Qualcomm, Freescale Bet on 'Smartbooks'

Qualcomm and Freescale Semiconductor are hoping that a netbook by another name smells as sweet. In hopes of eroding Intel's lead in the burgeoning market for small, inexpensive laptops, the chipmakers are putting marketing muscle behind a category of stripped-down computers called smartbooks.

Cell-phone chipmaker Qualcomm (QCOM) defines smartbooks as mobile computing devices that boast screens of 5 to 12 inches, designed for viewing Web video clips and e-mail. If that sounds a lot like netbooks, it should. These low-priced mini laptops have emerged as the PC industry's best sellers in the past year. Netbook sales are expected to almost triple, to 30 million units in 2009, according to investment bank Collins Stewart (CLST.L). The main difference lies in which company makes the chips. Intel (INTC) has a lock on the netbook market.

San Diego-based Qualcomm began using the term smartbook internally last fall and recently launched a Web site promoting the devices. Freescale, the chipmaker spun out from Motorola (MOT) in 2004, is devoting a big share of its marketing budget to smartbooks.

The smartbook branding effort reflects an industrywide shift toward a deeper array of products. No longer content with such broad categories as desktops, laptops, and servers that run corporate networks, Qualcomm, Freescale, Advanced Micro Devices (AMD), and other companies are creating categories of new devices sized somewhere between a smartphone and a small notebook.

Now Comes Massive Marketing

They're trying to appeal to consumers' appetites for specialized mobile-computing devices at a fraction of the cost of a desktop or high-end laptop. Rivals are also gunning for players such as Intel, which serves upwards of 80% of the netbook market, and Microsoft (MSFT), maker of the Windows operating system that comes with more than 90% of netbooks. "The name netbook we liked for a while," says Glen Burchers, a marketing director for Freescale, which on June 1 officially began using the term smartbook. "But after more and more products came out with the netbook name, they've come to be defined as 'Wintel,'"—machines containing Intel chips and the Windows operating system. Freescale wants manufacturers to build smartbooks that instead run its chips and open-source Linux software.

Smartbooks will make up the "largest segment" of Freescale's consumer marketing budget this year, Burchers says. "This is the most important consumer product we are focusing on." Qualcomm has begun running print ads in support of the smartbook brand. Neither company says how much they are spending, but marketing experts say it's not cheap to define a product category from scratch. Creating the netbooks category, for example, cost chipmakers and PC manufacturers "a couple hundred millions of dollars," says Philip Kotler, S.C. Johnson & Son professor of international marketing at Northwestern University's Kellogg School of Management. "These are major, major investments…It's not enough to make a product. You have to create a story around it."

Other new product categories in development by various players include Mobile Internet Devices (MIDs), mini notebooks, ultra-mobile PCs, and thin-and-light notebooks. Component suppliers and PC manufacturers are trying new labels to differentiate their products from those of rivals. "It's all marketing," says Will Strauss, president of semiconductor consultant Forward Concepts. "Everyone is trying to show no one is serving this category but me. If you define a category correctly, you can be No. 1 in it." The smartbook market may rise to almost 40 million units by 2012, from about 300,000 last year, Strauss says.

New Categories May Confuse Consumers

So will consumers be more enamored of smartbooks than they are of netbooks? Manufacturers hope to associate smartbooks more with smartphones than with larger computers, and will set their expectations accordingly. Some netbook buyers have been disappointed when they discover their netbooks can't tackle many tasks handled by other, more powerful machines. By contrast, consumers are aware that smartphones don't have much onboard memory or computing power and can only run light applications; they may, therefore, bear lower expectations for a smartbook. Freescale is talking to retailers about placing smartbooks in store areas near cell phones, away from bigger computers.

Adding new categories could have drawbacks. For one, customers might become confused, notes Ramesh Iyer, a director of worldwide business development at Texas Instruments (TXN). Qualcomm and Freescale approached TI about joining their smartbooks alliance, but TI passed. "We don't want to create more names for a market that's already confusing." TI does supply chips to manufacturers that make netbooks and comparable categories.

Smartbooks could also cannibalize smartphone sales, says Roger Kay, President of Endpoint Technologies. "Average market size decreases with more categories," Kay says.

The emergence of the smartbooks category could also put pressure on average selling prices for PCs, Kay warns. Smartbooks will initially cost in the $200 range at retail, vs. $350 and up for netbooks. Already, thanks largely to netbook sales, the average computer's selling price fell 14.3% in the fourth quarter of 2008, according to IDC (IDC).

If they help fire the campaign against Intel, those are risks Qualcomm and Freescale are willing to take. Before arriving at the smartbook name, Qualcomm surveyed hundreds of people around the world. "Some users even came up with the term smartbooks unaided," says Keith Kressin, senior director of marketing at Qualcomm. "It came out better than the term netbook the first time they heard it."

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