Tuesday, February 24, 2009

Netbook versus Labtop



The future of computing: cheap ubiquitous netbooks (which may not look like books but more like phones or music players) for the masses and expensive high power laptops for specialized professionals.


Inspired (or perhaps a bit scared) by the OLPC project, Asustek—Quanta's archrival in Taiwan and the world's seventh-largest notebook maker—began crafting its own inexpensive, low-performance computer. It, too, would be built cheaply using Linux, flash memory, and a tiny 7-inch screen. It had no DVD drive and wasn't potent enough to run programs like Photoshop. Indeed, Asustek intended it mainly just for checking email and surfing the Web. Their customers, they figured, would be children, seniors, and the emerging middle class in India or China who can't afford a full $1,000 laptop.
What happened was something entirely different. When Asustek launched the Eee PC in fall 2007, it sold out the entire 350,000-unit inventory in a few months. Eee PCs weren't bought by people in poor countries but by middle-class consumers in western Europe and the US, people who wanted a second laptop to carry in a handbag for peeking at YouTube or Facebook wherever they were. Soon the major PC brands—Dell, HP, Lenovo—were scrambling to catch up; by fall 2008, nearly every US computermaker had rushed a teensy $400 netbook to market.

By the end of 2008, Asustek had sold 5 million netbooks, and other brands together had sold 10 million. (Europe in particular has gone mad for netbooks; sales there are eight times higher than in the US.) In a single year, netbooks had become 7 percent of the world's entire laptop market. Next year it will be 12 percent.
"We started inventing technology for the bottom of the pyramid," Jepsen says, "but the top of the pyramid wants it too." This bit of trickle-up innovation, this netbook, might well reshape the computer industry—if it doesn't kill it first.

Dell and HP weren't going to pioneer a $400 laptop, because they were already selling laptops for $1,000. Why mess with a good thing? MSI had no laptop business at all, and Asustek had only a small business selling full-price machines under its own brand, mostly in Asia and Europe. Since the Taiwanese weren't addicted to selling SUV-class computers, they could swoop in like Honda with smaller, more efficient models. They also knew how to design on the cheap after years of producing motherboards with excruciatingly tiny margins.

In The Innovator's Dilemma, Clayton Christensen famously argued that true breakthroughs almost always come from upstarts, since profitable firms rarely want to upend their business models. "Netbooks are a classic Christensenian disruptive innovation for the PC industry," says Willy Shih, a Harvard Business School professor who has studied both Quanta's work on the One Laptop per Child project and Asustek's development of the netbook.

The Taiwanese firms, Shih argues, now have enormous clout in the PC industry. In the US, we regard branding and marketing—convincing people what to buy—as core business functions. What Asustek proved is that the companies with real leverage are the ones that actually make desirable products. The Taiwanese laptop builders possess the atom-hacking smarts that once defined America but which have atrophied here along with our industrial base. As far as laptop manufacturing goes, Taiwan essentially now owns the market; the devices aren't produced in significant volumes anywhere else.
If you had asked Taiwanese hardware CEOs a few years ago about their relationship with Dell, HP, and Apple, they'd have told you that the American companies did the branding and sales while outsourcing their design and production to Taiwan. Today the view from Asia is increasingly the reverse. "When I talk to them now," Shih laughs, "they say, 'We outsource our branding and sales to them.'"

Netbooks are so cheap, they're reshaping the fundamental economics of the PC business. Last October, British mobile-phone carrier Vodafone offered its customers a new deal: If they signed a two-year contract for high-speed wireless data, Vodafone would give them a Dell Mini 9 netbook. That isn't quite the same as getting a free computer; after all, Vodafone bills users $1,800 on that two-year contract, so it can afford to throw in the netbook. (In December, RadioShack offered a similar deal: a $99 Acer Aspire netbook for anyone who signed up for two years of AT&T's 3G service.)
What these deals signal is that computers are developing the same economics as mobile phones. Hardware is becoming a commodity. It's difficult to charge for. What's really valuable—what people will pay through the nose for—is the ability to communicate.
So netbooks have sent a sort of hot-cold shudder through the computer industry. Sure, it's great to have an exploding new product category. But this is a category in which it's incredibly hard to make a dime: At $300, a netbook sells for barely more than the sum of its parts—and sometimes less. "The profit margins on these things are nonexistent," chuckles Paul Goldenberg, managing director of Digital Gadgets, which created a line of netbooks under the Sylvania brand. "Everyone is saying 'We're losing money now, but we'll make it up on volume, right?'"

The great terror in the PC industry is that it's created a $300 device so good, most people will simply no longer feel a need to shell out $1,000 for a portable computer. They pray that netbooks remain a "secondary buy"—the little mobile thingy you get after you already own a normal-size laptop. But it's also possible that the next time you're replacing an aging laptop, you'll walk into the store and wonder, "Why exactly am I paying so much for a machine that I use for nothing but email and the Web?" And Microsoft and Intel and Dell and HP and Lenovo will die a little bit inside that day.
The decision is probably out of American hands. Indeed, living in the US—where netbooks are only just taking off—it can be hard to grasp just how popular the devices have become in Europe and Asia and the degree to which they're already altering the landscape. As Shih told me, "I was talking to the chair of one of the major Taiwanese notebook manufacturers, and he said, 'This is where my next billion customers comes from.' And he was not referring to the US." He meant the BRIC countries—Brazil, Russia, India, China—where billions of very price-conscious customers have yet to buy their first computer. And the decisions they make—Windows or Linux? Microsoft wares or free cloud apps?—will have enormous influence on how computing evolves in the next few years.

Netbooks could drive production of even crazily cheaper, lighter-weight computers. "If everything you're doing is online, then the netbook becomes a screen with a radio chip. So why do you need a motherboard?" OLPC designer Mary Lou Jepsen says. "Especially if you want the batteries to last. Why not just make it a screen and a really cheap $2 to $5 radio chip?" The cloud is also probably going to get powerful in ways that now seem like fantasy. AMD is working on an experimental 3-D graphics server farm that would run high-end videogames, squirting a stream out to portable devices so you could play even the most outrageously lush games without a fancy onboard processor. Patrick Moorehead, AMD's vice president of marketing, recalls that in 2007 gamers had to buy special powerful desktop machines loaded with RAM and $600 graphics cards to play Crysis: "Now imagine you've got servers running Crysis and streaming it to an iPhone or a netbook, sending just the vectors that let you navigate the game."

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