Netbook craze squeezing PC manufacturers' profits

San Francisco: Smaller personal computers are shrinking profits at PC makers and their suppliers.

Shipments of so-called netbooks - scaled-down laptops that offer internet access and other basic functions - will probably double this year, even as the overall market for computers contracts as much as 14 per cent, according to estimates by Goldman Sachs Group Inc and JPMorgan Chase & Co.

Cash-strapped consumers in the US and Europe are flocking to netbooks, which were originally designed to stoke demand in emerging markets such as China and Africa. By the end of 2009, netbooks will represent 8 per cent of the PC market, according to Goldman Sachs. Their price - $400 (Dh1,469) or less - means a smaller pie for the computer industry to divvy up.

"It's amazing for the consumer, but for the hardware guys, it's not a good thing," said Betsy Van Hees, a semiconductor analyst for Caris & Co. in San Francisco. "This is a real game changer."

Intel Corp, the world's largest chipmaker, jump-started the market with the release of the Atom processor for netbooks in April last year. The chip sells for as little as $29, compared with higher-end models that cost from $200 to more than $1,000. Intel investors, accustomed to profit margins of about 55 per cent for the past eight years, will have to settle for a per centage in the 40s from now on, Van Hees said.

Intel gets "healthy margins" from Atom and will use more advanced manufacturing techniques to lower the cost, Intel Chief Financial Officer Stacy Smith said in an interview in New York this month.

Still, the success of the new machines threatens the logic that Microsoft Corp and Intel, known as Wintel, have pushed on consumers for two decades: Every year or so there will be a new more powerful chip or fancier software that makes existing machines obsolete.

"The computing industry, for our entire lifetime, drove higher-powered consumption, more software," said Andy Hargreaves, an analyst at Pacific Crest Securities in Portland, Oregon. "The Wintel alliance heavily promoted that and it went far beyond what most users need or want."

For PC makers, cheap machines with limited functions also put more pressure on their margins, which have suffered for years from Intel and Microsoft's dominance, Hargreaves said.

Hewlett-Packard Co, which reported first-quarter earnings yesterday, gets more than a third of sales from PCs, while that unit supplies about 19 per cent of operating income. Dell Inc, the No 2 in the global computer business behind Hewlett-Packard, gets more than 60 per cent of sales from PCs. Dell will report earnings on Thursday.

Dell would rather sell netbooks than cut the price of its more expensive models, said John New, senior manager of global product marketing and innovation at the Round Rock, Texas-based company.

"Better to have something in the price band that they're comfortable purchasing, rather than discounting a product that costs more to manufacture," New said. "The importance is providing choices for people with different economic capabilities and different needs."

Intel, based in Santa Clara, California, rose 15 cents to $13.36 at 4pm New York time in Nasdaq Stock Market trading. Dell fell 23 cents to $8.65, while Microsoft advanced 3 cents to $18.12. Hewlett-Packard, in Palo Alto, California, declined 26 cents to $34.08 on the New York Stock Exchange.

Hewlett-Packard's Mini is one example of a netbook. The $279.99 machine has an 8.9-inch (22.6 centimeter) screen, a keyboard that's 90 per cent the size of a normal laptop, and comes with the Linux operating system.