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PC Makers Fight the Netbook Dilemma

SAN FRANCISCO -- Take away the marketing hype about innovation, and the computer business looks strikingly staid. For decades, customers have had two flavors to choose from: desktop PCs and laptop PCs.

That menu is now set for a major revamp.

In the past year, virtually every big PC maker has introduced or announced plans for a so-called netbook, a shrunken, laptop-like wireless gadget designed for email and Web browsing -- but not much else -- and priced significantly cheaper than a traditional laptop.

Dell (DELL - Get Report), the world's second-largest PC maker, jumped into the fray earlier this month with its Inspiron Mini 9, which is available for as little as $349, following in the footsteps of Hewlett-Packard (HPQ - Get Report) and Acer. China's Lenovo is expected to release its first U.S. netbook in October.

The sleek devices promise a new avenue of growth in a business that some believe is maturing, as PC ownership tops out in certain markets and customers see little pressing need to upgrade to new machines.

But in opening the door to a new market, netbooks also tip the PC industry further toward commoditization -- and threaten to alter the established business model.

And with Wall Street already skittish about demand for PCs and price pressure amid a rough economic backdrop, it's not clear whether netbooks ultimately represent a benefit or a curse for the industry.

The danger was on display last week when Quanta, a notebook contract manufacturer, reported an 18.5% drop in August revenue - the company's worst performance in at least two-and-a-half years -- even as its overall shipments increased from 2.9 million units to 3.1 million units. The culprit, the company reportedly said, were low-priced netbooks.

The picture looks worse on the bottom line.

David Carey, CEO of Portelligent, a firm that dissects electronic devices and catalogs their internal components, examined one of the initial netbooks introduced by Taiwan's Asus last October.

According to Carey, the cost of the components of the Asus Eee PC he examined represented about two-thirds of the device's $300 retail price, compared to the 50% ratio he says is common in traditional notebook PCs.

That leaves little room to make a profit once other costs like marketing and retail distribution are factored in, Carey says.

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