The Netbook is transforming the Windows PC market in a dramatic way. While PC sales are collapsing – figures suggest that the PC market has simply shrunk by about 20% – Netbook sales have been buoyant and are even growing in these dismal times. Sales grew in the last quarter of 2008 and projections suggest that sales may grow 50% in 2009. Some commentators are bundling Netbook sales in with laptop sales in the hope of convincing someone that laptop sales are not plunging. But they’re just whistling in the dark. The Netbook is not a laptop.

The question is who’s buying Netbooks and why?

The Netbook Market
The Netbook can currently be described as a dirt cheap low-life laptop. What do I mean by that? I mean that these devices are horribly underpowered. They’re OK for simple apps like word processing, spreadsheet, email and browsing. They suck mightily for serious graphics ang games. Most Apps from Adobe, for example, crawl like a comatose snail on a Netbook. Only old versions of Windows run on Netbooks.

It’s been a long time since any vendor tried to introduce a dirt-cheap low-life PC even though there is an obvious market for such devices (not just for Netbooks but also dirt cheap low-life desktop PCs.) Here’s a rough outline of that market:

1. People who really cannot afford a PC.
2. People who want to buy a very cheap PC for their kids.
3. People who think laptops weigh too much and will be content with a very basic PC.
4. People who only want a very basic PC anyway (no graphics, no games).

Or you could simply observe that if you reduce the price point in any market and only marginally reduce the capability of the entry level product, you will see new buyers appear. The market for very low cost PCs was initially opened up by Nicholas Negraponte’s vision of the $100 PC. That was the moment that the cat escaped from the bag.

The Netbooks that currently exist may be dirt cheap low-life laptops, but in time we’ll surely see even cheaper lower-life laptops, especially given that in India with they’re shooting for a $10 laptop.

The Netbook is not the Cavalry Coming to Microsoft’s Rescue

Unfortunately for Microsoft and the PC vendors, the Netbook offers the thinnest of profits to its vendors. That’s why Steve Jobs proclaimed that Apple couldn’t produce an acceptable product at the less-than-$500 price point. And it’s also why there was a 12% dip in Windows revenues in the last quarter of 2008. And even so, 25% or so of the Netbook market is currently Linux.

This is a nightmare for Microsoft. Thus far there has been no large population of desktop Linux users on which a thriving software market could develop. If one suddenly sprouts up on Netbooks, then Microsoft will be caught in a pincer movement between Apple’s OS X and Linux. Right now there are about 20 -30 million OS X users, but just a few million Linux desktop users. The number of Linux users is now growing, courtesy of the Netbook.

Microsoft’s problems stem from two sources. First Vista really was a disastrous release and it doesn’t appear to be possible to run it on a poorly powered Netbook. It looks as though a seriously trimmed version of Windows 7 will run on Netbooks, but Microsoft seems to be talking crazy. It is suggesting that the average Netbook user only runs 3 applications at a time and that it will limit the user to 3 applications. That’s the tyranny of averages. Just satisfy the average user and you’ll seriously annoy 20 percent of users for sure.