Netbooks have taken IT markets around the world by storm, but question marks have emerged over the sustainability of the business for partners.
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When mini-PCs first emerged as a serious hardware category it soon became apparent to most PC makers that failure to jump into the fray would leave them behind the competition. This led to the release of myriad tiny tablets and portable products to attract consumers in the Middle East and beyond.
From the consumer perspective, the appeal of highly portable computers that can answer the cravings of the always-online modern psyche is clear. At the same time, taking a mini-PC away from the store doesn't leave too much of a dent in the pocket.
Therein lies the first problem for the netbook channel. As far as the consumer IT market goes, netbooks might be the proverbial wolf in sheep's clothing because it is difficult to see them as anything but a mass product. Price points are low, the number of competing brands is huge and telecom operators are now offering them for free as part of network services bundles.
General manager at IT and consumer electronics retailer Jacky's, Jimmy Patel, says that during this recession the company has been experiencing a down-sell from a notebook to netbook. "Unless you make very big volumes it is not necessarily worth it, but you cannot afford to miss this category as well - it is growing at a very fast pace and it will almost double its share this year."
Dealing with netbooks may well present a safe bet as the financial crisis forces some players to focus on fast-moving products. But those that are thinking long-term survival over short-term gains might well be very cautious about this sector due to the relatively low opportunity for value that mini-PCs offer.
Matt Rowland-Jones, an expert in channel business and general manager at BChannel consultants, recently said that the value and opportunity of selling netbooks for distributors is questionable, citing the fact that in markets more mature than the Middle East, such as Western Europe, mini-PCs have been forming part of promotional bundles offered by telecoms operators for some time now.
"These type of PCs are often associated with packages that include services such as annuity services," said Rowland-Jones. "And that is bringing in a question about the value and whether we are only selling the hardware in order to sell the service and potentially that can undermine the perceived value of the kit. I have a big question in my mind about where that is going to take it in the long run."
This is a point now relevant to the Middle East market as vendors begin to sign up with telecoms providers in countries such as the UAE and start to integrate 3G capabilities into mini-notebook systems.
Guy Whitcroft, principal consultant at CapitalSteps, an IT consulting firm based in the UAE, suggests the mini-PC offers great potential, but that it is likely to dissipate after a couple of years. "There is certainly opportunity in the netbook and I think it is a two to three year opportunity," explained Whitcroft. "You will find over the next three years that the netbook will grow in specifications and size and ultimately become more like an entry-level notebook as we understand them today."
Samsung, which launched a netbook offering in the UAE at the end of last year, is looking to capitalise on the current potency of the mini-PC market. Despite coming to the market relatively late compared to some rivals, Samsung says that it has seen a positive response from customers.
"There has been a great response and we are extremely happy with what has happened so far and if we go quickly and shift the discussion to netbooks the product has taken off extremely well," asserted Madhav Narayan, general manager for the IT division of Samsung Middle East. Samsung, however, has not - as yet - provided any statistics to quantify its claims of success in the mini-PC market.
Narayan says that from Samsung's perspective, margins from netbooks are sustainable for the channel because the company operates "controlled distribution".
He explained: "With the controlled distribution model there is a fair amount of predictable margin that the reseller and the distributor get and they have been able to take good margins. We are not typically aiming for the situation where we give the product to one distributor and it gives it to every single channel that it can lay his hands on in the market. The moment that you do that, it leads to price erosion at the tier-two level, and we don't like it if that happens," said Narayan.
Samsung is not the only vendor in the Middle East that has been carefully considering its logistical strategy and alliances in an effort to ensure that margins from selling netbooks are not unworkable.
Hardware producer DTK says that if the channel is going to thrive in the netbook arena vendors have to be very careful about the pressure they put on them and provide adequate support. "We are flexible up to a limit that we can protect our channel.
Flexibility means that we can implement to suit our channel, we can bring the goods to the channel at a price point that is really competitive and we do this in a way that we aren't a competitor to our channel," said Nimer Al Attal, managing director at DTK. "If you are selling the consumer product you will not find someone around you within a hundred kilometres selling the same product."
As a vendor that came to the Middle East market earlier than others, DTK seems a lot less effusive about the potential of the category. Al Attal admits that the netbook market is difficult to grasp from both the vendor's point of view and that of the channel. It is certainly true that mini-PCs are a rather fickle segment, closer to the low-end and mass product mobile phone than the higher-end notebooks which they resemble. When you look at the price of a PDA and a netbook, the two are almost indistinguishable.
"Our expectations were higher than what we received in the market," confessed Al Attal. "We did not get the reception that we were expecting. We invested a lot of money with Microsoft, and Microsoft put in funds, but the reception was less than we expected."
DTK puts this down to the fact that the netbook is a relatively young product and there needs to be more education in the market as to the usage and worth of the technology. But the most important question for resellers, retailers and distributors alike is, what real value is there in netbooks?
Patel at Jacky's is sceptical about the overall value they bring to a retailer's offering. On the one hand it is a category that is growing and promotes significant footfall, but on the other margins are thin and the product distracts consumer attention away from the higher value notebook segment.
Further to this, Patel says Jacky's has seen a cannibalisation of profits and margins in notebooks after the arrival of the netbook to its shelves. This is a significant problem that seemingly only stands to intensify as netbooks mature in specifications and design.
"There is a canabilisation of the lower end of the netbook market and I would rank it anywhere between 15% and 17%," explained Patel. "If you see the absolute value then it is possible for me to sell one notebook and for the equivalent I would have to sell three netbooks. It is high volume, low margin."
For this reason it is important that the channel carefully positions the netbook, firstly to minimise the cannibalisation of the low-end notebook market and also to ensure they are aimed at the right channel, equipped to move the huge volumes needed to sustain the business. That channel, for the moment, consists of hypermarkets and hyper-retailers.
"We are not into big volumes, but maybe those like Carrefour or other big retailers are moving the numbers," said Patel. "With us, the focus on netbooks is not high. If you take overall business, it is about 15% of our cake."
Distributors that have been keen to pounce on the netbook category and view it as an added revenue source that can help them sustain the pressures of wholesaling in the current financial climate have, nonetheless, had to be savvy about the correct positioning of the mini-PC. In their eyes it seems that netbooks are commanding great attention, but are solely for power retail. They too warn retailers to be very careful about clearly demonstrating the difference between a netbook and a notebook to the end-user.
Most interestingly, some distribution partners do not see netbooks leading to the cannibalisation of the low-end notebook margins. Vijendra Singh, general manager for personal systems and retail at hardware distributor FDC, which carries Lenovo and Acer netbooks, effusively defends netbooks as a compelling category.
"The netbook market has given us an additional opportunity within the same category," asserted Singh. "It contributes 26% of our total business and it is not that we are losing market on the notebook - the notebook market is there - but the netbook market is additional revenue."
He goes further to suggest that the category has attracted new end-users such as the younger consumer and those that have a laptop for home and office use but see the netbook as a possibility to remain connected on the go. Singh also holds a view in common with almost all commentators of the IT market that the netbook retains limited opportunity for the corporate reseller channel.
George Su, deputy managing director of Asus Middle East - which has been a pioneering name in the netbook market since its conception - disagrees, however. He claims there is value in resellers that target businesses to consider carrying netbooks.
"One of the Eee PC target segments is the mobile corporate user who are definitely in need of connectivity with basic or mid-level computing," said Su. "For the corporate reseller they have a product which fits the bill of their customer's requirements."
FDC suggests that netbooks not only promote up-sell opportunities, but facilitate them as a result of their minimalist specifications, such as low memory and no optical DVD drive. According to Singh, bundling brings the channel extra revenue. "This cross-bundling is happening and the customers see a very good value proposition," explained Singh. However, he also concedes that the need for such added value is largely to do with the low and increasingly competitive price of the netbook. "They are buying bundles from us because currently the ASP for the netbook is low at US$399 and they want to bring the ASP up," added Singh.
Despite this, Singh insists the margins associated with netbooks are worthwhile due to the attractive cost for the end-user. He also indicates that the low ASP means the consumer is more flexible when it comes to up-selling attempts. "Margins are healthy on netbooks because the ASP is low, people don't mind paying a few extra bucks," said Singh. "They are moving much quicker. Last quarter we sold more then 12,000 units."
One vendor that says it is working hard to support its netbook channel is LG. Felix Baretto, business manager of notebooks at LG Middle East, claims correct positioning goes hand-in-hand with in-store marketing. "We are working on the channel in terms of incentives and target-driven rebate systems," said Baretto. "From time to time we also conduct dealer seminars to educate the partners and help them understand our direction."
Support from vendors has come in other forms - moves that take into consideration the financial crisis and the impact it has had on the IT channel in the Middle East.
"Some of the vendors don't have targets for the notebooks - netbooks are an additional business and they found that it was too immature for them to put targets on," admitted Singh. He does, though, expect vendors to begin implementing targets for the channel now that the size of the market and netbook potential has become clearer after two quarters' worth of data.
Perhaps some of the many vendors that have jumped on to the netbook bandwagon could lead the way by underlining the value that netbooks will hold for the channel once the consumer furore has died down. It is evident that netbooks are popular and that most retailers cannot afford to overlook them.
There just remains the issue that margins will inevitably tighten as the competition increases and retailers might find it unfeasible for netbooks to occupy shelf space at the expense of higher margin IT products. If the netbook business is to be a sustainable for the channel, retailers and distributors that cannot move huge volumes are going to have to carve out some sort of value offering that boosts the netbook sale.
Netbooks may be passing through retail outlets and warehouses in the Middle East at a rapid pace, but that will only continue if the consumer and corporate channels can develop a business model to make it all worthwhile.