Time may be ripe for netbooks

SAN FRANCISCO — Call it going small to get big, but a weak economy and expected declines in personal-computer sales have nearly all the major PC makers looking at low-cost, streamlined laptops — commonly known as netbooks — as a way to revive the market in the coming years.

The netbook takes the concept of the notebook PC to an even smaller level.

A netbook typically has a screen that is less than 10 inches wide diagonally, carries no optical drive, and runs on Intel's Atom processor. Most employ either Microsoft's Windows XP operating system or a version of open-source Linux-based software. Most weigh around 3 pounds or less.

For the consumer, though, the real allure comes from the price tag, as many start as low as $349. And PC makers are aware that the low prices could open up a new market among buyers who may have been holding back from purchasing a computer in the current economic climate.

"We're trying to reconceive the (PC) category," said John New, a global product-marketing manager with Dell. "We think that with the new price points and form factors, there is a great appeal to the netbook, especially when parents are looking at purchasing a PC for their children."

Dell launched its first netbook, the 9-inch Inspiron Mini, on Sept. 4, and New said part of the reason the company has gotten into the market is because making the devices is now economically feasible.

"With notebooks, the prices had gotten lower, but those products aren't designed to compete at those price points," New said. "But netbooks are. They are designed to reach certain price levels from their initial conception."

Aside from Apple, all of the major PC companies have now entered the netbook market.

The launch of Asus' Eee PC late last year was largely seen as the catalyst for the sector. According to NPD Group's Display Search, fewer than 1 million netbooks were sold worldwide in 2007, but that figure is expected to rise to more than 14 million by the end of this year.

Those numbers are similar to other predictions. IT hardware analyst Toni Sacconaghi of Sanford Bernstein predicts that netbook sales will pass 35 million units by 2012, when the segment will account for nearly one-third of total laptop sales.

"Netbooks represent a new category in the PC market, with their promoters betting that many users will trade off some computing power for a small form factor and very low price," Sacconaghi wrote in a Dec. 9 report.

Technology-research firm IDC also raised its outlook for netbooks. Bob O'Donnell, vice president of clients and displays at IDC, estimates 11.6 million will be sold worldwide this year, rising to 21.5 million in 2009 and reaching 42 million in 2012.

John Jacobs, director of notebook-market research for NPD's Display Search, said the market for netbooks is poised for dramatic growth in the near term due to the low prices for the machines, capabilities that make them perform more like traditional notebook PCs.

"Demand is forecast to grow rapidly over the next few years," Jacobs said, citing "a variety of sources, including early adopters, consumer and enterprise PC customers seeking a smaller or secondary notebook PC, as well as new PC customers in emerging markets."

Top seller

According to Display Search, Acer was the top seller of netbooks during the third quarter of 2008, with 2.15 million units and 38.3 percent of the market.

Asus came in second place with sales of 1.7 million netbooks and a 30.3 percent market share. Hewlett-Packard, Micro-Star and Dell rounded out the top five netbook sellers worldwide.

None of the major PC makers has released specific sales expectations for their netbook lines, but those companies see the category as one that is ripe for growth. Display Search ranks HP as the top notebook company in the world, followed by Acer, Dell, Toshiba and Asus.

To appeal to more customers, the PC makers are taking steps that allow consumers to build a netbook to suit their needs and styles. Dell offers nine different color schemes, and HP sells a case by fashion designer Vivienne Tam that it calls a "digital clutch" and is aimed at women.

"We see this as an evolutionary category for notebooks," said Ted Clark, senior vice president and general manager of global notebooks for HP's personal systems group. "Part of our strategy is to provide something new and specialized for consumers."

The portability of the devices make them well-suited for basic word-processing and work programs, and their ability to connect wirelessly to the Internet is seen as a major selling point.

However, the final determiner of what to buy could come down to the price tag. Prices on netbooks vary, ranging from as low as $280 for an Asus Eee PC 900A model with a 4-gigabyte solid state drive, available at Best Buy, to the aforementioned HP Vivienne Tam clutch, which starts at $699.

And nearly all of the netbooks' prices can increase depending upon changes made to the devices' memory and hard drives.

Some shortcomings

But even those who sell netbooks acknowledge that the devices have some shortcomings and aren't for everyone.

"This is a category of products designed for mobility and being cost-effective," said Dell's New. "They are very Web-centric devices, but we're trying to be sure the customer knows the netbook is not good at everything."

Matthew Wilkins, an analyst with iSuppli, said the trade-off comes with the netbooks' low prices, as they are designed for specific computing operations as a device in a small form factor.

"There is a limit to what they can be used for," Wilkins said. "They are designed to offer a basic mobile-computing experience, such as Internet browsing, e-mail and document creation. They are not designed to run advanced applications or performance-hungry games."

There is another, higher-end category of laptop devices known as "ultraportables." Like netbooks, these are also small, lightweight devices, but they offer the same full-scale performance of a normal laptop.

For example, the Vaio TT from Sony offers an Intel Core 2 Duo chip and Blu-ray player on an 11-inch screen at prices starting above $2,000.

Right market

Due to technological restraints, the debate over netbooks centers on the markets in which the PCs might find the most success.

At UBS, analyst Maynard Um says netbooks are in "the right place at the right time, for now," but that the future opportunities are dependent upon the different segments of the PC market.

Um said large enterprises are not likely to be hot on the netbook trail due to the devices' performance and security issues. As such, mobile workers might also tend to stick with their current laptops or upgrade to more full-featured models.

"As long as vendors and retailers continue to offer fully functional notebooks for about $100 more, we think the netbook market could be limited (in the) longer term," Um said in a research report.

However, Um believes netbooks will be popular with consumers, who will see the devices as secondary computers to their desktop PCs at home. And that brings up the issue of just how much of an impact netbooks could have on sales of their slightly larger notebook relatives.

"We suspect that netbooks will be cannibalistic to some degree to future notebook sales as the price (and) performance balance between the two become less distinct," BMO Capital Markets analyst Keith Bachman said in a research report.