MSFT’s Sept ’09 earnings (ll): MSFT and netbooks

The netbook transformation

1.  The idea

The netbook was invented by the Taiwanese tech manufacturer, Asustek (ASUS), a couple of years ago.  It was designed to be cheap (about $300), compact (8″ screen), light (2 lb.+) and fast (linux OS for quick boot-up and 30MB of flash memory for storage).  It’s very useful for email, web browsing, word processing and simple spreadsheets.

ASUS seems to have envisioned the netbook being used by young children, or perhaps as an upscale alternative to the machines developed by various $100 computer projects for emerging markets.

2.  The reality

Despite initial skepticism, netbooks have been a smash hit.  Sales have gone from zero to become 17% of all laptop purchases worldwide in about two years.  The users haven’t just, or even mostly, been the ones ASUS envisioned.  Netbooks have become a staple for business travelers and university students, as well as functioning as an “extra” computer for home use.

3.  The transformation

It turns out that netbook buyers don’t like linux.  So out that went.  Virtually all netbooks being sold today have a Windows operating system installed.  Initially this was XP; from now on, it will be some version of Windows 7.

But Windows uses up a lot of storage, about 12 MB worth for XP.  So solid-state storage has been replaced with small form factor hard disk drives in the 160 MB range.

Where to from here?

Open questions:

1.  Are netbooks popular because of recession-induced trading down that will disappear as the economy recovers? MSFT’s tone of voice when talking about netbooks makes me think this is what they believe.  There may be some truth to this.  Of course, MSFT also makes much more money selling software in a traditional notebook than in a netbook.  So they certainly would like to think buyers will trade up as the world economy recovers.

Most others–myself included–think netbooks are here to stay, and already comprise a new category that adds to overall laptop computer sales.  My guess is that traditional desktop-substitute laptops will stay as they are, but that the rest will strive harder to emulate the netbook’s portability–a feature consumers clearly want.  But I don’t see how they can adopt the netbook form factor without implicitly inviting potential buyers to expect a netbook price point.

2.  Will netbooks remain Windows machines? Netbook makers would prefer that they don’t.  There’s a strong economic reason for this.  If the manufacturer has to pay, say, $30, to MSFT for a low-end copy of Windows 7 vs. equipping a netbook with linux for free and can charge the same price for either, the profits are much higher if the customer picks linux.  The big problem so far is that linux has proved too hard for the typical netbook user to use.  Although netbooks can be ordered with linux, almost everyone chooses a Windows machine.

Google aims to change that, by introducing its Chrome OS in netbooks next year.  Chrome is based on linux and, like other versions of linux, is free.  The big question is whether the Google name or the Chrome performance will be enough to persuade consumers to turn down Windows.  No one knows yet.  If we look at Google’s other products, Google Groups, Picassa and Gmail are great, in my opinion.  But Google Documents are just not good enough.

3.  Will they use Intel processors? Again, it’s not clear.  The OEMs are going to introduce linux notebooks next year that are powered by microprocessors designed by the UK company, ARM.  ARM chips are commonly used in smartphones, so the move introduces a competitor to Intel, enhances the netbook communications capability and allows linux to be used as the OS.

Intel’s response?  It’s modifying its Atom chips so they can run linux machines.  It’s also joining ASUS and Acer in opening apps stores, like Apple has for the iPhone, for linux machines.  In other words, Intel is trying to make its position more secure by making it easier for OEMs to replace MSFT.

3.  Will there be an Apple entry? There have been persistent rumors on Apple-oriented websites for a long time that AAPL will soon offer a large screen, tablet-like, iPhone that will also be an entry into the netbook market.

I don’t understand what AAPL has to gain by doing so.  The company may produce a tablet (again, I don’t know quite why), but a netbook is a low selling price, low profit item made by high volume producers.  This really clashes with AAPL’s image.

An interesting spectator sport

What I find fascinating about netbooks is the battle of industry titans, each looking for a way to enter another’s key product markets.  It’s Google vs. Microsoft, Intel vs. ARM, ASUS and Acer vs. Dell and HP.  So far the field belongs to the Taiwanese and the Wintel alliance.  But for how long?

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