With Netbooks, Intel Playing a Dangerous Game

Our sister site JkOnTheRun reports on the proliferation (and large presence) of the netbooks at the CES 2009:

Netbooks are still a hot ticket item and we are keeping our eyes peeled for anything new that might come along. … More models, Atom inside, 8 – 10-inch screens, etc., etc. Asus is pushing the limits a bit with the touchscreen convertible T91 we spied last night but no word is being shared on pricing for this little netbook.

“The most crowded tables at CES Unveiled last night were all netbook vendors. And unlike last year when I was one of the few covering the show with Asus Eee PC, netbooks are being used everywhere I turn,” Kevin Toefel emailed from Las Vegas.

These little machines have caught the imagination of many and sold millions of units this past holiday season. Personally, I am staying on the sidelines, happy with a Macbook Air and the touchscreen joys of an iPhone; but the trend continues unabated, as more and more devices come to market. The growing popularity of these low-cost netbooks, which are now mimicking regular laptops, is a scary prospect for PC component makers, especially Intel.

So far, Intel is holding its own in the category, but it has two worries: the success of ARM-based netbooks and whether such devices will steal sockets from its higher margin chips. When it reports earnings on Jan. 15, analysts are sure to ask if Atom is cannibalizing sales of Intel’s higher-end processors, such as Celeron and Pentium Dual Core.

In its third-quarter earnings call in October, Intel said that the margins on its Atom chips are equal on a dollar basis to the margins on its Celeron chips used in lower-end computers and laptops and actually are higher on a percentage basis. But if consumers choose a netbook over a higher-end notebook, then cannibalization becomes a real concern.

Sales of these devices have increased from 1 million units in 2007 to an estimated 14 million in 2008, according to research from DisplaySearch. Still, that’s just a small fraction of the 80.6 million total PCs (including netbooks) Gartner estimates were sold in the third quarter of 2008. However, with the recession in full swing, netbooks could be gaining ground.

Mika Kitagawa, principal analyst for Gartner’s Client Computing Markets group, said in his her October report on third-quarter PC sales, “In the North America market, the economic crunch created more interest in the sub $500 segment. Because the mini-notebook is still a new segment, it is too early to determine if the emerging segment created new market opportunities, or if it cannibalized lower priced systems.”

Such cannibalization is easier when computer manufacturers link their netbook branding with the names of their more powerful notebooks. C’mon, even Toyota keeps its luxury Lexus brand far away from its everyday Toyota Camry and Corolla brands. In its “Netbooks are the Third PC Form Factor” report, Forrester Research warned:

Consumer products strategists at key vendors have mistakenly named their netbooks as extensions of their laptop lines: The Dell inspiron mini is closely linked in nomenclature to the inspiron notebook line. Similarly, lenovo’s S10 is an ideaPad, while Acer’s one is an Aspire. Even HP’s mini-Note suggests a “miniature notebook.” This branding strategy is dangerous — it cultivates consumers’ confusion about whether netbooks are, in fact, laptops or something else. Craft a completely new sub-brand to market these devices appropriately.

Of course, Stacey made the very same point about consumer confusion months ago. The recent introduction of 12-inch models is only going to accelerate the cannibalization of the notebook market. For someone like Intel, that is a prospect scarier than the 20 percent decline in quarterly revenues.

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Additional reporting by Kevin Toefel and Stacey Higginbotham.

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