PERSPECTIVES - Books etc

The notebook sector is growing, but it's still not easy to make money. Buyers are more confident and demand the best deals, but increasing standardisation means it's hard to differentiate product in an overcrowded market.

The notebook market is an enigma at the moment. It is growing fast,ey. Buyers are more confident and demand the best deals, but increasing standardisation means it's hard to differentiate product in an overcrowded market. yet it's increasingly difficulty to make money out of it. There are fewer ways to differentiate machines and, as a result, both brand name and non-branded boxes are starting to squeeze out the products in the middle ground.

Any vendor that doesn't have a competitive low-end package can't hope to win any significant market share. There is still some growth of the notebook as a desktop replacement, but many users are second or third time buyers - confident buyers looking for the best deals. As a result, direct vendors are taking greater market share and the notebook is starting to take off in the retail space.

If this scenario sounds familiar, don't be surprised. The notebook market is heading the way of the desktop. It is polarising and fragmenting with the trusted brands taking the higher value sales and the majority of the market, while the non-branded products mop up at the low-end of the market.

The vast majority of brand name vendors are running two lines - one is the stock corporate notebook that uses the same architecture and components, accessories and docking stations as earlier incarnations. The other is the leading-edge product. Some vendors are trying to find niches between the value and volume products, but that's very difficult in a market where users are increasingly looking for a standard configuration. Prices have been falling and getting closer to the desktop pricing, but they still have some way to go.

Despite all this doom and gloom, the prospects for the notebook market remain healthy, with unit sales up by as much as 40 per cent in the early part of the year, according to Philip Williams, senior analyst for the personal systems group at Dataquest. The downside is that growth is highest for direct vendor Dell.

'The notebook market became healthier in the fourth quarter of 1998,' he says. 'We see growth being about 20 per cent in 1999 and the low end of the market in particular will be very healthy.'

Lower cost processors have made all the difference, Williams adds. AMD's K6 range has lowered notebook prices significantly and Intel has had to respond. The result has been a sharp fall in prices and a boom in the consumer market.

But the boom does not extend to non-branded boxes among corporates. Brand names are still important, says Andy Brown, PC market analyst at IDC.

'It's swings and roundabouts as regards branding versus price. Price has been the key factor when it comes to local vendors making good revenue debadging equipment and out-doing the big-name players.

'But that scenario has come full circle with the industry giants becoming very price aggressive and local vendors are starting to feel the pinch.

Many are now looking to other areas for margin, using alternative processor brands such as AMD in an attempt to differentiate,' he adds.

Eleonora Betancourt, market analyst at research firm Context, also expects a good year for notebook sales and lower prices. Context's figures show notebooks accounting for 12 per cent of the overall PC market in the fourth quarter of 1998, although most vendors say it is about 20 per cent.

'Apart from Intel releasing its PII333, PII366 and Celeron mobile processors, as well as the announcement of AMD's K6-2 for notebooks, there have been other signs in the first quarter of this year that the mobile sector is preparing for a period of sustained and furious activity,' she says. 'All the key vendors, including IBM, Toshiba, and Dell, are becoming very bullish and increasing their marketing push, especially in the retail sector.'

The retail market is the one they all want now, Betancourt adds. 'Although not as high value a market as the corporate segment, vendors are beginning to see some real opportunity in the retail space - an area previously unexplored, let alone exploited.'

Brown says most of the main vendors are making a determined effort in the consumer market, luring price-sensitive users with very good offers.

But he isn't sure that this is due to A-brand vendors feeling the pressure and seeking to diversify, so much as them finding a new market to target.

'The notebook market in Western Europe, especially in the consumer sector, is still relatively untapped. The notebook vendors know this and so a push into the retail end of the market is a calculated, logical progression.'

He claims that in this area more than any other, notebook pricing will be a significant factor. 'Penetrating this market is going to be tough, even for the most dedicated, street-wise vendors. With desktop pricing so consistently aggressive, consumers looking for a notebook know they can get a lot of desktop PC for their money. Unless the price of the mobile is right, they'll stick to desktop technology.'

Despite this, Sony with its Vaio range, has been enjoying considerable success. The manufacturer is apparently seeing growing demand through its retail push with Dixons Stores Group, which it supplies direct. One source estimated Sony's retail sales were outstripping channel sales by as much as three to one.

Williams believes success in other parts of Europe could be replicated in the UK. In Germany, food retailer Aldi has been successful with basic notebooks, while French supermarkets have also experienced similar levels of demand with PCs.

In the UK, Tesco has started to make inroads with desktops and the same could happen with notebooks this year, although it's important to recognise the difference in buying cultures, says Williams.

'The UK market is not ready for that yet,' he says. 'The Germans want the lowest price for the highest performance and they don't expect much support in return.'

In the UK, the channel is losing a considerable number of notebook sales to Dell. In Western Europe, the direct vendor's fourth-quarter sales were up 133 per cent according to Dataquest, to 9.3 per cent of the market.

Context gives Dell a 10 per cent market share.

IDC's Brown says Dell has certainly made significant inroads in the mobile market and that other vendors are going to have to learn from its example.

'Dell has achieved this through effective changes in management and strategy. It has optimised its distribution process and reduced inventory and lead times. It's built a solid reputation among its corporate clients for quality of product and service and that can take a firm a long way in the current climate.'

Williams agrees that, despite having had problems aligning its range, Dell has hit the right spot. 'It did not have the right products in the right sectors but now it has got the segmentation right and it is working perfectly well.'

Dell also did well because Toshiba took its eye off the ball for a while and did not have a lower-end product. That, says Williams, has been rectified with the introduction of K2-based models and he foresees a real fight developing, as all the top four vendors have strong packages.

Although its growth figures are lagging behind Dell and the others, IBM, Williams notes, has revived its fortunes somewhat after regaining the channel's faith. Add to these vendors the fast-growing Fujitsu, Siemens and the not inconsiderable forces of the Hewlett Packard and Apple brands, and you have a very competitive market indeed.

It's also a market that is changing rapidly, says Betancourt. 'The lines of demarcation between the individual market segments are becoming more clearly delineated. The differences between the corporate and consumer market sectors are more defined than ever before, being brand and price driven respectively.'

This is what has happened in the desktop sector but the notebook market has a much more sensitive supply chain than the desktop sector, she adds, and it can never have exactly the same set of rules.

Desktop hardware is highly commoditised and components are freely available.

This exacerbates the downward pricing trend, but with notebooks, some parts are much more specialised and manufactured in much smaller numbers due to the lower volume requirements. A supply problem with notebook-specific products may have an impact on the whole market and prevent price drops or even lead to increases. This, says Betancourt, is one reason that notebook prices have not dropped as fast as many have predicted.

TFT screens are a great example of notebook-specific products and output shortages have restricted the potential of the market, according to Williams.

Betancourt adds: 'It's a common problem and not isolated to just a few minor components. The TFT glass shortage a while back gave flat-panel monitor manufacturers particular headaches but, albeit to a lesser degree, its effects were felt by notebook vendors too. Prices held up for some time as a direct result.'

But that particular problem is likely to be less of an influence as screen sizes settle down. Instead of growing as it has almost non-stop for the past 10 years - causing swings in availability - a standard is emerging. This is having two effects - to make it easier for manufacturers to cut costs and get closer to optimum output levels and also to erode differentiation.

Betancourt says although TFT screens of up to 15in were unveiled last year, the predominance of 12.1in and 13.3in form factors will carry on for the remainder of 1999. Williams adds: 'Because the optimum size and screen has been reached, as the notebook becomes standardised, resellers are starting to lose that competitive advantage.'

The delay between chip speeds being available on the desktop and then in a mobile footprint is also now much shorter. But the launch of the Pentium III in mobile format will change that - with a version not becoming available until the third or fourth quarter of this year.

Even so, the power of the notebooks already on the market will do for most users and the arrival of the PIII should not provide any significant impact on growth. The partial quenching of the user's thirst for power will give the notebook more of a chance of becoming the desktop replacement machine, says Betancourt.

'Notebooks are integrating more power, screen size, storage space and better connectivity features. This is forcing the pace and a growing desktop replacement market is the result. Notebooks are becoming a more realistic replacement option for desktops in the mid-range as well as at the high end.

THE KEY PLAYERS

ACER

The company that claims to be the largest notebook vendor in the world, currently has a share of the Western European notebook market holding steady at between 8 and 8.5 per cent, according to market research firm Context. With its TravelMate series, Acer offers a full range of entry-level to high-end notebooks incorporating all the usual features and including thin and light options. In addition to its range of more traditional form factor models, the vendor also manufactures the TravelMate 310 series - a range of fully featured Windows driven sub-notebook devices aimed, Acer says, at the mobile user who needs added portability and flexibility without any loss of functionality.

VENDOR VIEWPOINT

It's an interesting market at the moment,' says Con Mallon, marketing manager at Toshiba. 'Growth rates are beginning to tail off and there's concern about the economy and year 2000 compliance issues. Corporates are being a little bit circumspect.' According to one distributor, companies are being very cautious and notebooks are often the first to come off the corporate procurement list. But it's not all bad. IDC's latest numbers paint a very different picture. According to the market research firm, the notebook sector grew by 40 per cent in unit terms across Western Europe in the fourth quarter of 1998.

Mallon says overall growth in the UK notebook sector in January was about 20 per cent, compared with six per cent for the total UK PC market. But the real question isn't about overall market growth - it's about how much of that growth is going through the channel. Indirect vendors have to ask themselves if they're losing volume to direct sales and, if so, what are they going to do about it?

What is obvious is that more sales are going through retail and direct.

What is not quite so obvious is the amount of volume being done by off-the-page sellers. 'Off-the-page has been growing way ahead of the market rate, taking the direct guys head-on. They have more immediacy,' says Mallon.

That may be the case, but direct vendor Dell's growth in the fourth quarter of 1998 was pretty amazing. That may be so, Mallon counters, but the off-the-page sector now sells one in every three notebooks in the UK.

'They can ship product as quickly as Dell, and if you think about the logistics in the warehousing, stocking and shipping, there is an economy of scale because they are physically smaller,' he adds.

Toshiba believes off-the-page resellers can do a good job - particularly for the volume buyer - and can be competitive on price against the direct seller. But at the same time, vendors have to be realistic - whether it's off the page or direct, the notebook is being handled by fewer people in the supply chain.

'I think there is a general movement that we all have to accept,' says Mallon. 'Customers are more confident about buying and the power of the phone and the internet in particular are increasing.'

For its part, Toshiba lost ground in the fourth quarter of last year, with analysts citing a lack of a competitive product in the low end. The introduction of its Tecra range may have rectified that to some degree, but the vendor knows everyone is after its market share. Vendors that are already strong on the desktop seem to pose the biggest threat - Compaq, IBM, Hewlett Packard, Siemens - all of which can use their position in corporate accounts to cross-sell notebooks.

Most observers estimate the notebook market to be one-fifth the size of the PC sector, but the ratio of notebooks sold against desktops is expected to rise. With margins in the desktop space under severe pressure, notebooks are an obvious route to take.

Siemens is one company that often gets dismissed by the competition as a potential serious challenger, but it is the market leader in Germany and although it only has 2.5 per cent of the total Western European market now, it has a long-term strategy to build on this.

Paul Slaney, regional product manager for mobile PCs at Siemens, says the vendor wants to achieve a five per cent market share by 2001 and has set out a plan detailing the product development and markets it wants to target. 'The message we're trying to get across concerns the convergence of data and communications. We are already offering a complete system that includes GSM communications, a printer and power management - all the things that will make it easier for the dealer to sell the product on. The approach we're taking is very modular, so vendors will be able to add in the components.'

Siemens is also going all out with corporate sales teams to generate more pull for products. Getting the route to market is all very well, but a key part of the vendor's job is about generating demand for the brand. Without that, it's a price-driven market. Siemens has thought about how it is going to address the notebook space and is a competitor worth watching, in spite of its apparent meagre market share.

Another player worth watching is HP. Traditionally a sub-notebook vendor, it has started targeting the broader market. 'We are trying to focus our product where we see the holes in the notebook market,' says Sean Gallagher, European market development manager for mobile products at HP. 'We're looking at the notebook with the eyes of the MIS department. Sometimes they are not as glamorous as the user might like to think. We are using pretty much the same architecture and accessories and concentrating on the HP user base.'

The presence of these companies in the corporate market will force the pace of direct and retail markets. Mallon claims that Toshiba's superiority in manufacturing will enable it to hold onto the number one spot.

But that's a debatable point. Toshiba does control most of its key component manufacturing - screens, memory and disks - but with the market increasingly settling for standard specifications, vertical integration won't be enough on its own and could even hamper Toshiba as it is exposed to demand fluctuations all the way down the line.

Vertical integration is also the main argument being used by Samsung, now pushing its own brand products, having dropped the AST name in February.

Samsung makes up to 70 per cent of the components inside its notebooks, including the screens. This is yet another tough contender for the likes of Toshiba and Compaq to fight off and it's come into the market with very aggressive pricing.

Toshiba will have to come up with really great products to hold on to its narrowing market lead. The Tecra and Portege ranges are good, but they may not be enough unless Toshiba manages to decrease pricing across the board. Its huge slice of market pie looks vulnerable, not only from other top vendors and the direct channels, but also from those riding the retail wave such as Sony and Fujitsu.

It's a sector all vendors have to address. Retail sales of notebooks are growing very quickly. Mallon claims retail sales of notebooks grew by 144 per cent in January, and believes a lot of the buyers are users who, having familiarised themselves with notebooks at work, then bought them for personal use.

Even if that is the case, many more traditional problems still exist.

Differentiation is getting harder and prices are being driven downwards.

There is, according to Katharine Sharp, notebooks brand manager at the IBM Personal Systems Group, still room to cut prices: 'Although the prices are coming down, so are the costs of the technology, which means manufacturers are still retaining margin within this segment. As technologies become similar, it is vital that manufacturers and dealers focus on service, support and added options.'

Dave Pritchard, vice president of mobile computing at Fujitsu, agrees.

He says lower prices are driving down resistance to notebook adoption.

'The gap between the cost of desktop and notebook computers is closing. Because of the growth of the notebook market, they are no longer perceived as a premium product, which in turn has led to more competitive pricing. Three years ago, you would pay a #700 premium, whereas today this figure is nearer to #200 or #300. We could see similar prices within a year.'

Pricing could be a significant vendor battleground. More companies are fighting for market share and some are coming into the market very aggressively.

Samsung, for example, is going after the SME market. Matthew Street, European marketing manager at Samsung, says: 'As a result of the Asian financial crisis, we have the potential to bring products to the market at an aggressive price point.'

But this intense competition probably can't last much longer. Alan Rogers, marketing manager at Olivetti Computers, predicts a consolidation of notebook vendors, driven by a demand to gain market share and retain margin.

'Notebook product lines address the demands of the user who requires a small, ultra-lightweight product, through to the desktop alternative at the most demanding end of the market. Changes from these formats will only come with technology advances from component manufacturers. The opportunities for the channel will revolve around communications - the resellers that follow this thinking will succeed with the more lucrative business.'

This is why companies such as Siemens, which are determined to win more market share, are coming up with ideas, bundling telecoms products with the notebooks and targeting specific types of users. We're bound to see more of this approach over the coming months and that could help the reseller community. As Slaney says, it gives the reseller the chance to look at other areas of business. With telecoms, for example, there may be an opportunity to benefit from repeat revenues on the sales of services.

The numbers are going to be there for those who still want to sell in volume. According to IDC, the Western European mobile PC market is going to grow 13.2 per cent in 1999 to a total estimated size of 3.1 million units. The compound annual growth rate for mobile PCs between 1998 and 2000 will be 10.5 per cent.

Toshiba says it will ship between 800,000 and 900,000 units this year.

If the vendor has about 30 per cent of the market, then the potential market available is about three million units. If we take an average unit price of #1,500, then the European market is approaching #5 billion. The UK's share of that is healthy - about 900,000 units this year, according to Slaney, rising to 1.1 million in 2001.

But not all of those will be new buyers. Mallon says between 25 and 30 per cent of sales this year will be replacement machines, so branding is very important. Corporates in particular also want fewer changes, says Steve Torbe, PC products marketing manager at Compaq: 'We're seeing a lot of emphasis from customers on stability and consistency. They want us to minimise the changes we make on portables.' Slaney claims this is something customers have always wanted and that some vendors have only just woken up to the need: 'They didn't actually provide that before and we have been winning business against them because of it. Our 486 machines still use the same docking station we provide now.'

Inevitably, the term total cost of ownership (TCO) is raised by vendors when they start talking about differentiation and all the leading vendors are ready to salute this particular flag. The line is familiar - management of the product is now critical and portables are harder to manage than the desktop, therefore resellers can add more value.

'Remote management and warranty services are trickier concepts for users - that's where the reseller can really add a lot,' Torbe believes.

But cost and management are lines that vendors seem to resort to most often these days when they lack other ideas or leading products. TCO may be an issue, but price is a big issue for much of the corporate market now and the products have to be right.

'Our job is to provide what the customer wants,' says Torbe, which is as good a summary of the vendor's role in the notebook sector as you'll find. They have to respond to customer demands for lower cost, better value and reliability.

THE KEY PLAYERS

COMPAQ

Closing the gap behind the market leader Toshiba, Compaq is coming in at a tight second. According to Context, Compaq held more than 19 per cent of the Western European notebook market in the fourth quarter of 1998. The vendor's Armada mobile product range is firmly encamped in the traditional notebook sector with products to suit entry level, mid-range and high-end usage. Beginning with the Armada 1700/1750, moving through the 3500 and 6500 models and finishing with the powerful 7000 range, Compaq offers various specification options incorporating multi-bay design, extended battery life and integrated modems. Starting at about #1,500, all the models in the range support various storage options including LS-120 SuperDisk, Zip and DVD. In addition, Compaq also offers a choice of form factors - users can choose from light, thin, ruggedised and power models.

THE KEY PLAYERS

DELL

Having almost doubled its Western European market share in the past 12 months, from 5.2 per cent in the fourth quarter of 1997 to 10 per cent by the fourth quarter of 1998, according to Context, Dell's claim of being the only manufacturer to have increased its market share in each of the past four quarters, seems justifiable. A growing threat to the other key players in the sector, Dell claims its direct model allows it to be a price leader in the market - a factor to which the company attributes much of its recent success and growth.

Preferring to design products to suit particular customers rather than particular markets, Dell's products are divided broadly into two ranges, Latitude and Inspiron, both of which include the full range of bolt-on features. The Latitude series is aimed at the corporate business buyer and ranges from the lightweight Latitude LT 266MMX at about #1,400, up to the powerful 13.3in CPI366XT starting at #1,853.

Inspiron, meanwhile, is the vendor's Soho, consumer brand. From the Inspiron 3500 at #1,199 up to the 15in Inspiron 7000 366MHz at #1,999, models come with a choice of software bundles.

THE KEY PLAYERS

HEWLETT PACKARD

Lying in a surprising seventh place in terms of market share, Hewlett Packard held a 2.6 per cent stake in the Western European notebook market at the end of last year. That figure was, however, an improvement - a 0.60 per cent increase on the vendor's fourth-quarter 1997 share, according to figures from Context. In an attempt to fuel further growth, HP has made several additions and improvements to its OmniBook range of mobiles in recent months. The HP range, which incorporates the usual functionality and connectivity features and technologies, begins at the low-end with the OmniBook XE.

With a starting price of about #930, the XE is followed by the OmniBook 900 as a mid-range product at #1,700. The vendor's high-end package includes the OmniBook 4150 and the OmniBook 7150 both starting at about #3,000.