The increase in notebook sales during Q2 2005 is dissipating, with preliminary Q3 figures out from IDC showing that 304,000 notebooks were shipped in Q3, down from 330,000 in Q2.
While the sub-$1000 notebook has done wonders for the market in the past six months, its magic is starting to wear off, with revenues also beginning to come down fast.
According to IDC senior analyst PC hardware Mike Sager, the strength of the Australian economy was, ironically, to blame for this malaise.
"Australia has a stable economy and hasn’t had the same drop-off as the United States and this has attracted a lot of vendors to the market here," he says. "The local market is quite crowded now."
This had resulted in a flood of notebooks creating additional price pressure, according to Sager. "You’ve got Acer, Dell, HP and now Lenovo with a sub-$1000 notebook, so you’ve got four vendors playing in there," he says.
The squeeze
While the increased choice for resellers would seem like a boon, many of the challenges facing vendors were being passed onto dealers.
On the one hand, vendors and dealers needed to be price-aggressive and push as much product as possible, but on the other hand, there is still a need to make decent margins. For many resellers, managing both is just not possible.
One Victorian reseller, who asked not to be named, says notebook margin squeeze was adding strain to his already tenuous relationships with suppliers.
"The notebook manufacturers screwed the market," he says. "They don’t really care about resellers."
He says notebook hardware sales ‘have had it’ and without current service and repair income, resellers would be out of business by next year.
According to Toshiba information systems general manager Mark Whittard, resellers need to be selective in what brands they represented.
"Some manufacturers have reached very low sub-$1000 price points by squeezing the reseller margin but Toshiba doesn’t do that," he claimed.
"Our strategy is to offer the product at full margin to the channel and we bear the brunt of any price decline so channel margins remain the same."
With seasonal variations also having a large impact on managing revenue streams, choice of vendor partner was not the only challenge resellers had to hedge against, IDC’s Sager says.
In the countdown to Christmas, the research company has identifi ed three key product categories — printers, projectors and PDAs — that will increase competition for the consumer notebook dollar. "Notebook sales are very much contingent on what happens in other product categories," Sager says. "If prices in these three product categories decline going into Christmas, then notebook sales will be hurt."
Mass market buying power was also another consideration, Sager says. This was especially important in the face of Harvey Norman’s recent purchase of Megamart.
"Harvey Norman has a lot of power," he says. "A lot of how notebooks fare over Christmas will be contingent on what they and stores like BigW do."
However, for HP notebook product manager Janet Bradburn, the addition of peripherals to low-margin notebooks was a strong card left for resellers to play.
"Resellers who focus on up-selling customers to higher models, and add key notebook options and extended warranties, will be the ones enjoying the highest profi ts from the sale of mobile devices," she says.
Queensland-based reseller, The Laptop Company (TLC), has developed a ‘cradle to the grave’ service approach to selling its notebooks.
TLC director David Hawley, says the company manages the customer from their first purchase through to successive model upgrades, by arranging financing, doing regular health checks and offering trade-back deals come upgrade time.
"When TLC first got into notebooks it was a niche market," he says. "Now notebooks are way more commoditised. Everything’s price-driven and very few people care about the back end of the sale."
Just as customers needed to be choosy in picking a reseller, so too did resellers in selecting prospective distributor and vendor partners, IDC’s Sager says.
"Over the next nine months there will still be a lot of marketing dollars coming in from the new vendors," he says. "Once we get into next year and the consumer market slows down again, that funding will begin to dry up."
Sager cautions resellers to be on the lookout for vendors that kept their channels separate.
Just six months ago, Acer was the target of a number of disgruntled resellers with its charge into the sub-$1000 notebook market. But its mobile computing business manager, Lindsay Tobin, claims partner fears about being undercut by mass merchants had been addressed.
"We think the issue’s been addressed fairly well," he says. "From the feedback I’ve had we’re seeing the initial concerns in the commercial segment being well and truly alleviated."
HP is also keen to mark the sub-$1000 notebook as a positive, with Bradburn arguing the products have opened up a new market.
"The sub-$1000 notebook has fuelled growth in unit terms, so sales growth has not occurred at the expense of higher priced notebooks," she says. "These notebooks have brought new customers into the market."
While cheap prices may attract new users in the short term, second generation purchase will be dictated by other concerns, ASUS managing director Ted Chen, says. "The user’s experience and service quality will decide their next buy," he says. "Therefore the dealer should support a reliable vendor which has a clear channel policy without jeopardising dealers’ long-term advantage."
While many resellers will look to white-books as a possible saviour, IDC’s Sager says resellers could not compare the past success of white-boxes against branded desktops with the notebook market.
"White-boxes have been able to be price competitive and build economies of scale," he says. "But with notebooks, the multinationals are heavily favoured and are about three years ahead of any white-book vendor."
However, in the last quarter, white-books have gained a little, going from 5.2 percent to 6 percent of the notebook market, Sager says.
"It’s going to take them a while to figure out how they will approach the market and a lot of it will be on the back of what Microsoft and Intel can do to support them," he says.
David Wu, general manager of Queensland-based reseller Computer Australia, disagrees with the value of white-books for a number of reasons.
One is stock. With white-boxes, lots of parts can be kept on-site and sold individually, whereas customer demand for such parts for notebooks was low.
"If resellers do keep parts and prices drop or technology changes, you get stuck with the stock, or you won’t have the right stock for the customer," he says.
Second is the issue of warranties and quality control. Different manufacturers produce different parts and only warranty their own products. The white-book produced by a local shop cannot
compete with international warranty offers, leaving customers exposed when overseas, Wu says.
Third, large notebook manufacturers often get a lot of funding from Microsoft and Intel and use that funding, plus their own, to heavily market their own notebooks.
"For example, ASUS has done a lot of press, TV, radio, magazine advertising lately, whereas local white-book producers can’t afford to do that because of a lack of funding," Wu says. "So their brand will not be as well known as those larger multinational brands."
Nowadays, the fact white-books are not that much cheaper than brandeds was not the only challenge facing white-book manufacturers and distributors, Toshiba’s Whittard, says.
"A white-book guy has to do his own marketing, has to spend a bare minimum of 3 percent of their turnover just to make a noise, and they have to then do their own collateral, do their own PR, create their own sales tools, advertising, create a brand, and differentiate themselves and get the message out there," he says.
Then there’s doing their own packaging, providing their own website, creating their own bios and drivers, providing service infrastructure, having the resources for repairs, carrying spares inventory, and in case of an epidemic failure of some sort you have to have accruals in your balance sheet to cover that, he adds.
It seems even all that is not enough to deter some. Henry Lee, notebook product marketing manager for local white-book manufacturer Optima, says white-books will always have a future against well-established brands as they continue to provide flexibility in terms of specifications, local logistics and service.
"With white-books around, the channel will continue to enjoy competitive pricing and specs," Lee says. "Many customers and end users who purchase from local resellers prefer the closer relationship they get and generally better service."
Jeff Li, product manager, Pioneer Computers Australia concurs. ‘Notebook sales are going well, better than last year,’ he says.
"As we know other brands are making a loss on the sub-$1000 notebooks, but we’re still making money and dealers are making money."
Pioneer builds to order in Malaysia and Sydney, and Li says the company has 20 build-to-order models, whereas most of the others only have four to six. Li says Pioneer was the first to have face recognition technology on its notebooks, and in two weeks, notebooks with AMD’s dual-core technology will be available.
"We have been in this market for eight years," he says. "We work very closely with the factories; if you don’t have that relationship, you won’t do notebook business. The first couple of years were tough, but now it’s picking up."
To try to give Pioneer more muscle, Li says the company is working with Intel on a new build-to-order program for dealers with huge nation-wide advertising.
White-book players know the multinational companies have a head start over the channel in terms of brand awareness, but distributor TodayTech is not deterred.
Its marketing manager, Jennifer Hsieh, says you have to take it step by step, gradually getting the word out, holding seminars, showcasing the latest technology and notebooks to customers.
"With build-to-order, the reseller has more control over the product they sell, and can get a competitive edge," she says. "For resellers there’s more money in customised and fully configured white-books, helping resellers expand their business. Freedom to control their business is slowly converting resellers."
Following this approach, TodayTech is launching a series of notebooks called Macron, Hsieh says.
"These notebooks are a fully integrated unit," she says. "How it works is we’ll have a starting point for resellers and if they want, they can put in a different CPU or a different chipset or graphics kit."
She also says TodayTech will have two machines fully available with the Napa platform in January — in both Macron series and barebone series.
"And by end of Q1 2006 we will have six models with Napa," she says. "I believe we’re one of the first to have the Napa platform."
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