Invasion of the Netbooks

As Brian Pelowski shopped for a new computer for his wife, who's working on her doctorate in developmental psychology, he wanted a machine that was lightweight and low-priced. So he opted for a Lenovo IdeaPad S10 netbook instead of a higher-end laptop. "She walks to school and can stick this in her big sidebag without it taking up a lot of room or killing her shoulder," Pelowski explains. "We also didn't want to spend a ton of money."

Neither do the millions of other people who this year are expected to buy netbooks, a relatively new family of inexpensive, pint-sized, Web-connected computers. Rising demand for any tech gear is welcome at a time when recession is forcing consumers to refrain from all but the most essential purchases, but the enthusiasm is tempered at the computer manufacturers whose sales will be pinched as buyers opt for a netbook in place of a full-featured laptop that can cost more than three times as much.

It wasn't supposed to be like this. PC makers surmised that netbooks would complement bigger PCs. They would appeal to weary business travelers, for example, who wanted to get online and send e-mail from a hotel room. But in many cases, consumers are opting for netbooks in place of laptops, PC manufacturers say. Jackie Hsu, president of the Americas division of laptop and netbook maker Asus, estimates that 10% to 20% of netbook buyers would have bought a more expensive laptop or desktop if netbooks weren't available.

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Sumit Agnihotry, director of notebook product marketing for Acer America, places cannibalization at 8% to 10%. And since netbooks are generally less profitable than their bigger cousins, manufacturers will have to make up much of the sales difference through higher volume sales of netbooks. Users are expected to purchase 11 million netbooks this year, from 182,000 in 2007, according to market researcher IDC.

Analysts expect the popularity of netbooks to continue to rise. Mobile-phone service providers, which have an interest in promoting wireless Web-enabled machines, are likely to step up in-store netbook marketing in the coming months. Vendors including Acer and Dell (DELL) are expected to unveil models richer in features such as longer battery life, larger screens, and better wireless-network compatibility. Researchers at iSuppli expect that netbooks will account for 18% of portable computer sales in 2012, up from about 8% this year. "Netbooks are cheaper, and the concern is they could account for a greater proportion of the business," says Matthew Wilkins, a principal analyst at iSuppli.

Amid the worst economic crisis since the Great Depression, computer makers and retailers reckon it's better to sell a cheaper product than none at all. And many netbooks are sold to consumers who've never bought a PC. Still, the industry may have to cope with lower sales in cases where a netbook substitutes for a laptop. What's more, as more consumers buy netbooks, they may replace more expensive laptops less frequently, say, every 36 months instead of every two years, Agnihotry says.