Apple's Real Problem: Netbooks

Brian Caulfield, 01.20.09, 06:00 AM EST

Forget Steve Jobs' health problems. Cheap

''netbooks'' could steal the sizzle from Apple's hot
notebook business.

BURLINGAME, Calif.--Forget Steve Jobs' health problems. Apple has other troubles. For starters, the
Cupertino, Calif.-based computer and gadget company is wading chest deep through a recession with a
heavy load of pricey products on its back.

Analysts estimate that the company's earnings will fall a little less than 1% for the quarter ended in
December. Net income is expected to fall to $1.21, or $1.04 billion, from $1.16, or $1.05 billion,
during the year-ago period, according to analysts polled by Thomson Reuters. Sales are expected to rise
to $8.2. billion from $7.5 billion during the year-ago quarter.

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Those figures, however, discount the power of Apple's (nasdaq: AAPL - news - people ) surging
iPhone business, since Apple defers recognition of iPhone revenue. Discard the effects of the
subscription-based accounting method used to tally profits and sales from iPhone and AppleTV, and
Apple should be able to power ahead of last year's results.

The real problem is how Apple's portfolio of expensive gear--particularly notebooks--will fare as the
recession starts to bite. We already know Apple isn't immune to the recession; over the past six months,
the company's shares have fallen by more than 50% to $82.33 from $171.81.

More worrying: Apple's slice of the U.S. computer market fell to 8% in the fourth quarter, from 9.5%
in the third quarter, according to recent figures released by tech tracker Gartner.

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Apple's success in the computer market last year was largely thanks to surging sales of its notebook
computers. All told, notebooks began outselling desktop computers in the U.S. market for the first time
last year, and Apple's eye-catching designs--and power-sipping Intel (nasdaq: INTC - news - people )
processors--positioned the company well to capture a big chunk of that growth.

But while Apple's notebooks were hot sellers last year, average notebook prices are falling fast as the
economy worsens. Strong sales of Acer's Aspire One--available for as little as $320 on Amazon.com
(nasdaq: AMZN - news - people )--helped the Taiwanese computer company hustle past Apple to grab
fourth place in the PC market during the last quarter of 2008, according to Gartner.