[tt] NYT: Smaller PCs Cause Worry for Industry

[Premise Checker]

Smaller PCs Cause Worry for Industry
http://www.nytimes.com/2008/07/21/technology/21pc.html

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."