Computer makers are now taking tiny laptops seriously, due to the success of Taiwan's Asustek and India's HCL. Acer will soon join the fray
For years, many in the PC industry dismissed efforts by a small group of innovators to come up with small laptop computers that would be far more affordable than the traditional notebooks sold by the likes of Hewlett-Packard (HPQ) and Dell (DELL). Nicholas Negroponte, the visionary Massachusetts Institute of Technology professor, launched his One Laptop Per Child (OLPC) foundation with the goal of creating a $100 machine. But skeptics wrote off Negroponte and OLPC as do-gooders without a real business model who were more interested in providing computers to impoverished kids in African or Asian villages than selling them profitably in developed countries.
Proving the naysayers right, the XO laptop that rolled off the factory line late last year was beautifully designed and loaded with innovative features, but way over its $100 price tag and behind schedule. The XO also met with an underwhelming response from governments in the developing world, and Negroponte is now reorganizing (BusinessWeek.com, 3/5/08) his group.
If OLPC didn't make much business sense, then neither did the low-cost laptop project of Negroponte's main rival, Intel (INTC). Engineers at the semiconductor giant's Shanghai development center were working on the Classmate PC (BusinessWeek, 7/9/07), but it, too, was aimed at children in the world's poor countries.
Asustek's Newest Eee PC
Now, computer companies are finally starting to take miniature laptops seriously. That's largely due to Asustek Computer, a Taiwanese maker of notebook PCs. On Mar. 5 at the CeBit electronics show in Hannover, Germany, Asustek unveiled its newest Eee PC, the most advanced mini-laptop. The Windows XP-driven model, with an 8.9-inch screen and 1 gigabyte of flash memory (and no hard drive), is a follow-up to the first generation of Asustek's Eee PC, a Linux-based model with a 7-in. screen and 512 megabytes of flash that the company launched last October at a starting price for consumers of $260. Asustek hasn't revealed the price of the new machine yet but it's likely to be around $650.
Asustek is aiming its mini-laptop not at rural students in Nigeria but at affluent consumers in the U.S., Japan, and elsewhere in the developed world who may be put off by a full-fledged computer. "There's very big potential for nonsophisticated users—young kids, housewives, and senior citizens," says Asus chairman Jonney Shih. The company sold 300,000 of its Eee PCs in the last three months of 2007 and predicts it will ship as many as 5 million this year. The response "has exceeded our expectations in almost all countries," boasts Shih.
Sensing a rare opportunity for new growth in the sluggish computer industry, other companies are rushing to launch mini-laptops. Among the leaders is Indian computer maker HCL, which has worked with Intel to come out with a machine based on the Classmate PC. The No. 2 PC company in India, behind HP, HCL in January launched the MiLeap X Series in India. The machine has a 7-in. screen, an Intel Celeron processor, and a $350 price tag. Last month, HCL even unveiled a pink version in time for Valentine's Day.
Acer Plans Its Entrance
More powerful players are preparing to take on Asustek. Acer, the Taiwanese company that purchased Gateway last year and is now the world's third-largest computer brand, behind only HP and Dell, is planning a low-cost laptop of its own to compete directly with the Eee PC. And the industry is abuzz with speculation that HP and others plan to sell mini-laptops soon, too.
Providing support and encouragement to many of these computer companies is Intel. Last year it formed a short-lived alliance with Negroponte, but by yearend Intel and OLPC had parted ways and the chipmaker was again focusing on its Classmate as the answer to companies looking to develop a low-cost computer (BusinessWeek.com, 1/8/08).
To appeal to users in the developing world who demand more performance from their computers, Intel is now working on an updated version of the Classmate, with a 30GB hard drive instead of the 2GB flash memory in the first version, says Lila Ibrahim, general manager of the Shanghai-based division in charge of mini-laptop development. By yearend, she adds, Intel engineers will add a camera to the Classmate and a battery that lasts longer than the four hours in version 1.0.
Lots of Assistance from Intel
Intel is not in the business of making computers itself, so the company's strategy is to help manufacturers develop products of their own. Intel's engineers, for instance, have worked with their counterparts at Asustek, providing them with assistance on the Eee PC. Asustek has "a cool design that is getting everyone's attention," says Ibrahim. "It's rethinking the way that PCs can function and look."
The mini-laptop is also boosting Asustek's fortunes. At a time when other computer makers are struggling because of the slumping American economy, Asustek, which traditionally hasn't prospered in the U.S., has an edge, analysts say. "Asustek stands out from its hardware peers on low exposure to U.S. markets and new drivers from the notebook and Eee PC business," Credit Suisse (CS) analysts Robert Cheng and Jill Su wrote on Jan. 30.
The Eee PC is already starting to affect Asustek's bottom line. The machine is "innovative and [making] a meaningful contribution to profit," a team of analysts at Bear Stearns (BSC) led by Jack Tse wrote on Jan. 29. They estimate that the mini-laptop will account for 8% to 9% of Asustek's earnings this year, helping to boost gross profit margins from 9.7% last year to 10.2% this year. Bear Stearns predicts Asustek will earn $1.1 billion on sales of $24.8 billion this year, a 23% boost in profits on a 4% increase in revenue.
Price and Functionality: A Tricky Balance
Not everyone is impressed by the Eee PC and the mini-laptop model. "There's been a lot of hype," says Bryan Ma, a Singapore-based PC analyst with International Data Corp. While the Linux-based machines are inexpensive compared to regular laptops, they also don't deliver the performance that consumers expect. "It's not a full-blown PC," says Ma. "It looks like a notebook but it's not quite; it's more of a gadget." Asustek's Windows XP-driven Eee PC, with more memory and a larger display, addresses some of those concerns. But those features don't come cheap.
As prices rise, Ma wonders whether consumers might just decide to stick with a more traditional computer instead. "The problem with trying to compete on price is you have to strip down a lot of the functionality to get there," he says. "As the functionality turns out to be not what people want, the vendors will have to build the functionality back into the product. So you are back to having a PC again." For now, other computer companies will be chasing Asustek in developing the mini-laptop market. But, Ma says, "they may just come back to square one and say, 'Let's just sell notebooks again.'"
For more on mini-laptops, see BusinessWeek's slide show.
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