Economies of scale

With netbook sales on the up, it's not surprising that more and more vendors are getting in on the act ?but what will this flood of machines offering miniscule margins mean for retail? Andrew Wooden reports?
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Last month PC Retail reported on the mass adoption of cheap laptops (or netbooks or subnotebooks, whichever term you choose to employ) is largely responsible for keeping the PC industry in such good shape, while other markets are struggling in the economic climate.

While on the surface this seems like a success story (and in many ways it is just that) many in the retail sector have expressed concern as to how they can continue making money on these machines – especially when some competitors are offering free PCs with broadband contracts.

Furthermore it could be argued that low cost laptops could potentially pose detrimental consequences to the service side of a retailer's business, since buying a brand new machine at low prices may seem preferable to spending money to get a faulty one fixed.

The questions as to how much such fears are warranted can be measured by consumer perception of what a sub-£200 PC really is. If a customer can't see any tangible value in spending over £500 on a PC when he can get one for practically nothing, you'd have a hard time convincing him to pay more.

On the other hand, if they are seen as supplement items and correctly identified as unable to perform most of the tasks a fully-specced modern PC can, then the situation is nowhere near as grave. The key to ensuring the latter occurs most of the time is accurately informing the consumer and responsible selling from retailers.

Selling responsibly
PC World parent DSGi was the first to introduce free laptops with broadband deals. Unsurprisingly it doesn't believe such schemes are damaging to the industry, but insists that will only be the case as long as customers are told exactly what they're getting for their money.

"We see our Get Connected products that have come out as a future route – if you don't get a free laptop on subscription you get huge amounts of money off a laptop depending on your order," says head of media relations Mark Webb. " So it's an area that we're developing. We're not particularly concerned about effects yet, but I think we need to say 'let's sell it responsibly, let's keep our customers engaged, let's address our customers needs and see this as an opportunity to retain them.'

It's all about engagement with the customer and responsible selling and could become an issue if it isn't sold responsibly. Some of these netbooks are genuinely good products, but there are superior and more expensive products out there and people need to understand what they're getting for their money."

Something for nothing
In any industry, as technology gets more widespread, with ever-increasing levels of supply and manufacturing capability, it's inevitable that basic unit cost will go down. This can be seen with stereo systems and LCD TVs, but as prices get lower people don't necessarily jump at the cheapest possible model each time. Some will of course, but in a growing market that's not a problem – as long as the perception that one PC isn't necessarily as good as another remains.

"I actually don't agree with the theory that the user's value perception of computers is notably diminished by the low-cost or free cost model," says PCA founder Keith Warburton. " That argument held water when we were downsizing the hardware at the same time as reducing the price. If you 'gave' someone a computer that was the size of a house they'd appreciate that they were getting a hell of a lot of technology; but if you give someone a computer that is pinhead sized, they'd not see its real value.

"But now and for the near future we are at a size plateau which will exist so long as our computers (as opposed to hand-held devices) require reasonable sized keyboards. We have become used to that size of product and the solutions it can offer us, and therefore we understand and appreciate the 'value' of the kit. We know, by and large, that if someone is offering us the kit for low or no cost, we are going to pay for it somewhere else along the line. Most of us understand that you get what you pay for, that you get nothing for nothing, and there's no such thing as a free lunch."

From this point of view, the netbook influx could be seen to have no noticeable impact on 'standard' PC sales and upkeep at all. So are we headed for a world where everyone owns two laptops – a mobile machine and a higher specced main one? Some are wary of jumping to conclusions, questioning the longevity of the market at all.

"Despite the big volumes, this is not yet a proven segment. We are still in the 'novelty' phase with netbooks – tablet PCs saw similarly rapid up-take when they were first launched, now they have all but disappeared from the shelves," says Alastair Edwards, senior analyst at Canalys.

"Vendors are jumping on the bandwagon, but I think there is still a lot of internal scepticism that this will be a long-term segment in its own right. I think certain markets will adopt these products successfully – education is one – but this is a product that sits somewhere between a smart phone and a notebook. It doesn't replace either, and this is part of the problem. For business customers, the screen is too small for real mobile working. I think the iPhone is much more of a 'must-have product' for many business users than a netbook."

False alarm?
While the increased popularity of a cheap lowmargin product will initially seem alarming, it's not necessarily all it seems. It's true netbooks aren't a proven segment yet, and could well lose their current popular appeal.

On the other hand there could be a backlash against machines that can essentially only handle email and the internet, while the rest of the industry is busy proclaiming all the exciting new abilities that modern software and applications can offer, which all these new netbooks would have a seizure over if you tried inserting the disk.

Yes, they are shipping bucket-loads at the moment – but in an economic climate where consumer spending is shrinking anyway, perhaps that is more of an understandable temporary effect and not the pemanent way of things.

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