Why Apple must not produce a “netbook”

I’m astounded by the recent number of financial analysts and technology pundits who are calling on Apple to build a netbook. In theory, it’s a good idea. The logic goes that if Apple could deliver a small, stylish, inexpensive laptop computer, they could capitalize on the recent trend towards budget computing. By selling millions of cheap mac netbooks, Apple could gain more market share while giving Apple a new revenue stream in these uncertain economic times.

It’s great except for one small problem. It’s wrong. And it’s not just a little bit wrong, but horrifically wrong. Spectacularly wrong.

The thing that everyone seems to forget here is that Apple makes its money on hardware. Regardless of whatever software or services they develop, it’s always in support of hardware. The iTunes Music Store exists to help sell iPods. The new app store exists to help sell iPhones. Bundled software like i-Life and even OS X exists to help sell Macs. Anything which damages the profit margins of Apple hardware is ultimately bad for the company, which leads me back to the problem of netbooks.

I find it interesting that while millions of these things are being sold, nobody seems to be making money off of them. Dell, which has eagerly embraced a whole range of netbooks just announced in the last few weeks that profits had declined by 49%. Asus, which essentially helped launch the netbook revolution with the eePC lost 2.7 billion last quarter while selling more units than ever. It would be easy to blame these decreases on the weakened economy and certainly the poor financial climate plays a major role, but there is an ugly truth to be faced here. netbooks sell for only a tiny fraction over their build cost and the war between budget PC makers to offer more features at lower prices have pushed profit margins even lower. As more companies jump on the netbook bandwagon, marketshare is divided, volume goes down and profits evaporate. Dirt cheap computers may be great for consumers, but without the necessary volume to makeup for thin margins, they can be a slow death to PC makers.

Apple, the company that personifies unique, high-margin hardware would be the most damaged by any attempt to compete in the budget netbook space. When Tim Cook, interim Apple CEO said recently that Apple couldn’t add any value to the netbook, it was a formal acknowledgment that for apple to produce a such a device, it would have to dilute or abandon the very things that make its products unique. Apple making a $300 netbook makes about as much sense as Montblanc deciding to produce a disposable ball-point pen or Aston-Martin building a low-cost commuter car to compete with offerings from Toyota and Honda.
So, where does this leave the rest of us? Obviously, there is pent-up demand for a low cost Apple device that can surf the web, send email and watch movies. But the netbook as it exists today is a losing proposition. Simply taking away or downsizing features to arrive at the magical $300 price point is both futile and potentially dangerous.

So what is Apple’s play here? $300 for Apple laptop?

The answer, I believe, lies in observing apple history. Since the return of Steve Jobs, Apple has rarely been the first to move into growth markets. They were incredibly late in joining the digital music revolution with the iPod, which arrived years after other companies like Creative and iRiver had released their MP3 players. Apple didn’t produce the first smart-phone either, lagging for years behind companies like Palm and RIM. In each case, Apple studied took time to study the market, evaluate the competition and identify specific weaknesses with those competing products. Ultimately, Apple would offer up a unique solution that addressed one or two key weaknesses and either had an unusual form factor or some special features that could justify its price.

When you look at netbooks today, there are lots of trade-offs. You get downsized keyboards, mediocre battery life and operating systems that many times simply don’t work well on low-voltage processors with a user interface unsuited to smaller screens. Apple has all the tools it needs to build a better solution. the iPhone OS, built with bits from OS X, is designed for mobile processors and a touch screen interface. New mobile processors from intel and Nvidia are packing far more power into a smaller, efficient unit. Even the recent battery optimizing technology used in the new 17” Macbook Pro holds the promise of extended battery life. All that’s required is to fit those pieces into something stylish and unexpected.

Apple cannot, MUST NOT simply cough up a watered-down $300 laptop to appease analysts who think they should have one. It would be damaging to Apple’s profitability, it’s image and ultimately its long-term financial well-being. At the same time, it must compete. There is a powerful desire for a more portable, less expensive device to do basic computing tasks. Apple must respond to that opportunity in a way that not only safeguards it’s own profitabilty but also sets itself apart from other competition.

I’m reminded of a scene from the classic 80’s movie “War Games” in which the child-like computer Joshua is learning about the futility of nuclear war. After running every conceivable military strategy and seeing them all lead to mutual destruction he comments, “a strange game….the only winning move is not to play”.

Anyone who urges Apple to cannibalize its own line of profitable computers by selling a stripped-down, low-profit device like a netbook simply to drive up unit sales simply does not understand how Apple differs from most companies. Innovation is how Apple traditionally builds value and protects its margins. Innovation creates differentiation and ultimately desire. Apple must innovate in the netbook space, not simply copy.

When it comes to netbooks as they exist today, the only winning move for Apple is not to play.