Netbook phenomenon caught Intel by surprise

SANTA CLARA, Calif.--The popularity of the Netbook caught Intel by surprise--more than once.

Shipments of this category of inexpensive, ultra-light, handy laptops--almost all powered by Intel's Atom processor--are set to hit at least 20 million units this year, about twice the number shipped in 2008, according to IDC. But if an analyst had suggested these numbers to Intel in March of 2008, executives would have dismissed the forecast out of hand--or laughed.

This failure, by many in the industry, to grasp the significance of the Netbook, forced Intel into perpetual catch-up mode at the beginning. "I'm the one who had to explain to our factory--I'm really, really sorry I miscalled the demand," said Noury Al-Khaledy, general manager of Nettop and Netbook Computing at Intel in an interview last week. "And the next month, I didn't quite get it right either," he said.

"I think we under-called how easily people would comprehend how useful the device was," he added. For the record, Asus launched the phenomenon with the Eee PC in late 2007, followed in 2008 by Hewlett-Packard, Acer, and Dell, among others.

Al-Khaledy continued. "I think there was sort of this pent-up desire for an affordable, portable, Internet-access light editing sort of device and many of our customers--with our help--nailed it. They helped us so much."

One of the distinct advantages that Intel Atom-based Netbooks have over other similar devices--such as those based on ARM processors--is Windows. ARM-based devices today don't run Windows XP or Vista--and won't run Windows 7. Intel-based Netbooks can run all of these operating systems and versions of Windows 7 may run as well, or better, than XP on Netbooks.

"People bash (Microsoft) all the time. But then what do you really want to buy?" Al-Khaledy asked. "People really do want Windows...the XP attach rate was really, really good." Though Al-Khaledy praised Asus' initial Eee PC and its Linux operating system, some consumers were disappointed when they found out that it wasn't Windows.

"The Linux thing wasn't clear to people. If you think you're getting Windows and then you get home and it isn't (that's a problem)," he said.

And what impact will Windows 7 have on the Netbook market? Pricing will be critical. Unless Windows 7 is priced aggressively, Al-Khaledy doesn't see it as a catalyst necessarily for a spike in Netbook sales. "I don't see it as a big tipping point. It's all about pricing. If you have to pay $30 more for Windows 7, it might make (consumers) pause. There's just not a lot of margin in the box," he said. "(But) if Microsoft prices Starter and Basic aggressively, why wouldn't you?"

"I would expect most (PC makers) will launch a Netbook with Windows 7," Al-Khaledy continued. "The Starter, Basic (versions) should run well." He isn't sure about the premium version of Windows 7, however, and said he is still in discussions with Microsoft.

And what is the pricing sweet spot for Netbooks? "The bulk today is between $350 and $299 but I would love to see it get to $250. Wait 'til Q4," he said.

Al-Khaledy takes issue with Netbook makers that price their systems above $600. Though he would not mention any names, Sony has come out with an Atom-based Netbook (which Sony insists is a notebook), priced well over $1,000. "Generally speaking, there have been people (PC makers) that have charged really high prices for Nettops and Netbooks, and those products have not done well because over time people start to compare them...if you spend $650 for something, you expect the 650 experience," he said.

"Are there a huge swath of people that are going to pay that price for Netbook performance? I don't think so."