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Mini-PCs or ‘netbooks' have taken IT markets around the world by storm, with vendors such as Acer and Asus making serious in-roads into this relatively uncharted territory - the latter recording numbers that have proved to be a shot in the arm as far as its standing in the Middle East IT market goes. But as competition heats up, question marks have emerged over the sustainability of the business for partners. Channel Middle East finds out why the channel should continue to invest in netbooks when the margins are so low.
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.
