The evolution of the Netbook

It's getting harder to tell the difference between a Netbook and a notebook.

Except when you look at the bottom line of the companies making them. Though initially thought of as a way to sell cheaper, less powerful companion devices to notebooks, Netbooks are beginning to lose their distinction, as evidenced by the new Netbooks unveiled at CES 2009. While it's good for consumers, the blurring of lines between the two could potentially be destroying the business models of PC manufacturers.

That lack of distinction between a Netbook and a notebook will become more clear as soon as Windows 7 arrives on the scene, likely in the next nine to 12 months. Microsoft's new operating system is designed to work on Netbooks and actually may provide a good experience for users on relatively low-powered devices, unlike Vista. That calls into question the value proposition of the Netbook category if the same OS is available on what are supposed to be two different kinds of machines, according to Stephen Baker, vice president of industry analysis for the NPD Group.

"What does that do to our business model? Have we (just) traded $799 sales for $399 sales?" he asked.

And the timing isn't great. "The unfortunate aspect is we're bringing these products out in a recession, which is likely to mean it's harder to (sell) these as an additional PC and not as replacement for something else you're going to buy," said Baker.

For the past year, when a laptop had a screen smaller than 10 inches, an Atom processor, and cost below $400, we'd call it a Netbook. Starting from essentially zero market penetration in late 2007, by the end of last year, roughly 10 million Netbooks have shipped, according to IDC. They now account for 7 percent of all portable PCs, an extraordinary growth rate in a short time. But exactly how the category is growing is the big question mark.

"The market is multi-faceted," said Loren Loverde, PC analyst for research firm IDC. "You don't get growth along a straight trajectory, more like growth in an amoeba. It stretches out in different directions and grows and absorbs different things."

What is a Netbook?
At first there appeared to be a semblance of agreement on what made a Netbook different, and its own category of computer. Intel launched the category with its Atom processor, which promised less computing power, but for far less cost. One Laptop Per Child and Intel led the way with low-cost notebooks intended for developing nations. But Asus broke the category open for consumers in late 2007 with itsEee PC, at first equipped with a tiny 7-inch screen, little chiclet keys, solid-state memory, and Linux instead of Windows.

Much has changed since then. A year later we have almost as many interpretations of a Netbook as we do manufacturers. Dell defines Netbook differently than Sony, who sees the market in a way that Acer and Hewlett-Packard do not. (And Toshiba refuses to see any Netbook market at all--at least in the U.S.)

Acer and Asus essentially agree on what a Netbook is: a low-power notebook with a 9-inch screen with a price point between $300 and $400. They're not meant for much beyond connecting to the Web. Those two Taiwanese manufacturers were first to market and have been rewarded handsomely for their efforts, capturing the majority of Netbook market share early on. Acer has done particularly well in Europe.

In late summer, Dell, the largest PC maker in the U.S. and the second largest worldwide, threw its hat into the ring, apparently to defend its territory. The Dell Inspiron Mini 9 was a normal Netbook, but the subsequent Mini 12 was puzzling. By grouping it with the Mini line it's being sold as a Netbook, but the 12-inch screen size is bumping up dangerously close to smaller traditional notebooks. At just under $600, it also appears to compete with the $699 Dell Inspiron 15.

Each PC vendor is trying to mold the Netbook trend in a way that fits with their own product line. Companies like HP are trying to draw a distinction between Netbooks through software: The Mini 1000 MIE has a custom interface designed to hide the fact that it's essentially a Linux device. Sony's also putting its touch on the idea, with the Sony Vaio P Lifestyle PC, an expensive device not aimed at the masses.

By each company tweaking their Netbooks a little here and a little there in the name of differentiating and adding more features that consumers want or expect, they're basically creating something that looks like yet another notebook PC.

At what cost?
Dell VP of Consumer Sales and Marketing Michael Tatelman insisted at CES last week that it's "still too early to tell" if by selling Netbooks it is drawing customers away from buying traditional notebooks, which cost more and offer manufacturers higher margins.

"In some places it's a way to acquire new customers faster, in some places it's a companion device, and in some places it's a primary computer," Tatelman told a crowd of journalists while introducing the company's third Netbook, the Inspiron Mini 10 last week.

HP also insists Netbooks and notebooks are very separate. To which former Seagate CEO William Watkins promptly snorted and rolled his eyes at the idea in an interview last week. He summed up how the category's naysayers feel, saying, "A Netbook is just a low-end notebook."

By the midpoint of this year we'll be able to assess the damage the Netbook craze has done to traditional notebook revenues, said NPD's Baker. "We know there will be some (cannibalization), but we'll find out just how much."