Notebooks are go
- 29 May, 2006 10:58
Notebooks now make up more than half of all PC sales in major consumer markets. The desktop is, or will be, dead in a few more years. Simply put, it is cheaper to produce millions of smaller, lighter notebooks than larger desktop PCs. Economy of scale is driving the trend but there are some significant pressures on the notebook market.
The first is price. We first saw notebooks available for less than $1000 last year and now they have edged down to $799. The question is how cheaply can they be made while still leaving a profit margin for the manufacturer and retailer? As prices continue to drop there is enormous pressure to sell more just to make the same profit. This is a vicious circle.
The second pressure is that consumers are now primarily focused on price rather than what they need. A sub-$1000 notebook won't be a powerhouse, won't have long battery life and won't be built to last - it's as simple as that. Users still need to spend more than $2000 and sometimes a lot more to get features like discrete video processors and memory for video editing, SATA hard disks, better screens and larger batteries. No notebook manufacturer can make a profit and stay in business if they only service the low end of the market.
Third is the cost of warranty and support. Why is it that all consumer notebooks have 12-month warranties? Because they are made to last one year and one day - well, perhaps longer, if they are only used by little old ladies at church on Sundays. Warranty claims cost big money in terms of labour so it is in the interests of notebook makers to have a very low hardware failure rate. And keeping parts for superseded notebooks is a horrendous cost. Very few vendors now keep parts for more than 12 months out of warranty - it used to be five years. Fourth is that the above pressures are going to cause a massive reduction of the number of vendors in the near future. As profits decline the ability for a vendor to source and re-badge a notebook, differentiate and resell a limited one. I see no future for whitebooks and I see limited future for vendors without their own, or a large shareholding in, manufacturing capability.
Low-end notebooks are all about commoditisation, instant gratification and convenience. It is no secret that all the entry-level notebooks are made by a handful of mass production factories in China. There is no research and development, everything is made to a price and the only things that change are the design of the external case and the name badge. Only massive economies of scale can make low-end notebooks possible.
The higher specification notebooks are where the money is and they distinguish themselves with additional warranty, better software and configuration, better service, better parts, longer life and more options.
As for the cash back offers now so prevalent in the mass merchant stores, did you know the average take-up rate is 10-20 per cent? That is why they are popular as a way of 'reducing' retail pricing.
Going back to warranties, it is in the interests of manufacturers to produce reliable products. Hardware failure rates of 2-3 per cent are reasonable. But here is the big question - why do reliability surveys show that notebook problems are generally in excess of 30 per cent with some vendors hitting 50 per cent? The problem is the nut that holds the wheel rather than the car itself. Issues such as virus, spyware, accidental and plain stupid deletion of files and physical damage all force these failure rates up. Manufacturers can't absorb the cost of supporting the end user any more and have to be firm in offering two support options - press F9 to reformat and reinstall the operating system, which will fix the problem and most of the time; or provide your credit card number for user support. I have noticed now that end-user support from large companies such as Microsoft, Toshiba and Acer is being priced to make a profit. So it should be.
The future is clear. Notebooks will largely replace desktops but PCs will remain for extreme power users, enthusiasts and gamers. They will command a considerable price premium over notebooks.
Market differentiation for notebook vendors will be difficult with price being the prime decision maker. Some vendors will succeed in differentiation by being perceived as cool, up-market or feature-rich and trendy. If I were HP, Lenovo or Dell I would be working flat out on a strategy for survival in this market right now - or planning an exit strategy.