Will Netbooks Swallow the Laptop?

Even as Hewlett-Packard, Dell, Acer and other companies have gravitated toward “netbook” production in the last 12 months, fear has arisen among certain segments that these low-cost laptops are cannibalising market share from higher-end, pricier laptops.

Netbooks have existed for a relatively short time within the portable-computing spectrum, but already their impact is being felt. In the current economic doldrums, consumers and some enterprise buyers have turned to netbooks as a way to pinch pennies while fulfilling their connectivity needs.

On the 19th Feb., Dell announced its newest low-cost laptop in the Mini line, the Inspiron Mini 10, a follow-up to its Mini 9 and Mini 12. Retailing at $399 (£277), the notebook PC allows Dell to continue to compete in this particular market space.

The Inspiron Mini 10, like many netbooks, utilises Intel‘s Atom processor. The Atom processor, paired with netbooks’ popularity, is one of the reasons why Intel has managed to gain market share in the face of stiff competition from Advanced Micro Devices and Via.

In turn, this has led to media headlines such as “Netbooks: Cheap Young Cannibals of Laptop PCs.” But how real is the threat of netbooks to higher-end laptops’ market share?

The issue is one that HP CEO Mark Hurd felt he needed to address during a recent conference call with financial analysts to discuss the company’s latest quarterly results. HP, which remains the world’s leading manufacturer of PCs, has recently launched a number of netbooks and mininotebooks, including the HP Mini 2140 and the 2133 Mini-Note PC.

For Hurd, the issue requires further study.

“I’ve seen in print, from people who claim expertise, that 80 percent of netbooks is new [sales] and 20 percent is cannibalisation of the bottom part of the notebook market,” Hurd said during the 18th Feb. conference call.

At the same time, Hurd claimed that this relatively recent launching of HP’s own netbook line meant “we have some time before I can give you a good metric and good consumer data back” as to whether netbooks are truly eating into the market share of other laptops. But he said he thought the available signs pointed to other factors.

“It’s not the move to netbooks that’s cannibalising,” Hurd added. “What you have is someone buying a more thickly configured notebook, who’s now buying a more thinly configured notebook, and that’s what’s adjusting the ASP [average selling price].”

According to a number of analysts, the fear of netbook cannibalisation of the laptop market is overblown—but that doesn’t make the rise of netbooks as a low-cost alternative any less remarkable.

“In just over a year, they’ve evolved from these Linux-based, solid-state devices into fully [Microsoft] Windows OS-based, 120GB hard drive systems, which are very similar to traditional notebooks,” said Richard Shim, an analyst with IDC. “So we’ve had a dual effect here, with many netbooks becoming more robust and expensive, while notebooks have come into the same price range.”

The market-share percentage lost by traditional laptops to netbooks, Shim said he believes, “is a lot lower than many are worried about – maybe 10 to 15 percent.”

IDC has forecasted sales of 10 million units for netbooks in 2008, or less than 10 percent of an overall notebook market of 142 million. Other players in the notebook market such as Acer, by making an aggressive push into netbooks as a way to gain market share against larger competitors such as Dell and HP, have contributed to the low-cost laptops’ rapid growth and evolution.

“A year ago they [the PC vendors] were hardly in the market, and so the gross rate is pretty exceptional,” Shim said.

Another factor contributing to netbooks’ growth has been the recession, which drives consumers toward IT gear with a cheaper price tag.

Shim said, “There’s been a natural price decline for PCs; then you layer on top of that these mininotebooks, which appeal because they’re lower-priced, and the concern for a lot of people becomes, long-term, what’s this do to consumer perception of value?”

Given that netbooks have provided a much-needed boost to hardware sales, however, it’s unlikely that any PC makers will give up producing netbooks—especially as the economy continues through its current rough patch.