Netbook Numbers Suggest Apple Has the Right Strategy

There are those who say that Apple will remain steadfast in its pursuit of the premium notebook market and make a lot of money. Then there are those who claim that, in this economy, Apple is missing the boat by not having the right product ready, a netbook competitor The truth is in the middle, and so is Apple.

According to the research firm NPD, netbook sales, as a percent of total PC sales volume, reached 12 percent in December 2008. Acer and Asus are the leader, and each company is selling about as many netbooks per quarter as Apple sells for all Macs combined.

So one would think that Apple has something to gain here, but do they really? Piper Jaffray's Gene Munster told TMO that he expects Apple to sell 2.2 million Macs in the Jan-Mar 2009 quarter, down from 2.524 million in Apple's first quarter that ended in December. Similarly, Barclay's Ben Reitzes puts the number at 2.182 million. That looks more like a ~12 percent downturn, due to economic conditions, than a major shift towards cheaper PCs with Windows. Apple customers don't defect on price, generally, and as Mr. Jobs said recently, they're more likely to defer a purchase than to jump to a netbook with Windows or Linux.

So what about the question of going after ten percent of the netbook buyers? After all, if the netbooks keep selling at the rate of 5 million per quarter, Apple could expect to capture 500,000 of those customers with a low cost, competitive Mac netbook. That would halt Apple's current slide of 300,000 units per quarter now and maybe worse later.

Acer Netbook

Acer Aspire One (credit: Wired)

The problem there is not whether Apple could make money. They could make a little, just like Acer and Asus. Recall what Steve Jobs said, last fall: "We don't know how to make a $500 computer that's not a piece of junk; our DNA will not let us do that. We've seen great success by focusing on certain segments of the market and not trying to be everything to everybody, and you can expect us to stick with that winning strategy." Some people took that comment to mean the hardware would be crap, but considering the OS technology Apple's has developed for the Mac, a considered translation of that remark is more likely the following:

"Yeah, we could make a fine $500 computer, and even make some money on it, but the profile of a netbook computer is low cost and low performance. The things that people have come to expect to do on a Mac would render the perception of the computer as crap."

The Role of Netbooks

Netbooks are primary used for surfing and e-mail, not for graphics and video. That's why they require Windows XP or Linux, lightweight (such as they are) OSes, compared to Vista. On the other hand, Apple customers have come to expect Cover Flow driven by Core Image, Quartz Extreme, driven by OpenGL hardware acceleration, fast MPEG operations on dual core and so on. The performance of Mac OS X on a netbook would not measure up to what Apple's customers expect, and that means perceptions of a crappy computer. That, in turn, doesn't lead to the desired sales that would stem the current slump.

Apple has solved that problem, with the 600+ MHz ARM processor in the iPhone by severely watering down both the OS and the customer expectations. UNIX daemons that run on the desktop just don't exist on the iPhone. Only one app runs at a time, which is all the user needs or wants in a handheld. To top that off, Apple can expect to sell about as many iPhones in 2009 as netbooks sold. As a result, Apple's "third leg" of their business model substitutes for a Mac netbook. With fees coming back from AT&T, the iPhone is likely more profitable as well.

Despite all that, Apple customers would certainly like to save money, travel with a full featured Mac as well as their iPhone, and a new model just doesn't seem to fit in Apple's product line. What Apple could do is to take note of the fact that the MacBook Air, while premium priced because of its slim form factor and low weight, really has the performance profile of a high end netbook. Reducing the price gap between the MacBook and MacBook Air might make customers look at the Air more seriously as a top end netbook rather than a conspicuous, high priced status symbol in tough economic times.

The Total Perspective

The upshot is that while Apple can expect to see a decline in total Mac sales for a few quarters, offering a cheap netbook doesn't appear to have the market capacity to make up the gap nor fit in with Apple's iPhone strategy based on the sales numbers for all the products in question.

For example, here is the estimate of Barclay's Ben Reitzes for 2009, unit sales in millions:

        Mar Qtr,'09  Jun Qtr,'09  Sep Qtr,'09 
Mac          2.18         2.40        2.54
iPhone       2.18         2.12        4.66
Total        4.36         4.52        7.20

Looking at the issue in this light, one can argue that the sum of Mac and iPhone sales should be compared to netbook sales before deciding that the near term, minor slump in Mac sales merits the introduction of a cheap, low-profit netbook.