No Netbook for You, Apple

Analysts just won't leave Apple (Nasdaq: AAPL  ) alone. One of them, Ezra Gottheil of Technology Business Research, this week insisted that the iEmpire would have a netbook sometime in 2009.

"Apple is facing the possibility that as the economic news gets worse … they're increasingly pricing themselves out of an important market," Gottheil wrote in a research report. "Economic conditions are accelerating this."

True. Apple is facing an economic crisis, as is every other PC and device maker. But that doesn't mean the iEmpire needs netbooks to thrive.

Why Steve should say "nyet" to netbooks
Netbooks are stripped-down PCs priced for between $300 and $500 each. Intel's (Nasdaq: INTC  ) Atom processor is behind most of them, including Dell's (Nasdaq: DELL  ) Inspiron Minis. Amazon.com (Nasdaq: AMZN  ) sells around 70 netbooks from Acer, Samsung, and Hewlett-Packard (NYSE: HPQ  ) , among others, at its site. That's up from roughly 64 in October.

"They don't pack much in the features department, but at price points typically in the $400 range, netbooks are the right portable computing solution in this big-ticket-weary market," Foolish colleague Rick Munarriz wrote at the time.

He's waiting for Apple to create a netbook, as I'm sure are many. Hence Gottheil's thesis; demand certainly is not lacking. Why shouldn't Apple take advantage?

Because it's not Apple's style. "We don't know how to make a $500 computer that's not a piece of junk, and our DNA will not let us ship that," executives said in an October conference call with analysts.

Exactly. When Apple plays, it plays to win. To Steve Jobs, quality and inventiveness matter a lot more than speed does. Take the iPhone. We Fools were writing about the disruptive potential of an Apple-branded smartphone in 2006, about18 months before it reached market.

Nokia (Nasdaq: NOK  ) was the global heavy in smartphones back then. Here in the U.S., we were suffering from a CrackBerry addiction. That market was nascent two years ago and still is; would it have been right for Jobs to roll out an iPhone early, to ride the tide that was lifting all boats, even Palm? I doubt it. Apple is better off today for waiting to create a product that would leave rivals scrambling to catch up.

And when I say "better off," I'm talking principally about how the iPhone helped Apple to produce $8.5 billion in free cash flow during fiscal 2008, about an 80% increase over last year's $4.7 billion. That's vintage Jobs -- investing to create sustainable, cash-gushing disruptions. If he and his team don't yet have an idea for how to do that with a netbook, they must wait.

Wait for the Tao of Steve to take hold
I'm not arguing that Apple should forever forsake the netbook. Rather, I'm saying that Jobs should forgo launching a low-cost product until the design is such that it will seriously disrupt the market, create a competitive sales advantage, and confer above-average margins.

We know this formula works because it's worked in the past:

  1. Disruption. Look at the iMac. The flat-screen design from 2002 landed on the cover of Time. Today's self-contained design has been copied by PC makers yet remains a strong seller. Desktop unit sales were up 15% in Apple's fiscal fourth quarter.
  2. Advantage. The iPhone touchscreen interface drew both skepticism and raves at launch but has proved to be a stroke of genius -- so much so that Research In Motion (Nasdaq: RIMM  ) just tried imitating it with the BlackBerry Storm.
  3. Margins. All of that cash flow from above? According to Apple's 10-K annual report: "The Company's cash generated by operating activities significantly exceeded its net income due primarily to the large increase in deferred revenue, net of deferred costs, associated with subscription accounting for iPhone."

Finally, consider Apple TV. It's an interesting product, to be sure. But was it ever really a generational leap beyond what competitors were offering? Not really, and I think so far it's been one of Apple's rare losers as a result.

So, yeah, the economy's a mess and competitors are rushing, like lemmings to the ledge, to sell low-cost PCs to strapped consumers. Will they profit? Who knows? Who cares? The Apple I bought into invests for returns, not scraps.

You have time, Steve. Build a better netbook -- one that blows apart the idea of what a netbook is -- and the customers will come. They always do.

Amazon and Apple are Stock Advisor selections. Dell, Intel, and Nokia are Inside Value picks. Try either of these Foolish services free for 30 days. There's no obligation to subscribe. The Motley Fool owns shares and covered calls in Intel. 

Fool contributor Tim Beyers had stock and options positions in Apple and a stock position in Nokia at the time of publication. The Motley Fool's disclosure policy keeps its Tao in tow.


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  • Report this Comment On November 26, 2008, at 4:08 PM, Silaschino wrote:

    Excellent analysis. There is no rush here. Over time, Apple may be able to simply lower the price point of the MBAir such that it makes all the netbooks look sad by comparison.

  • Report this Comment On November 26, 2008, at 4:52 PM, SSchlesinger wrote:

    I am not an Apple fanboy, in fact there is a lot I don't like about Apple. Just the same I am a huge Intel fanboy. That being said, I think Apple has made the right decision to not jump into this market, for now.

    The Intel Atom processor is great, but its still fairly new. This entire netbook segment is also new. A lot of what makes a Mac a Mac requires a lot from a processor. In the PC realm a good portion of the market is still into XP. The is a smaller footprint OS than OS/X and as Jobs illuded to, trying to make it work on a netbook would just be horrible. Instead of rewriting code, or going back to old operating systems these processors, and most importantly the solid state drives will get much better, faster and cheaper over the next year.

    As you may recall the Ipod wasn't anywhere near the first generaton MP3 player. They waited until the time was right. They are doing the same with this technology. I don't doubt for a moment that Apple isn't interested in the mini laptop market. When their time comes to make one, just watch, it will be like they invented the market!

    Apple knows how to make neat, innnovative products that their customers appreciate. So, even though I love seeing Apple bashed anytime, anywhere, on this one I think it's safe to say, cut em some slack!

  • Report this Comment On November 26, 2008, at 6:01 PM, lewsreviews wrote:

    I've been eyeing the netbook market for some time now and keeping an eye on the Apple lineup too. A netbook from Apple could be a great product and have a good margin, better than their competitors'.

    Rumors about the Macbook Air were misinterpreted as a coming Apple netbook. While the Macbook Air is 'ultra portable' and very thin, there are three reasons it isn't a netbook, first being cost. Starting at $1,799 and up to $2,499 the Air is well above the sub-500 price point of a netbook. Second is performance, most netbooks have small screens, Atom processors in the sub 1Ghz range and tiny hard drives. While the Air isn't as powerful as even an entry level MacBook it's not exactly wimpy and perfectly capable of running Apple's newest OS X Leopard. Third is the physical size of the Air. The Air is very very thin and light, which makes for more room in your laptop bag and less weight to carry around, a blessing for anyone who needs to travel with their laptop and doesn't want to give up their 13.3” screen. And so, while thin and light the Air has a footprint similar to their standard entry level laptops thanks to the 13.3” display. Compare this to a netbook with a screen size of 7” to 10”. Clearly the Air is not a netbook, nor was it supposed to be.

    Why haven't we seen a netbook from Apple yet? Though Apple is capable of making small and low power machines that use OS X (e.g. the iPhone) they can't currently make a machine with a form factor and price point of a netbook which is powerful enough to run their current desktop version of OS X with the performance that we've all come to expect from a Mac. Despite this I have no doubt that a netMac is in the works, as Apple has a couple advantages that the general PC market does not have.

    First is the Apple name, buyers are willing to pay a little more for the Apple name and the spit-and-polish that comes with their products. The aluminum “unibody” design of the new Macbooks would provide a look, feel and durability that the average plastic netbook couldn't compete with.

    Second is Apple's OS X Snow Leopard. Current PC netbooks run either a small version of Linux or Windows XP (since most are not powerful enough for Vista's requirements). OS X Leopard is less demanding for hardware than Vista, but still too demanding for any machine with the size and cost of a netbook to run as smoothly as with a normal laptop. OS X can run on a shoe-string budget for resources and the iPhone's version of OS X is proof of that. To deliver the same experience in a netbook you get in a laptop or desktop will require a flavor of OS X which has the current feature set of Leopard but with a smaller footprint and less hardware requirements and this is what OS X Snow Leopard is. Snow Leopard is due out some time in 2009, and would give a Mac netbook, or NetMac a huge advantage over a PC netbook which is a full-fledged OS like one you'd find in a desktop that runs fine on a $500-ish tiny netbook.

    Lastly Apple's experience with the touchscreen and accelerometer technologly in the iPhone and iPodTouch could easily be implemented into a NetMac allowing for tablet style iPhone input.

    For these reasons I think that Apple could and will make a great product for the netbook market, and would do very well against the $500ish netbooks even if the Apple product was priced slightly higher.

  • Report this Comment On November 26, 2008, at 8:32 PM, Secon wrote:

    I recall rounds and rounds of criticism that Apple Computer wasn't producing a tablet MAC many years ago and that they were going to loose out of lots of money. Strange thing is they didn't loose out, even slightly as the TabletPC has remained in a tiny, tiny niche. Years ago they were slammed for not making a cheap computer and that they'd continue to loose market share. Strange thing is they didn't loose out, even slightly, if anything they've gained. Analysts need to be taken with more than a grain of salt, their batting record is rather poor. One would be a FOOL if you based too much on these researchers/analysts. : )

  • Report this Comment On November 26, 2008, at 9:42 PM, SSchlesinger wrote:

    I just wanted to respond back to Lewreviews,I think we agreed a lot on the same points. The current Atom processor is about as powerful as a Pentium 3. That's quality 1995 computer technology we're talking about! Anyway, Intel is throwing a lot of support behind the Atom processor in terms of development. They will move it to the 34NM cores starting next year which is about as cutting edge as you'll find right now. Their goal is to tap into the cellphone/smartphone market with these processors. What this means is that these processors are going to get a lot better very quickly. They are projecting that by 2010 the Atom will be about as powerful as the low end Centrino laptop processors.

    The joint announcement of joint project between Intel and Micron for 32GB flash memory will mean that the drives on these little nettops will jump from between 4GBand 16GB to minumum 32 very soon. What this all means is that within the next year the processors and hard drives won't be a limiting factor for entering this market.

    At the current time people have taken the beta build of Windows seven and run it on these nettops without problems. So, both Mac and PC's will have newer operating systems with smaller footprints.

    Someone mentioned the tablet PC's. Those things never really caught on in the PC realm for a variety of reasons. This mini laptop market is too large to ignore. I don't think you'll ever see a $199 Apple minilaptop. I do suspect that they will start off at $500 and offer innovative things like a touch screen that has that spread zoom feauture like you see on the Iphones.

    The Atom processor is being pushed by Intel as a revenue stream for smart phones and developing markets around the world. Due to the poor economy this is where they are going, and they are putting a lot of resources behind. What this will do eventually is elevate the technology of the bottom end of the laptop market. As this occurs it's gong to be more difficult for all laptop makers to justify their high end lines with high prices. This is going to effect eveybody including Apple. So, even if they decide to stay in the $1000 and up laptop market these little mini laptops are going to eat away at their market share. In other words, the profitability of the laptop market is going to get squeezed..

  • Report this Comment On November 27, 2008, at 11:08 AM, Babble100 wrote:

    Apple: Forget netbook. Let PC manufacturers lead the race to the bottom, cramming an ill-fitting overstuffed OS into an ever-more performance-constraining smallbox.

    Reinvent the "tablet PC", Mac style.

    Just a flat, thin, light, paper-tablet sized slab with no lid. A bigger version of iPhone with more screen and a snap-on keyboard option. Easy to use. Intuitive. Attractive. Slips into a briefcase with no pain.

    Synchs with the iPhone but greatly extends its capabilities.

    Executives will buy it. Administrators will buy it. Managers will buy it.

    They'll pay you three times what the netbook makers are getting.

  • Report this Comment On November 27, 2008, at 6:06 PM, JurisP wrote:

    My crystal ball tells me Apple will build a netbook into which the user will insert their software enhanced iPhone as the touchpad. It will serve as the 3G port, supply extra memory and cpu power, and when the session is finished detach taking away anything new that was downloaded or created while using the netbook.

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