Evaluating Extended Warranties and the Disparity in Netbook/Notebook Failure Rates

Last month, SquareTrade—a company in the business of selling extended warranties directly to consumers online, with what it claims are better prices and coverage plans than store-bought options—released a report on netbook and notebook failure rates. Much of the discussion the report generated focused on the company's estimated failure rates for three-year-old systems, as well as the significant disparity between vendors. In focusing on that admittedly juicy section of the data, however, some of SquareTrade's other conclusions and the practical impact they may have on your wallet went mostly unreported.

Study Methodology:
SquareTrade's report is based on an analysis of 30,000 randomly selected netbook and notebook laptops, all of which were purchased new. The company's survey data was gathered from its own customer base, and does not include any failure data that was reported to the manufacturer, rather than to SquareTrade (also referred to in this article as SqT). The netbook/notebook distinction is defined in terms of price, with systems under $400 classified as netbooks. Systems that cost more than that are notebooks, although the company splits that category when discussing failure rates. In that instance, an entry-level notebook is a notebook with a retail price of $400-$999; laptops with a four-digit MSRP are referred to as premium notebooks.

Laptop Failure Rates:
The chart below represents SquareTrade's measured and projected failure rates for all laptops (netbooks included) from all manufacturers. The dashed green line indicates that the third year accident rate is a projection; it's not clear why the company needed to estimate third-year accident rates if it simultaneously had data on third-year component failures.

Graph reprinted from SquareTrade reliability report.

SquareTrade's data suggests that nearly one-third of all laptops fail within the first three years; a percentage they don't find particularly surprising. As the report notes, "laptops contain far more sophisticated mechanical and delicate electronic components than most other electronic devices. Keyboards pointer devices, media drives, and hard drives are all mechanical components that increasingly wear out when subjected to heavy use, while motherboard circuitry, memory, and wireless devices are sensitive to heat and environmental factors."

There's actually some interesting information in the graph that SquareTrade doesn't address. The chance of malfunction jumps sharply from year one to year two; a laptop is 2.74x more likely to break in year 2 than in year 1, but just 1.57x more likely to break in year 3 as compared to year 2. Considered in this light, Y2 could represent a natural shake-out point—we don't have enough information to know for certain, and failure rates can fluctuate markedly from year to year—laptops bought in the year 2006 might display a different curve than laptops bought in 2007.  It's also possible that the year 1/year 2 jump is caused by accidents or mishandling that doesn't appear to damage a system, but causes a component to fail much more quickly than it otherwise would have. A mobile hard drive that fails six months after being dropped may be considered a component failure rather than an accident, particularly if the customer doesn't recall (or chooses not to recount) the original incident.

Does Price Affect Reliability?
This is where the netbook/notebook distinction comes into play. As we previously noted, notebooks below $400 are classified as netbooks, notebooks between $400-$999 are 'entry-level', notebooks above $1000 are premium. That's an extremely problematic definition, for reasons we'll address below. First, let's consider the netbook/entry-level notebook gap. SquareTrade notes more than once that because it only has data for 12 months of netbooks, the numbers below should be taken with a grain of salt; we recommend no less. The data below does not include accidents.

Graph reprinted from SquareTrade reliability report.

Grain of salt or no, that's not a very happy-looking chart. At the one-year mark, netbooks fail 23.4 percent more often than entry-level notebooks. If we assume the difference in failure rate as shown above continues through the next two years (but does not change), 15.9 percent of all netbooks will have experienced component malfunction by year two, and 25 percent by year three. Total failure rates by the end of year three would approach 40 percent, assuming accidents occur at the same rate.

SquareTrade's data suggests a relationship between price and failure rate—but the company's decision to lump laptops from $400-$999 into a single group makes it impossible to tell if there's a point at which reliability significantly shifts upwards or downwards. While it's true that very few people would opt for a $1000 notebook instead of a $399 netbook, consumers would very much like to know if the sub-$400 market is actually being pulled down by markedly higher failure rates below $299, or if the $400-$999 market looks better than it should because failure rates actually decrease markedly at the $600 price point.

Meanwhile, there's a doozy of a confounding variable that SquareTrade either didn't consider or didn't document considering: Apple. Reports have indicated the company accounts for 91 percent of all system sales that cost more than $1,000, which implies one of two things: Either SquareTrade neglected to mention that its "premium" category was almost entirely Apple-based, or SqT's sample of $1000 systems doesn't reflect current market reality.

This doesn't mean SquareTrade's Apple analysis is wrong—you can still calculate failure rates by manufacturer, even if Apple buyers don't buy most of their warranties from you. This is a point SqT should've addressed one way or the other; the report's failure to do so casts a shadow on its $400-$999/$1000+ comparison.

Do You Need an Extended Warranty?
The relative value of a longer warranty period is typically measured by comparing the initial cost of the system to the cost of the warranty and the length of the extension. Despite some questions about the company's methodology when comparing premium and entry-level laptops, SquareTrade's data does generally indicate that relatively high notebook failure rates could make extended warranties a good deal at the right price ratio. While in-store warranties are well-known cash cows, SquareTrade bills its product coverage as significantly less expensive—if that's true, it does strengthen the chance that coverage might be worth paying for.

Price, however, is far from the only important factor. Other issues include:
  • Specific Features: If you're buying a computer based around non-performance capabilities like a particular type of LCD, integrated Wacom tablet, or for its input/output jacks, it may be worth investing in an extended warranty, especially if the feature set is unique to a certain model or hard to come by.
  • One-Time Deal: If you're buying a system on an unexpected windfall, or paying more than you can normally afford, a warranty may be a good idea, particularly if you don't have a lot of money at the end of the month. True, the extra warranty adds to the cost, but if you don't think you could afford something as nice as what you're about to buy two years down the line, it may be a good idea to spend the extra dough now.
  • High-risk User: Individual OEMs guard failure rate data with their lives, but one tidbit Lenovo exec Ray Gorman dropped in the wake of SquareTrade's survey indirectly points out the wisdom of investing in certain types of systems. According to Gorman, Lenovo would "expect a 10X difference in repair rates between systems bought for [secondary school] students and systems used only in a home office by adults." If you think about that for a second, it implies some nasty things about student failure rates—even if home office systems fail at a measily 2 percent, that's a 20 percent failure rate for student systems.
  • Upgrade Cycles: Before you fork over additional dough, take a moment and consider your own upgrade preferences/previous upgrade cycles. If you tend to replace a laptop every two years, three year coverage may be wasteful. If, on the other hand, you typically replace your main but hand the laptop over to a rug rat, it may be worth paying for a little extra coverage, especially if you're buying a nice system that could have a useful lifespan of 4 years or so.
If you're curious about the manufacturer-specific failure data, it's in the latter half of SquareTrade's report. Again, Apple is something of an outlier: The company's average ASPs are nearly three times higher than its competitors ($1400 per notebook, as compared to $569 for a Windows laptop). SquareTrade makes no mention of Apple one way or the other, but the fact that the manufacturer lands squarely in the middle of the pack implies that consumers who go Apple in the hopes of buying reliability may be chugging snake oil.

Lenovo was rather grumpy about its rating and challenged SquareTrade's methodology, as reported here—SquareTrade then answered Lenovo's rebuttal with additional commentary. Asus and Toshiba come out in first place in the company's manufacturer report, while Gateway and HP bring up the rear.