Netbooks: Searching For Their Soul

In August 2008, Gartner predicted that the market for netbooks could explode to 50 million by 2012. That would be almost 40 percent of the mobile PC (notebook) market, and a significant increase from the 11 percent level in 2008. By March 2009, other researchers started forecasting that netbook penetration would plateau at 18.9 percent. Does this signal a slowing of the netbook market? To answer this question, we need to better understand, exactly what a netbook is and evaluate recent trends.

So what is this product that in less than five years is expected to reach such proportions exhibiting faster growth than any other product in the history of consumer electronics? In the shape of smaller-sized laptops, the netbook market exploded in the late 2007 holiday season as consumers swamped to purchase low-cost devices intended to allow easy access to the Internet when mobile. These devices were not laptops or mini-laptops; they were positioned as ‘netbooks’ – mobile devices for easy Web access. Had the era of anytime, anywhere Web-access finally arrived? With this vision, millions of consumers brought this new gadget.

Unfortunately, the initial experience has been rather trying, and this has been exhibited by the high level of returns faced by retailers for netbooks. Initially, most netbooks were bundled with only LAN and WiFi connectivity. Entry-level customers that were drifting toward netbooks were also looking to avoid the complexity of laptops and traditional PCs. Such customers in most cases did not have existing broadband services, hence no LAN or WiFi connectivity – and rarely found WiFi hotspots conveniently while mobile. Network operators seized this opportunity and started bundling 3G dongles with netbooks in order to provide them real mobility. But in the traditional nature of operators, this broader connectivity was provided with exorbitant monthly fees and long-term contracts. The complexity of connecting and configuring the dongles, left most netbook customers unsatisfied and unable to fulfill their requirement for a simple entry-level anytime/anywhere Web-access device.

Despite all its shortcomings, the netbook market continued to grow exponentially in 2008. Even Microsoft reported lowered revenue from Operating System sales due to the widespread adoption of Linux in the burgeoning netbook market. Simultaneously, the industry was looking for a solution to the high level of returns, but the shift from WiFi to 3G dongles didn’t seem to solve it. The consumer wanted mobile web access, which the industry was executing poorly. Looking for a solution, manufacturers started to supplement 7" and 8.9" screen devices with 10" devices, and loaded the same with Windows XP instead of Linux. Some manufacturers are now planning to even release 12" screens for netbooks. This evolution is blurring the line between laptops and netbooks.

The difference in size of 10" or 12" netbooks and 14" entry-level laptops does not offer substantially improved mobility. The bigger casualty of this transition has been the price. Netbooks gained popularity as they were priced at less than half of what you could buy an entry-level laptop for. The change in operating system resulted in more expensive processing power and requirements for greater memory. Coupled with the larger screens, the cost of these new netbooks reached the same range as that of entry-level laptops.

Popular British magazine PC PRO’s April 2009 issue ran a provocative lead article on its front cover, titled: ‘Netbook Killers’. It reviewed a number of entry-level laptops, priced around 300 pounds, the same price-level as the new generation of 10”/XP netbooks, and questioned why one would choose a netbook. The entry-level laptops ran a newer version of Windows (VISTA), provided better processing power and incorporated a DVD drive – why would a consumer choose lower processing power, skip the DVD drive and use an older operating system, especially if there was no improved mobility or pricing.

In making its forecast of 50 million netbooks by 2012, Gartner based its prediction on the cost of netbooks dropping to $100. Unfortunately, they’ve instead risen from the $200 level when Gartner made its prediction in 2008 to the current average of $450, butting heads against entry-level laptops. This provoked magazines to publish titles proclaiming ‘Netbook Killers’, and updated research to forecast netbook penetration of the mobile PC market leveling off at 18.9 percent, instead of reaching 40 percent.

To avoid an early demise, netbooks need to find their soul. For the industry to continue its upward trajectory, there needs to be a focus on providing simple, inexpensive mobile Web access. Device form-factors need to provide better mobility than laptops. The price trend needs to be downward, not upward. The upper limit for netbook pricing should be half of entry-level laptops. These are the key ingredients that allowed this product category to take off in the first place, and are necessary for continued growth. Manufacturers that focus on the real reasons for the initial success of netbooks will win, and those that transform netbooks to notebooks will be pushed out of the market.

Tuli is CEO of DataWind.