Invasion of the Netbooks

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Putting Pressure on PC Prices

With their lower price tags, netbooks could also pressure overall PC prices. "In a down economy, you've got a new category at a low end of the price spectrum, and that requires price adjustments," says IDC analyst Loren Loverde. Next year the average selling price on a PC will drop 12%, partly due to netbooks, posting the largest price decline since 2001, Loverde estimates.

PC makers aren't the only players in the computer industry that could lose out as netbooks become more popular. The devices tend to feature cheaper processors, graphics chips, and displays, and they use less memory and older software. In a Nov. 13 presentation for clients, Citigroup (C) analyst Brent Thill called netbooks a "troublesome trend" for Microsoft (MSFT). The reason? PC makers get the Windows operating system for netbooks for $15 to $25 per device—that's less than half of what the company charges for its lowest-priced Windows XP software, according to estimates by David Daoud, research manager at IDC.

During an October conference call discussing quarterly results, Microsoft Chief Financial Officer Chris Liddell blamed netbooks in part for missing quarterly revenue growth forecasts by four percentage points. "At this stage, it is too early to determine the extent to which the new netbooks segment is cannibalizing the traditional consumer PC market sales, or simply capturing a new market opportunity, though we believe that there are likely aspects of both," Liddell said.

Bad News for Chipmakers

Growth could suffer for vendors of computer components as well. Intel's (INTC) Atom processor, which powers many netbooks, sells for $35 to $40, vs. $150 for a traditional notebook chip, iSuppli's Wilkins figures. And while percentage margins on the semiconductors are similar, Intel's dollar margins on Atom are three to four times lower, estimates David Wu, an analyst at Global Crown Capital.

"We've not seen widespread [cannibalization] yet," says Bill Calder, an Intel spokesman. "It's something we are mindful of, and we are watching it closely." On Nov. 12, Intel lowered its fourth-quarter outlook, and projected lower revenue and gross margins on weaker-than-expected demand. Netbooks use about half the memory of a typical laptop computer. That could be troublesome for memory vendors such as Samsung, Intel, Sandisk (SNDK), and Micron (MU).

For more on netbooks, see BusinessWeek.com's slide show.

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