Are Netbooks the Future of PCs?

In my in-laws’ Sunday paper this morning, Fry’s advertised a Windows notebook computer for $300, their “everyday low price” albeit with “no rainchecks.” (Perhaps they now have better prices after suing a former exec for defaulting on $10m in loans to cover gambling losses). The same computer is $327 at Amazon (AMZN).

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While this particular model of the Acer Aspire One has only an 8gb flash memory drive, it otherwise has the recommended features: 8.9" screen, 1gb of RAM and Windows XP. It certainly makes me feel like a dolt for spending $150 to (as long planned) put Windows XP on my MacBook Air instead of buying a new $300 netbook.

There is no denying that the netbook boomlet — started in Fall 2007 by the Asus Eee PC — was one of the biggest computer stories of 2008. The 1 million units sold in 2007 have reached 13 million this year as both Taiwanese ODMs (like Acer) and major branded PC makers (Dell (DELL), HP (HPQ), Lenovo (LNVGY.PK)) have jumped into the fray.

As it turns out, the netbook was also the subject of one of the better student projects earlier this month from my MBA technology strategy class. The four students started out asking whether netbooks are betwixt and between smartphones on the low end, and laptops on the high end. Their conclusion was that the netbook looks a lot like a Clayton Christensen “disruptive innovation” for the existing laptop market. I am inclined to agree (which is why they got a good grade).

I draw four conclusions from the rapid success of the netbooks.

First, Intel’s (INTC) low-cost, power-saving Atom microprocessor has been both a success and a failure. It’s a success in that it’s becoming the popular choice for the various netbooks. However, with the exception of a (numerically) few Linux servers, Intel is still basically a one trick pony: selling microprocessors to run Windows. Their efforts to use the Atom to create an entire new category of device, the “mobile Internet device,” is instead commoditizing its main source of product growth, laptops.

Second, the fact that netbooks are Windows machines raises doubts about whether any new computing platform can be established, at least in the next decade. Sure, a wide ranges of vendors offer netbooks with Linux but 90% of buyers prefer XP. In retrospect, Palm (PALM) never stood a chance in its hopes to establish the Linux-based Foleo on its own and so was right to pull the plug.

Third, within 18 months — if not Fall 2009 then Fall 2010 — netbooks will take over the US college market, becoming the standard computer for most entering freshmen. (In the rest of the world, it will be netbooks vs smartphones and I can’t predict the winner yet). For students, netbooks have no disadvantages and many advantages. Students don't buy CDs or software; except for PC gamers, they don’t need high performance machines. They walk all day across campuses, long distances, and thus need to lighten their backpacks as much as possible. They are cash poor, and some carry laptops in urban campuses where robbery is a risk. And unlike us geezers, they have good eyes, and thus can read smaller but higher resolution LCD screens.

Given all this, Apple (AAPL) needs to respond to the netbook threat. Yes, my MacBook Air is small, light, with a low-power processor, small hard disk and no DVD drive — but it’s $1600, not $300-400. There have been rumors of an Apple netbook in October and November, but they are so vague as to make it clear that no announcement is coming at next month’s Macworld Expo.

While I think Apple will respond (and probably in 2009), I think the response will be different than expected; I believe today’s predictions will prove as inaccurate as the predictions of the “Mac tablet” (which proved to be the iPod Touch). For 20 years, Apple has been loathe to cannibalize its main franchise, and I don’t think it will cannibalize its 13" MacBook (or MacBook Air) sales to respond to netbooks.

Instead of a stripped MacBook, I think it more likely that Apple will offer a scaled up iPod Touch or iPhone: adding a keyboard and increasing from the 3.5" 480x320 screen to either netbook resolution (9", 1024x600) or perhaps even an HDTV-compatible 720p (1280x720). Unlike the Foleo, such an iPod Touchbook would start life with more than 10,000 applications.

The only question in my mind is whether the device will be a GSM phone or merely a Wi-Fi-connected mobile Internet device. I think requiring an AT&T (T) contract would put Apple at a huge disadvantage, so my money would be on the Wi-Fi device (or both).

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BY Joel West

Source：Seeking Alpha

Disclosure: Author holds positions in INTC and MSFT.