Did the iPad Kill Netbook Sales Even Before It Launched?

A financial analyst has floated the theory that Apple's iPad pretty much decimated netbook sales just by showing up, but the findings are being met with skepticism by the company providing the supporting data.

An interesting side bit of speculation about the iPad was included in a research note Morgan Stanley analyst Katy Huberty sent to subscribers on Thursday. The note, which was focused on HP's acquisition of Palm, also discussed the netbook market. Huberty said netbook sales plunged in January, when Apple (NASDAQ: AAPL) announced the iPad, and flatlined in April, after the iPad's release.

Huberty said that in July 2009, the year-over-year netbook growth rate was 641 percent, based on Morgan Stanley and NPD Group data. It trailed off to 179 percent in December, then plunged to 68 percent in January and continued to fall, reaching just 5 percent by April.

"U.S. retail netbook unit growth decelerated to about 5 percent year-over-year in April from 25 percent in March and 53 percent in February, according to NPD. If this trend continues, upside to notebook and related component shipments could be limited, even with a strong corporate refresh cycle," she wrote.

Huberty backs that up by pointing to a March 2010 U.S. consumer survey by Morgan Stanley and Alphawise that points to notebooks (including the subcategory of netbooks) as the highest cannibalization risk from iPad sales. "Specifically, 44 percent of consumers planning to purchase an iPad will not buy a notebook as a result of their tablet purchase," she wrote.

Ironically, the next victim of iPad cannibalization was the iPod Touch, with 41 percent of those surveyed saying they would take a pass on the music player if they bought an iPad. This was followed by e-readers at 28 percent and desktop computers at 27 percent.

However, Steve Baker, vice president of research at NPD Group, disagreed with Huberty's conclusion. "I think iPads are a direct competitor to netbooks. But are iPads the reason netbook sales books are slowing? No. the reason is you are comparing this year's sales, which are relatively normal, to last year's sales when it was a new product. You can't maintain that kind of growth. Netbooks are finding their equilibrium," Baker told InternetNews.com.

Netbooks were first introduced in 2007 and got off to a shaky start. They had very small screens (seven or eight inches) and ran Linux. The second generation started in 2008 and caught fire in 2009. Those newer netbooks had larger screens, up to 10 inches, and ran Windows XP.

The percentage of sales for netbooks is pretty stable in the high teens, which implies it's growing the same as the overall notebook market, said Baker. "We're not seeing netbook sales trail off yet. We're seeing them level off at a pretty strong percentage of the total. They are not losing share within their segment. They are maintaining the high teens," he said.

While the iPad shipped in April, it was announced in January and the rumor mill had been going strong for a few months leading up to the news. But Baker dismissed any potential Osborne Effect of people holding off on purchases in anticipation of what Apple would announce. He said people buy when they need something and, generally, those who needed a netbook weren't going to wait for a product Apple was rumored to have in development.

But Baker does not disagree with Huberty's basic thesis that the iPad could cannibalize netbook sales. "Pads and slates do the same basic function. Consumers have said they would do the same things with pads and tablets as netbooks. Are they competitive? Absolutely, but is that the reason why we expect to see netbook sales growth slow? No it isn't. It will take more than the iPad and more than one month of sales to make that happen. We need a bigger market and need to sell those pads selling on an ongoing basis," he said.

HP and Palm

Getting back to Huberty's main point on the impact Palm would have on HP (NYSE: HPQ), the analyst said she expects that by fiscal year 2013, Palm could provide $1 billion in annual earnings, or $0.45 per share. That's assuming WebOS can grab up to 15 percent of market share, an aggressive prediction given Palm's current tiny share of the market. Under Morgan Stanley's most bullish projections, Palm could add $4 to HP's valuation.

Morgan Stanley has a target price of $62 on HP. Its May 5 price was $50.92.

Andy Patrizio is a senior editor at InternetNews.com, the news service of Internet.com, the network for technology professionals.