art with code

2009-08-22

Why do netbooks cost 40% more than a year ago?

The netbook was touted as a small, slow and cheap second computer. The first netbooks were small, and while the 300€ pricetag wasn't all that small, at least compared to the promises of hundred dollar laptops, they were still the cheapest portable computers around. Today, netbooks are still small and slow, but they are anything but cheap. The average netbook costs 500€, which puts it in the midrange price category, above fully-featured 15" entry-level laptops that regularly sell for 400€ and below. What could be the reasons for the massive 40% netbook price hike?

Let's think like a computer manufacturer for a bit. You have a highly contested market with standardised parts and low levels of product differentiation and customer loyalty. And, worst of all, your product designs become obsolete within a year or two. 

Ok, first you want to set a breakeven period, during which you predict to sell enough copies to recoup your development costs. As computers obsolete quickly, you want a short breakeven period, let's say three months. So, in that time, you need to sell enough copies to make copies_sold * (selling_price - parts_cost) >= development_costs true.

The development costs are pretty much fixed for a run-of-the-mill laptop and copies sold depends mostly on selling price, so the only part that you can control is parts cost. Given the nonlinear curve for copies sold as price increases (demand curve), you need to increase your profit margin as you increase the parts cost. 

If you predict that you'll sell a hundred thousand copies of a 300€ netbook but only fifty thousand copies of a 400€ netbook, and your development costs are fifty million, you can work out the profit per copy required for each price point: 50€ for the cheaper netbook, 100€ for the more expensive netbook. You can then get the parts cost by deducting profit from the price: 250€ parts cost for the 300€ netbook, 300€ for the 400€ netbook. So adding fifty euros to the parts cost brought the sales price up a hundred euros.

Further, as the demand curve is sigmoid, sales of a slightly more expensive 500€ netbook might be only linearly worse than a 400€ netbook, so you could put in 75€ worth of extra parts and go for the low-end luxury segment. And, given the choice between the commodity and luxury ends of a linear segment of the demand curve, you want to go for the luxury end, as it makes your brand more prestigious, allowing you to spend less money on marketing.

My working hypothesis on the cause of the massive netbook price hike is that the parts cost rose by around fifty euros, bunting it from the exponential part of the demand curve into a linear segment, leading netbook manufacturers to start marketing netbooks as luxury items instead of commodity items. 

The basic hardware of netbooks has been fixed by Intel and their bundling policy, where it's cheaper to buy a CPU with the bundled substandard integrated graphics chipset, than only the CPU, making third-party chipsets unable to compete on price. The two major new parts added to netbooks since their introduction are an expensive large hard disk and the similarly expensive installation of Windows software, which probably account for the increase in parts cost.  

The resulting price increase then drove manufacturers to position the netbook as a luxury item. And as luxury items are very much driven by differentiation, but the fixed hardware platform does not allow for differentiation through faster processing speeds or bigger displays, manufacturers were required to differentiate on the basis of battery life and industrial design.    

In conclusion, low-cost commodity software and storage made the original 300€ commodity netbook a working proposition in the marketplace. Replacing the commodity parts with more expensive variants necessitated a disproportionate price hike and repositioning of the netbook as a luxury item, though the amount luxury you can derive from the slow CPU chained to substandard integrated graphics is debatable. 
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Built art installations, web sites, graphics libraries, web browsers, mobile apps, desktop apps, media player themes, many nutty prototypes, much bad code, much bad art.

Have freelanced for Verizon, Google, Mozilla, Warner Bros, Sony Pictures, Yahoo!, Microsoft, Valve Software, TDK Electronics.

Ex-Chrome Developer Relations.