Smaller PCs Cause Worry for Industry

July 21, 2008
By MATT RICHTEL

SAN FRANCISCO — The personal computer industry is poised to sell tens of millions of small, energy-efficient Internet-centric devices. Curiously, some of the biggest companies in the business consider this bad news.

In a tale of sales success breeding resentment, computer companies are wary of the new breed of computers because their low price could threaten PC makers’ already thin profit margins.
The new computers, often called netbooks, have scant onboard memory. They use energy-sipping computer chips. They are intended largely for surfing Web sites and checking e-mail. The price is small too, with some selling for as little as $300.

The companies that pioneered the category were small too, like Asus and Everex, both of Taiwan. Despite their wariness of these slim machines, Dell and Acer, two of the biggest PC manufacturers, are not about to let the upstarts have this market to themselves. Hewlett-Packard, the world’s biggest PC maker, recently sidled into the market with a hybrid of a notebook and netbook that it calls the Mini-Note.

Several makers are taking the low-powered PCs one step further. In the coming months, they are expected to introduce “net-tops,” low-cost versions of desktop computers intended for Internet access.

A Silicon Valley start-up called CherryPal says it will challenge the idea that big onboard power is required to allow basic computing functions in the Internet age. On Monday it plans to introduce a $240 desktop PC that is the size of a paperback and uses two watts of power compared with the 100 watts of some desktops.

It wants to take advantage of the trend toward “cloud computing,” in which data is managed and stored in distant servers, not on the actual machine.

Industry analysts say that the emergence of this new class of low-cost, cloud-centric machines could threaten titans like Microsoft and Intel, or even H.P. and Dell, because the giants have built their companies on the notion that consumers want more power and functions built into their next computer.

Some of the big computer companies put a positive spin on the low-cost machines, saying they welcome new categories. But they would just as soon this niche did not take off, given the relatively low profit margins.

“When I talk to PC vendors, the No. 1 question I get is, how do I compete with these netbooks when what we really want to do is sell PCs that cost a lot more money?” said J. P. Gownder, an analyst with Forrester Research.

Even as some PC vendors are jumping into the fray, others say they are resisting. Fujitsu, one of the world’s top 10 personal computer makers, said that it believes the low-cost netbook trend is a dangerous one for the bottom line.

“We’re sitting on the sidelines not because we’re lazy. We’re sitting on the sidelines because even if this category takes off, and we get our piece of the pie, it doesn’t add up,” said Paul Moore, senior director of mobile product management for Fujitsu. “It’s a product that essentially has no margin.”

Stan Glasgow, chief executive of Sony Electronics, said, “We are not looking at competing with Asus.” But he said the company is investigating what consumers want in a second PC.

It is a market that caught the major computer companies — both hardware and software — by surprise after Asus, entered the market last year with the $300 Eee PC. The company thought the device would essentially appeal to the education market, or as a starter laptop for adolescents, but the interest has turned out to be broader.

With an emphasis not in on-board applications (like word processing), but Internet-based ones like Google Docs, the Linux-based Eee PC sold out its 350,000 global inventory. It has been in short supply ever since, said Jackie Hsu, president of the American division of Asus. Everex has sold around 20,000 of its CloudBook, which sells for about $350.

The sales are a veritable drop in the bucket compared with the 271 million desktop and laptop PCs shipped globally last year. But there is an intensifying debate about how big the category can become, and what segment of the market finds these computers appealing.

IDC, a market research firm, is predicting that the category could grow from fewer than 500,000 in 2007 to nine million in 2012 as the market for second computers expands in developed economies.

Intel is projecting that by 2011, the market for the netbooks will be 40 million units a year, which is why Intel is jumping in with low-powered chips that would be used in the netbooks and the net-tops.

With its new Atom chip, Intel is competing against upstarts including Via, a Taiwanese company that has a chip called the C7. The C7 is showing up in netbooks and, indeed, is being used in the Everex models and in H.P.’s $500 Mini-Note.

William Calder, an Intel spokesman, said that the cost of the Atom for PC makers is around $44, compared with $100 for a state-of-the-art chip. He said that Intel executives think the market for low-cost PCs is too big to pass up, though it does raise a potential threat to more powerful and more profitable computing lines.

Microsoft has been a reluctant participant too. Even though it is no longer selling its Windows XP operating system software, it made an exception for makers of these low-cost laptops and desktops. Microsoft said it was responding to a groundswell of consumer interest in the low-cost machines, but some makers of those machines say Microsoft did so reluctantly because it did not want to lose market share to Linux.

Tim Bajarin, an industry analyst with Creative Strategies, a technology consulting firm, said that while the big computer companies have been caught off guard by the market’s potential, they are finding little choice but to dive in.

“H.P., Dell and these other PC makers have learned that if there’s consumer interest, you can’t just sit back and let someone else steal all the thunder,” he said.

Hewlett-Packard thinks consumers want more than a mobile Internet terminal. “Our competitors proved there is a pretty good market,” Robert Baker, a notebook product manager at Hewlett-Packard conceded.

Dell has not been specific about the price or features of its entry, but Michael Tatelman, vice president for marketing at Dell, said he believed that the category would have limited consumer appeal.

They are useful for someone on the go at an airport or on a commuting trip on a bus, but not for a more intense computing experience, he said. “It’s a good 30- to 90-minute experience.”

Copyright 2008 The New York Times Company


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