How Low Can PC Prices Go?

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Fears of Cannibalization

The adoption of netbooks presents a challenge for the established players in technology. Companies such as HP and Microsoft want to get in on the growth in netbook sales, but they want to avoid cannibalizing their existing businesses, which tend to be more profitable. David Daoud, research manager at IDC, estimates that PC makers pay $15 to $25 per netbook for Microsoft's Windows operating system, less than half the price of the company's cheapest version of Windows XP for laptops. Citigroup (C) analyst Brent Thill called netbooks a "troublesome trend" for the software giant.

While netbooks have always been cheap, they're getting larger and more powerful, too. For as little as $360, a nine-inch Asus Eee PC 901 comes with built-in Wi-Fi connectivity, a camera, and easy uploads to photo-sharing site Flickr. Netbooks have crept up in size from the original seven- or nine-inch screens to 12 inches, bumping right up against traditional notebooks, even though they can cost one third the price. "What's concerning here is, [netbooks] could potentially reset consumer expectations of what you pay for a notebook," says Richard Shim, research manager at IDC.

Chipmaker Freescale is working with manufacturers on computers costing as little as $199, which will make their debut later this year. On Feb. 16, another component supplier, Nvidia, announced its semiconductors will power mini-computers costing less than $100 and able to run high-definition video. While some computer makers are skeptical anyone can deliver a respectable product at that price, Nvidia executives say they're determined to do so. "Our belief is, you'll be able to build a very high-capability device," says Mike Rayfield, general manager for Nvidia's mobile business. "You can't go much cheaper than $99."

Lower Prices Could Rev Up Demand

Changes in distribution could further erode consumer perceptions of what a computer is worth. Wireless carriers in Europe and the U.S. are starting to offer netbooks to their customers for little money up front or even for free with a monthly wireless data contract. Retailer RadioShack already sells an Acer Aspire One netbook with a two-year AT&T (T) contract for $150. That's $50 less than the cheapest Apple iPhone from AT&T.

On the plus side, cheaper PCs could rev up demand. "There's definitely price elasticity and an opportunity to sell more units to new customers," says Ezra Gottheil, an analyst at Technology Business Research. That's why iSuppli predicts that, despite the downturn, portable computer shipments should grow 12% this year, to 156 million units globally.

At this point, some PC makers are happy to be able to sell anything, even cheaper netbooks, that have to make up in volume for slow sales of more expensive PCs. CTL in Portland, Ore., which sells about 100,000 computers a year, expects netbooks to account for half of its sales this year, up from 30% in 2008. "They are just an easier sale [right now]," says John Tucker, a product manager at the company. "You can't fight it, you've got to adapt."

Kharif is a senior writer for BusinessWeek.com in Portland, Ore.