Netbook: Evolving Category?

Laptops are evolving—and forcing the rest of the computer industry to change

A new class of cheaper, smaller netbook computers might upset the IT establishment this year and potentially usher in new players in a hotly competitive market.

Simple, low-cost laptops are not a new idea. There were several abortive attempts to make them in the 1990s, but big computer-makers soon dropped them for fear that they might undermine sales of traditional laptops. In 2005 a charity called One Laptop Per Child designed an ultra-cheap laptop for the developing world. That inspired Asus, a Taiwanese PC-maker, to develop one of its own, called the Eee PC, which it started selling in late 2007 for $250.

The timing was perfect. A few months later, the credit crunch hit. At the same time, Intel started selling its cheap and power-saving new processor chip, called Atom. By the end of 2008, Asus had sold nearly 5m Eees and all its rivals had jumped on the bandwagon. In total, 21m netbooks will ship this year, almost twice the number in 2008 and more than 15% of the entire market for laptops, according to Gartner, a market-research firm.

Yet as netbooks have become more popular, many of them have also become more sophisticated. Asus’s first Eee PC was a puny device with a screen measuring only seven inches (18 centimetres) diagonally, a midget keyboard and flash memory instead of a hard disk. It also ran Linux, a free operating system. But consumers in the rich world wanted more. As a result, most of the new devices on display in early June at Computex, a trade show in Taipei, boasted at least ten-inch screens, full-size keyboards and sizeable hard disks, and they ran Windows XP, an old version of Microsoft’s flagship operating system. Many models now go for $600 a pop.

Though netbooks have acquired many frills and mutated into new forms, the theory behind them endures: computers do not need to be stuffed with the latest whizz-bang technology if they have a high-speed connection to the “cloud” of services available online. At Computex, a trade show in Taipei, firms showed devices equipped with WiMAX, a new wireless technology that allows for fast, ubiquitous wireless connections.

It is this combination of connectivity and cloud computing that makes netbooks and their successors so disruptive. Some mobile-network operators now throw in free netbooks if subscribers sign up for a mobile-broadband contract. This will put further pressure on prices, since mobile operators have more bargaining power than individual consumers, although it also opens a huge new distribution channel for computer-makers.

More important, netbooks and similar devices could weaken Microsoft and Intel, which have so far dominated the PC industry and extracted most of the profits. To keep Linux off most netbooks, Microsoft has had to discount Windows XP from $40-45 per copy to $10-15.

Intel, by contrast, has so far mainly benefited from the netbook craze, which has created a huge market for its Atom chip. The firm insists this has neither cannibalised sales of its other chips as much as feared nor put pressure on its lofty margins, since Atom costs less to make. Still, just as with Linux, there is a credible alternative to Atom: processors based on designs by ARM, a British firm, which already power most of the world’s mobile phones. Several Taiwanese PC-makers are working on a netbook-like gadget that would be powered by an ARM chip and run Android, a variety of Linux developed by Google for use on smart-phones.

At Computex, Acer announced that it would use Android together with an Intel chip. Other firms are expected to follow suit. Intel is also pushing another version of Linux, called Moblin. Its long partnership with Microsoft notwithstanding, Intel does not seem to care what operating system netbooks use, provided they contain the firm’s chips.

Netbooks are surging. At first, vendors thought of them as a way to sell cheaper, less powerful alternatives to notebooks, but netbooks have gradually come into their own—and now we're almost to the point where netbooks can be taken as seriously as their larger, weightier brethren.

It seems that netbooks, already hot, may benefit from improved functionality. It is unclear if the gradual improvements represent a new generation or simply incremental improvements as the technology evolves. Regardless, that the category is addressing some of the shortcomings of the past, such as “cramped” keyboards, small screens, slow processors, short battery life and too little memory.

The march of devices from consumers to businesses is occurring in the netbook sector. ADNH Compass, a 17,000-employee caterer in the Middle East decided to give workers Aspire One netbooks instead of full-size laptops. Perhaps the most interesting tidbit is that the company’s ERP software manager is in the process of enabling the devices to access SAP applications via 3G wireless. This clearly shows that the netbooks aren't out of their league and are robust enough to support the heavier workloads demanded in business environments. IT managers who formerly scoffed at the idea of replacing laptops with netbooks are taking the concept far more seriously.

The netbook/MID/smartphone/laptop sector is perhaps the most interesting and fun to watch. For one thing, the sour economy means that nothing good is happening in many other sectors.

What do you think? Are netbooks the future? This industry always evolves toward smaller and less expensive. If netbooks can continue to harnass great computing power—as with the Acer AspireRevo—I think there's no stopping them. And that means a lot of PC manufacturers are going to see a lot of upheaval in their business models.