The netbook fraud: Truth, lies, and consequences in the PC market's hottest segment

At first glance, today's netbook still looks like a laptop that spent a little too much time in the dryer. But after a few false starts and barely two years of serious evolution, netbooks have the first seriously unique market niche in hardware since laptops initially hit critical mass in the mid-'90s. And what's not to like about them? They're incredibly inexpensive, a lot easier on travellers' already overburdened shoulders and backs, and more than capable of handling the kind of routine work most of us churn through over the course of the average workday.

They're also ridiculously underpowered for anything beyond basic workflow like editing documents, managing e-mail, and accessing the Web. Their tiny, often laughably laid out keyboards make touch typing a fond memory. The small, low-resolution screens turn scrolling into a national sport -- which you'll probably want to avoid given the ergonomically frightening trackpads that are typically crammed wherever there's space. Battery capacity is lousy, too, often barely stretching beyond a couple of hours, if that much.

By the time you've upgraded the memory, battery, and storage to levels that allow you to do actual work while on the go, you've priced a netbook close to a low-end laptop. But that doesn't seem to be a deterrent.

IDC reports vendors sold seven times as many netbooks in Q1 of 2009 as they did the previous year, and predicts 22 million sold by the time the year is out. In a PC market marked by flatlining sales of conventional PCs, netbooks are a rare source of good news. As the economy continues to struggle and consumers increasingly seek inexpensive alternatives, these mini machines are poised for even greater market penetration.

But every silver cloud must have a dark lining. For Intel, its biggest fear -- cannibalization -- may already be coming true. The company's own global estimates show netbooks now accounting for 16% of overall notebook sales. The chipmaker, which makes the Atom processor that currently powers most netbooks, estimates that figure will soon edge toward 20%. In some European markets, it's already closer to 25%. Although Intel insists it makes a comfortable profit for each Atom sold, it's safe to assume quad core workstation chipsets haul in significantly more per unit. For a company used to selling higher-margin chipsets in full-blown machines, this erosion is a long-term challenge to profitability.

Like Intel, Microsoft finds itself in relatively new territory. Vista's a non-starter here because of its sheer girth, and its next-generation OS, Windows 7, won't be released until October at the earliest. Windows XP has become the de facto Microsoft netbook standard bearer in the interim. But Microsoft, which has been trying to kill its previous-generation OS for years now, can't be happy that it's forced to keep selling XP into this low-margin environment.

It won't get better long-term, either. Even when Windows 7 ships, the days of triple-digit profits for every copy of pre-loaded Windows will be history. In a world of $300 -- and declining -- machines, Microsoft needs to learn how to make do with a lot less profit per unit sold. This will affect its conventional OS strategies as well, as low OS pricing for netbooks undermines the value proposition of an OS on a full-fledged notebook or desktop PC.

The rise of open source is another cause of worry for Microsoft. Google, which never met a mobile market it didn't want to own, is moving aggressively to grab its own piece of the netbook pie. As well it should, since it doesn't have a legacy processor or chipset business to protect. Versions of Android, its operating system initially built for smartphones, are being prepared for release on netbooks later this year. Initial reviews are positive, pointing to snappy performance and stability. If Android and other open source Linux-based offerings gain any sort of traction, Microsoft's entire Windows franchise could join Intel's chip margins on the endangered species list.

Although this points to a rosy future for the diminutive machines, a bunch of things have to happen first before netbooks transition from cheap low end notebook alternatives to mobile productivity devices in their own right:

• Better connectivity. Although netbooks are mobility-enablers, most of them are still disconnected until they find a Wi-Fi hotspot. They need 3G, and they need a new cell phone-like purchasing model where customers who commit to a two-year data plan can have it for under $100 -- or ideally, for free. Although AT&T and Verizon have had some early success with this and are moving quickly to expand availability, it won't hit critical mass until more netbooks include 3G wireless capability standard.

• More power. Three-cell batteries that give up the ghost before the morning commute is over are so yesterday. Once battery runtimes approach the 5-6-hour range, netbooks can realistically be toted around all day without needing an outlet or an adapter.

• Improved UI. What works on a notebook doesn't always work when you're looking something up quickly before getting into the airport security line. User interfaces that require less scrolling and clicking -- perhaps taking a page or two from smartphones -- need to replace the traditional icon-based desktop paradigm.

• Human-scaled ergonomics. There's no reason netbook owners should risk personal injury from using the God-awful keyboards and trackpads that almost all of these devices have. Smaller form factors should represent an opportunity for hardware vendors to introduce innovative ways of interacting with devices (touchscreens, anyone?) instead of simply shrinking down existing hardware and hoping no one complains.

• Expanded capability. There's no reason why power-miserly processors need to be so wimpy. Future netbooks need more guts to support more than basic computing. Moore's Law should fix this in time, but it still needs to be a priority.

There's no question that netbooks hold a huge amount of promise. It's just as true that in many cases they've been hugely oversold. Still, once vendors figure out what buyers want -- and once buyers learn that these devices are a lot more than shrunken notebooks -- we'll all benefit from machines that more closely meet our rapidly evolving, hyper-connected needs.

Carmi Levy is a Canadian-based independent technology analyst and journalist still trying to live down his past life leading help desks and managing projects for large financial services organizations. He comments extensively in a wide range of media, and works closely with clients to help them leverage technology and social media tools and processes to drive their business.