Intel Stranded on Inventory Mountain

Updated from 9:19 a.m. EST

Intel's (INTC Quote) chip inventory is piled high enough to see netbooks sharply altering the landscape for PC giants Hewlett-Packard (HPQ Quote) and Dell (DELL Quote).

With inventory growing 10% sequentially since the September quarter and revenue falling 19% during the same period, Intel is clearly feeling the crush of its slumping PC customers. And given the direction the industry and the economy -- the liquidation of Circuit City on Friday jumps to mind -- there's plenty of downward pressure still building.

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Businesses aren't buying loads of new gear, and with rising unemployment and falling home prices, consumers aren't nearly as free-spending as they once were. But within the gloomy big picture is a vibrant corner at the low end of the market that is growing. So-called netbooks, the under-$500, stripped-down laptops from Asian upstarts like Acer, MSI and Asus, have caught on with tight-fisted consumers.

Not only do these smaller, sleeker devices threaten conventional notebook sales, but they also don't use Intel's most advanced chips or Microsoft's (MSFT Quote) huge Windows Vista operating system. In other words, netbooks represent the long-predicted undoing of what's commonly referred to as the Wintel empire.

Maybe symbolically, anyway. The current crop of netbooks, while fine for kids and business travelers, don't pack enough processing speed or graphics power to make video fans and gamers happy. But more robust machines are coming, and that will be a big problem.

Suppliers have to go where the orders take them. For chip manufacturers and other component vendors, when orders for cheaper parts come in, they have to shift production away from more lucrative widgets.