Intel rethinks Netbooks - and why

Per a CNET report, at a recent Raymond James IT Supply Chain Conference, Stu Pann, Intel VP of sales and marketing group said his company now sees the netbook differently now.

The reason cited is that market uptake demographics have been different from initial expectations. Instead of coming from emerging markets and school kids, sales are from
"Western Europe, North America, and for people who just want to grab and go with a notebook."

Another reason cited is the user experience - "If you've ever used a Netbook and used a 10-inch screen size--it's fine for an hour. It's not something you're going to use day in and day out."

Intel's comments, while coming on the heels of rival AMD's declaration that it is ignoring the netbook phenomenon, are still surprising considering the company makes the Atom processor and accompanying chips that go into most of the netbooks sold today.

It is questionable, too, that Intel would view the netbook segment as mostly incremental to their total available market. While in sheer dollar amount, margins might be incremental, in sales volume, the numbers can't be ignored. The netbook segment is in fact the fastest growing segment of the PC market today. And considering that Intel spends a substantial amount putting its brand and logo in front of users, it would be natural that it would want to capture new users and get them used to using Intel-equipped notebooks. Given this, the netbook market simply can't be more than just incremental in the overall scheme.

As for user experience, the iPhone has already proven the (small) size of the sceen is not necessarily a detriment to satisfactory surfing. Of all mobile phones, iPhone owners are most inclined to surf using their units. Obviously, the iPhone's screen is nowhere as big as a 10" screen. Granted, user interface counts a lot. But netbooks tend to use familiar UIs and browsers, thus providing familiarity and a minimum comfort level for most users.

Moreover, and more importantly, screen size is relative. If you are coming from a 17" or 15" screen, a 10" screen will certainly look cramped. But if you are coming from mobile phones or simply have no previous computer experience, then a 10" screen will look great. In fact, a 7" screen will suffice. And this is actually the initial target market of netbooks as conceived by Asus - the 2nd billion. Those living in developed countries but can't afford mainstream notebooks and those living in developing worlds who have previously no access to such products. So for the initial target market, screen size is a non-issue.

Which brings us to the current market - as Intel has claimed, most of the sales are not from the initial target market. This is probably true given that pricing of netbooks has gone the opposite direction - higher prices for more features - than when first announced by Asus. This simply makes them out of reach, price-wise, for the initial target market. So naturally, current customers, for the most part, come from the established segments.

But if you are up-to-date with manufacturing trends in China, where practically all netbooks are made, then you should be familiar by now with the growing popularity of what is commonly referred to as an EPC (in a nod to the original netbook - Asus Eee PC). The EPC is a generic term used to refer to a low-cost netbook (actually glorified PDA) that uses an embedded OS (usually Win CE 5.0), has only 128MB or 256MB RAM, SSD, WiFi and sells anywhere from $100 to $180. Most significantly, it does not use an Intel CPU. Instead it uses one from a horde of lower-tiered manufacturers such as Samsung, Ingenic, etc. But not Intel. Not AMD.

The EPC's specs might be spartan but they are enough for most typical users, especially those in developing countries. Email, YM, chat, standard office apps - they all work just fine. Meaning EPCs do fit the bill fine. Not only in terms of features but in terms of pricing as well.

The problem for Intel is, of course, pricing. Low prices mean low margins. Unlike Microsoft, which has shown its willingness to cut prices in order to protect its market, Intel probably can't (or won't) compete head-to-head with the Chinese manufacturers on low-end products, especially since its hardware products require actual physical components rather than the intellectual property of Microsoft.

While Intel would opt for the high end of the netbook market and in fact does, the segment is slowly but surely being segmented into entry-level 7" models and higher end 10" models, Intel knows only too well given the explosive growth, it will be just a matter of time when 10" screens will become as ubiquitous and therefore as cheap as 7" screens. So the generic models will sooner or later make their way up to the 10" segment, with their attendant cheaper "generic" CPUs.

And because affordable netbooks have proven to be such a disruptive product, its continued growth does not bode well for the rest of the notebook market, where higher margins are still being enjoyed. So naturally, Intel (and AMD) would rather netbooks go away. Hence, their publicly proclaimed dis-interest.