Dell, Hewlett-Packard Adapt to Netbook Nemesis

NEW YORK ( TheStreet) -- Netbooks could be cooling off, but the netbook effect continues to chill the PC industry.

The arrival two years ago of the lightweight, stripped-down, $300 mini-laptops made by Asian shops like Asus and Acer exposed a vulnerable underside to the PC industry.

Now, in response, giants like Dell ( DELL) and Hewlett-Packard ( HPQ) are courting the close-to-cheap market with new models that run on faster chips with bigger memories and have smaller price tags in the $600 range.

"We're already seeing the big PC makers responding in two ways: by getting into the netbook game themselves, and by pricing their notebooks more competitively," says Peter Rojas, co-founder of consumer-tech Web site gdgt.

The race to the bottom has placed average PC selling prices on an even steeper slope than usual.

And while today's cheaper devices certainly fit a leaner, more recessionary time, the netbook's influence on the industry will drag on for years.

"The sub-$500 average selling prices stand to be a deflationary force for all notebook PCs over time," wrote JPMorgan analyst Mark Moskowitz in a research note last month.
The Netbook Discount
Average PC prices worldwide
Source: JPMorgan, Gartner

Feature inflation meets price deflation

For years, in an effort to keep prices up, the PC industry kept piling on more hardware capacity, software muscle and processor speeds. But the sudden success of the netbook revealed how far PC technology had overshot the user, says long-time industry analyst Ashok Kumar.

Netbooks gave people cute, portable devices on which to do most of their daily tasks such as checking email and viewing the Internet. And the prices, at about a third of those of laptops, were killer.

But after a blistering success, netbooks have shown some limitations. Many netbook users, who want to view HD videos or run several programs at once, have discovered some shortcomings.

One window on the marketplace suggests netbooks aren't flying as fast as they used to. Just a year ago, netbooks accounted for nine or 10 of the bestselling computers on Amazon. Today, netbooks hold six positions on that list.

And while PC makers are bending to fit lower price ranges, netbook makers are adding pricey features like better chips and DVD drives.

"It's been great for consumers," says gdgt's Rojas. "Being able to get a more powerful notebook PC at a cheaper price is great. I've seen a lot of people surprised at what $500 or $600 will buy in a 14-inch or 15-inch notebook these days," says Rojas.

"I think that there will stop being a meaningful distinction between netbooks and notebooks," says Rojas.

None of this is particularly good for investors, however. Given the weak economy and continued job losses, 2009 is not shaping up all that well for the PC makers. Shipments are expected to be flat with 2008 levels, and industrywide sales are likely to be down 15% this year, says analyst Kumar.

The one great hope is that there is a big PC-buying cycle just around the corner.

Consumers who have held on to their clunkers may find reason to upgrade. Microsoft's ( MSFT) Windows 7 operating system promises to be less of a fiasco than Vista, and fast, thin chips from AMD ( AMD), Nvidia ( NVDA) and Intel ( INTC) should be at the core of new lighter, slimmer machines.

Of course the only thing that fairy tale needs is a suddenly confident consumer to bring the PC business back to life.