PC Makers Race to Market With Low-Cost 'Netbooks' - WSJ.com

Some high-tech companies are bracing for an economic downturn. But others are betting on customers like Jamie Morgenstern.

The University of Chicago undergraduate recently bought an Eee PC, a low-end laptop from Taiwan's Asustek Computer Inc. that starts at $299. The device has a small screen, a cramped keyboard, no hard drive and was introduced with Linux rather than Microsoft Corp.'s Windows operating system -- and Asustek can't make enough of them.

Inspired by the Eee PC and the urging of Intel Corp. and other chip makers, other large and small hardware makers are racing to introduce their own low-end portables. They are betting that a new low-price category could sharply expand the PC market. The target: kids, college students and others that need an inexpensive way to get on the Internet and do other simple chores.

"I wanted something that I could bring to all my classes," says Ms. Morgenstern, a 19-year-old studying math and computer science. Among students, she predicts, machines like the Eee PC "can do violently well."

Intel, which calls the new devices "netbooks," says 10 computer makers have committed to designing 20 machines. The company, which showed off prototype designs at a conference in Shanghai last week, projects netbook sales at 50 million units annually by 2011, compared with about 250 million units for conventional notebooks.

"We believe there is definitely an opportunity in this space," says Dan Forlenza, vice president and general manager for business notebooks at Hewlett-Packard Co.

H-P, which is No. 1 in global PC sales, Tuesday is announcing a small laptop called the Mini-Note for the education market that starts at $499 for a version running Linux. The company is not discussing whether it will try to hit lower price points. Dell Inc., the No. 2. PC maker, also has not spelled out plans for the segment, but people familiar with the company's thinking say it is planning a low-end laptop this year.

The category carries risks as well as potential rewards. A shift to laptop computers has been a lucrative trend, with portables typically commanding a price premium over desktop models. By 2007, however, average prices for laptops had slid to $1,111 from $2,618 in 1998, Gartner Inc., estimates. Though there are plenty of high-end portables -- such as Apple Inc.'s new MacBook Air, starting at $1,799 -- models that start around $500 are not uncommon. To approach $250 for the new machines, they are making tradeoffs such as offering a small amount of data storage on memory chips, rather than using a disk drive.

Now the question is whether Netbooks will take sales from higher-priced laptops. Mike Abary, a Sony Corp. senior vice president, says his company is watching whether systems like the Eee PC actually attract new customers or simply push down laptop prices much faster. A drop in average selling prices "by 50% in any given year in the U.S. would not be a good thing," he says.

Few worry about falling prices more than Intel, which enjoys hefty profit margins from selling chips that act as electronic brains in PCs. Chips in netbooks can't cost much -- $25 or less, analysts say, compared with more than $100 for chips in mainstream PCs.

Undaunted, Intel is excited enough about the new category to make a major strategy shift. The 39-year-old company so far has always reserved new production recipes that shrink circuitry for chips that command the highest prices. Now, an Intel team in Austin, Texas, has exploited the company's most advanced technology to design an ultrasmall chip -- dubbed Atom -- that comes in a version for netbooks.

The company is betting that the new chips for netbooks will cost much less to make than larger chips and so command similar profits. That strategy is dramatically different than the tack Intel took in the 1990s, when it initially fought a move to sub-$1,000 PCs that wound up expanding the market. "We resisted it like it was the plague," says Uday Marty, an Intel marketing director, who calls that decision "incredibly stupid."

But Intel won't be alone. Austin, as it happens, is also home to rival groups of chip designers -- from Via Technologies Inc.'s Centaur Technology unit and Advanced Micro Devices Inc. -- that are equally determined to help build the new category.

Centaur has 95 employees compared to thousands of designers at Intel. But the company, purchased by Taiwan's Via in 1999, has expertise in chips that conserve battery life. Its chips have been chosen for a number of low-end laptops, including the $399 Cloudbook from Taiwan's Everex and H-P's Mini-Note, which weighs 2.6 pounds and includes special coatings to protect its keyboard and display from classroom wear.

Where Intel is likely to spend heavily to build the Atom brand, Centaur President Glenn Henry argues that microprocessors should become a little-noticed feature as computer makers focus on more important selling points. "On our data sheet we don't even say what kind of processor we are using," says Jackie Hsu, president of Asustek's U.S. unit, which used an Intel Celeron chip in the computer.

AMD has long promoted the concept of low-end laptops, mainly targeting emerging economies. "We invented it," declares Hector Ruiz, AMD's CEO.

An AMD chip called Geode is used in the $188 XO portable from One Laptop Per Child, a nonprofit group that began an aborted partnership with Intel last year. One reason is a competing Intel design, dubbed the Classmate; both systems were tailored for use by students in emerging economies.

Intel last week announced a second version of that laptop, expected to be sold by hardware makers for $300 to $350. The company now expects hardware companies to market it in industrialized countries as well.

Indeed, vendor excitement over netbooks largely reflects the potential in more-affluent households. Some parents, for instance, may want to save money on giving kids an early start in computing, and ease competition for the home PC to get on the Web. Other targets include travelers who want a very lightweight device.

Brian Pitstick, a senior manager of consumer products at Dell, suggests netbooks might be suited for perhaps 30 minutes of usage at a time, compared to three minutes for a cellphone and three hours for a conventional laptop. "I really think this is a different category of device," he says.

The Eee PC weighs two pounds and has a seven-inch display. Asustek says it sold about 500,000 last year and hopes to sell 3.1 million in 2008. It has models priced up to $499, and plans to introduce improvements that include an 8.9-inch screen.

Such machines could represent an important new opportunity for Linux. One motivation is cost. Microsoft doesn't disclose how much it charges computer makers for Windows. Roger Kay, an analyst at Endpoint Technologies Associates, estimates the average price of Windows XP is about $70, though many computer makers pay much less.

But Mr. Hsu says another reason is simplicity; Windows is too complex for some people. The Eee PC -- whose name stands for easy to learn, easy to work, easy to play -- uses a Linux version that has a navigation system with tabs carrying labels such as "Internet," "Work," "Learn" and "Play."

But Eee PC users have taken to modifying the system in many ways, and loading Windows is a frequent option. Asustek on Monday began selling a version that comes with Windows, available at Best Buy Co. stores for $399.

Michael Dix, a general manager in Microsoft's Windows group, says its customer surveys suggest there is strong demand for Windows on netbooks. But the new systems can't easily run Microsoft's complex Vista operating system, especially netbooks with little data-storage capacity.

So Microsoft last week announced plans to keep selling the home version of Windows XP on what it calls ultra-low-cost PCs until at least June 2010, while sales for other systems are being phased out this June.

Write to Don Clark at don.clark@wsj.com

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