every one you sell.”Then there’s the issue of cannibalization. “That’s part of the early reluctance of manufacturers to get into netbooks, because the margins suck and they’re going to be cannibalizing their notebook sales,” he says. The problem is, though, that if an enterprise customer wants netbooks, they’ll get netbooks – if not from their reseller, then someone else. “It’s a little bit of a conundrum for resellers,” he says, but it comes down to maintaining customer relationships.

A balancing act

Is it all bad news? Not necessarily. For resellers, it could be more of a balancing act.In the fourth quarter of 2008, 13,000 mini-notebooks were sold into the commercial space in Canada, while 74,591 were sold into the consumer space, according to IDC Canada.

On the retail side, market leaders are Acer and Asus; most other vendors didn’t enter the game until the latter part of 2008. On the commercial side, the traditional players are going to be the up-and-comers, says Tim Brunt, senior research analyst for the Canadian PC market with IDC Canada.

HP, Toshiba, Lenovo and Apple are all jumping onboard; Dell is offering Ubuntu as an option on its netbooks. “We’re tracking about 45 vendors,” says Brunt. “Even ViewSonic has come out with a netbook.”

While netbooks are still mainly a consumer play, enterprises are starting to take them more seriously, thanks to more powerful processors. But enterprises still tend to buy these products at retail. There’s a channel play here, says Brunt, but resellers have to add value to make it worth their while, such as adding components or services that will beef up margins.

One way to make something out of nothing is to package a netbook with a keyboard, mouse and monitor, to provide a docking station for executives on the go. “Resellers aren’t going to be successful just taking a mini-notebook and buying it through distribution and selling it at minimal margin,” says Brunt.

Netbooks aren’t huge cash cows unless you’re deploying thousands of units at a time, says Darren Leroux, commercial notebook product manager with HP Canada. “For a retailer, sure, they might be, but for us, it’s our lowest margin structure for both us and our partners,” he says. “Quite frankly, I’m sure most vendors would prefer to be selling 14- and 15-inch products that are further up the food chain in terms of performance.”

HP’s original target market for the mini-notebook was the education market. “That being said, what it’s coming down to is price,” says Leroux. “If it’s not a metal chassis, it could crack or break more easily, but in this economy, it’s all about budgets and how much they have to spend.”

If they’re not dealing with an RFP that’s been handed to them, resellers can tier how a customer is outfitted – a mini-notebook might work for a sales rep on the road, while an executive would require a high-end notebook. It comes down to offering a complete solution to the customer, he says, so if you want to maximize your profitability on a mini-notebook sale, look at add-ons, whether that’s a carrying case, external optical drive, USB docking solution or RAM upgrade.

However, since netbooks are practically disposable, a three-year extended warranty is going to be a tough sell, says Tauschek, because it just ends up being really expensive insurance.

A perfect storm

Market conditions are just right for the netbook, says Darrel Ryce, director of technology and entertainment with The NPD Group.

It’s like the perfect storm: high wireless penetration, new processor technology, an unstable economy and a product that addresses all of those things.

While business penetration is still low at this point, there’s potential in the enterprise market, since there’s more functionality in a netbook than a smart phone. “There are many of us who haven’t grown up typing with our thumbs, so it has a lot to do with comfort level and ergonomics,” he says. While smart phones are meant to be used on-the-go, netbooks fit in as a complementary mobile device for road warriors or traveling executives.

Another potential boost for office productivity applications on netbooks will be the release of Windows 7 this October. “Microsoft probably wouldn’t come out and say this, but essentially they built Windows 7 to make sure it would run on netbooks, because Vista wouldn’t – it would be really sluggish,” says Tauschek. “Windows 7 runs flawlessly on netbooks. In the beta, all the drivers were there for netbooks.”

As it stands now, about a quarter to a third of all netbooks have some variation of Linux, which could be why Microsoft is making sure Windows 7 will run on them, he says. But there’s a place for Linux in this market, he added, since a Linux variation drops the price point by $50 to $100.

And, since customers aren’t actually canceling purchases, but pushing them out a couple of quarters, this could lead to some pent-up demand when Windows 7 comes out. But that doesn’t mean resellers should be pushing netbooks – for many customers, full-featured notebooks are probably still the best bet.

The average selling price of a notebook from Tech Data out to a VAR is about $1,100, says Greg Myers, vice-president of marketing with Tech Data Canada. “Our average selling price for a notebook is up about five per cent from last year, and more powerful machines are in demand in the commercial space,” he says. “I don’t believe the notebook marketplace has been impacted by the emergence of the new [Intel] Atom-based netbooks – I don’t think anybody is positioning the netbook as being a primary PC for a business user.”

The market for netbooks, at least at this stage of their evolution, is more consumer-oriented, while high-end notebooks continue to be the choice of business users. “The banks aren’t running to netbook technology right now,” says Myers. As the netbook platform becomes more powerful, however, this could change, but screen size continues to be a significant differentiator.

In fact, according to Intel, the biggest market for netbooks right now is seven- to 12-year-olds – and there’s a 600-million-unit market globally. This is a new market for Intel, and a new market niche altogether, says Myers, who spoke with Intel execs about the netbook opportunity earlier this year. At a US$350 price point, a netbook is comparable in price to a video game system. Intel suggested that, as this market ramps up, a US$200 price point is where we’re going to land.

Netbooks may end up competing more with smart phones than notebooks. Intel, for example, has positioned its Atom processor for the low-cost netbook architecture, but also as an enabling technology for smart phones – since it’s easier to provide voice on a small PC than provide PC capabilities on a phone. “The smart phone and the netbook are really two different ways of bringing the same voice/data capability to mobile users, and those markets are going to collide,” says Myers. “Maybe they already have.” Soon we’ll be able to get a netbook from our local ISP on a monthly payment plan, just like a cell phone.

What would really give netbooks a boost in the enterprise market is the ability to sync a netbook with all other devices. Until that happens, says Brunt, it’s going to be difficult to justify the purchase of a notebook and a mini-notebook, as well as a smart phone.

But this functionality is coming. Leroux says HP is working on sync capabilities, where a user could sync a netbook back and forth with a desktop environment, almost like a PDA – but with a lot more horsepower. “You’ll start to see that kind of connectivity evolve into the products as we move forward, and we will have something in the near future that will do that,” he says. “Once you see that kind of application on a more consistent basis, it will become a sweet spot for the enterprise market.”

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Vawn Himmelsbach
Vawn Himmelsbach
Is a Toronto-based journalist and regular contributor to IT World Canada's publications.

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