Thursday, October 7, 2010

Laptop Sales Sapped by Tablet Frenzy

The Wall Street Journal

The boom in laptop computer sales is losing some steam, and not only because of a still-sluggish economy. Some shoppers are spending their money on Apple Inc.'s iPad tablet rather than the low-priced laptops that have fueled sales in recent years.

One is Vanessa Cole, a 31-year-old sales representative in Detroit, whose husband bought her an iPad as a gift in April. She had considered getting a low-priced laptop but said she prefers the iPad "for the bigger screen and apps" even though the tablet cost more at $499.

Analysts expect Apple to sell 11 million to 12 million iPads this year, more than double many initial estimates, and reach 20 million next year. Samsung Electronics Inc., Dell Inc. and other companies are racing to introduce their own tablets.

The tablet frenzy contrasts with some indicators for laptops. NPD Group estimates that laptop unit sales in U.S. retail channels rose 12.3% in the first eight months of the year—well below 30% growth of the year-earlier-period—and were down 1% in July and August, the peak of the important back-to-school shopping season.

Big computer chip suppliers, Intel Corp. and Advanced Micro Devices Inc., have recently warned of weak consumer demand and lowered their revenue forecasts for the third quarter.

Market researcher Gartner has trimmed its global forecasts for laptop shipments, but still expects a 26% increase to 214 million units this year. The firm says the average selling price of portable PCs has fallen 6% to $668 from $710 a year ago.

"Laptops are not the blazing growth category they were five years ago, but they're not going away either," Staples Inc. Chief Executive Ronald Sargent said in an interview. "For business use, you are still going to need a laptop."

IPad sales remain just a fraction of total portable computer sales, but industry executives expect the competition for consumer dollars to become more important next year, as more tablet options emerge.

The biggest impact so far appears to be on "netbook" computers, which run the same software as conventional laptops but have smaller displays and typically cost less than $400. Asustek Computer Inc. helped establish the category in 2007, but most major manufacturers offer models now.

Intel Chief Executive Paul Otellini said in a recent interview that netbook growth is now "sloping off." The Consumer Electronics Association predicts U.S. retail sales of netbooks, which more than doubled last year, will decline 12% this year.

A shift in consumer preferences is evident in actions by retailers such as Best Buy Co., the nation's largest retail chain by revenue. The company has begun showcasing e-readers, tablets and mobile devices in its most prominent store displays.

Brian Dunn, Best Buy's chief executive, said in an interview following its second-quarter earnings that the iPad was cannibalizing sales of "portable and netbook" computers by as much as 50%. The company later said Mr. Dunn intended to refer only to netbooks, not laptop computers generally, stressing that he was citing a rough internal estimate.

People in the PC camp, such as Mr. Otellini, argue tablets are a new category that will complement rather than substitute laptops.

"It's way too early to say" whether tablets will eat into sales of other products, said Steven McArthur, a senior vice president at Hewlett-Packard Co. "Clearly there will be some overlap," he said, but H-P's "data show it won't be huge."

Both netbooks and tablets have been promoted with a similar pitch: that many consumers only need a simple device for surfing the Web and enjoying Internet content. Apple's device pushes the notion the furthest, dispensing with Microsoft Corp.'s Windows operating system and a keyboard.

But some customers say they don't mind. Meghan Allen, a 31-year old New York resident said she has been using her iPad as her primary computing device since she received it as gift in June.

"I carry it around everywhere," Ms. Allen said, adding that she has stopped using her MacBook laptop. She liked her iPad so much she persuaded her husband to buy another one for himself.

Jeff Woelker, a 30-year old Chicago resident said he is trying to decide between a netbook and an iPad for his wife. Mr. Woelker is currently leaning toward a more affordable netbook, because "with how obsolete technology gets, why invest a ton of money? Why not invest the cheapest you can get because you're probably going to invest in another one in six months" Mr. Woelker wants a tablet computer for himself, but is planning to wait until Samsung's Galaxy Tab comes out.

Tablets are far from the only factor weighing on laptop sales. Some consumers view used laptops as a commoditized necessity, rather than sexy or stylish.

"Unless you are a gamer or have some special need for horsepower, you may not see a reason to upgrade what you have," said Stephen Baker, NPD's chief electronics analyst.

Mr. Baker, who recently conducted a survey examining the impact of the iPad, said the research suggests a substantial but far less sizable impact from Apple's device: roughly 13% of iPad buyers would otherwise have purchased a new PC.

"It's not a number to sneeze at, but it's obviously not the only reason the PC market went south," he said.

Consumers will have even more tablet choices to consider next year, which Mr. Baker and others expect to add pressure on laptop sales. Research in Motion Ltd., Samsung, Acer Inc., Toshiba Corp. and Dell have all announced tablets.

Meanwhile, some retailers and manufacturers trying to spur demand by creating specialized discount laptops. For example, Best Buy and Toshiba recently unveiled a laptop—dubbed the Kids PC—that is designed for children ages five to 10.

The computer, which will sell for around $500, features a rubberized spill-resistant keyboard with large letters and comes pre-loaded with the Lego Batman videogame as well as digital copies of the movies "Toy Story 2" and "The Princess and the Frog."

But the creators acknowleged the shape of such offerings may be changing; among the future collaborations being considered, said Toshiba executive Jeff Barney, is a kids' tablet computer.