A Sudden Appetite for Web Based Computers

|
Includes: AAPL, AMZN, GOOG, IBM, INTC, MSFT
by: Sydney Williams

Is the computer business model fundamentally changing? The explosive growth of netbooks – low cost, high performance PCs – suggests that it's already underway.

Priced at between $200 and $500, netbooks function mostly as web browser tools (offering the same performance in this regard as traditional PCs), but feature only limited storage (which means big cost savings). Experts see them as gateways to Internet-based computer services, or cloud computing.

The category’s sales are surging. According to industry trackers, global netbook shipments will reach 33 million units in 2009. That’s 100% year-on-year growth for an already substantial category, which only began a few years ago.

(No doubt, Microsoft (NASDAQ:MSFT) and Intel (NASDAQ:INTC), netbooks' primary software and microprocessor suppliers, welcome the category's growth. Desktop and traditional notebook sales, meanwhile, are languishing.)

Geographically, EMEA (13.3 million units), North America (8.8 million units) and greater China (3.9 million units) are expected to be the three largest purchasers. Growth rates, though, will be highest in emerging markets.

The recession has certainly aided netbooks' gains. But the consumer's expanding use of web-based applications could also signify a market shift away from traditional desktop computing. For phone companies, netbooks are the next significant growth opportunity after smart phones. Verizon (NYSE:VZ), for example, gives them away for free, recouping its investment in high-speed Internet access fees.

Because the category is so new and growing so quickly, industry people haven't fully defined it. For now, it just covers slimmed-down notebooks. Perhaps, one day, it could evolve to encompass smart phones and other devises. Future generations of Apple's (NASDAQ:AAPL) iPhone, already more a computer than a phone, could resemble netbooks, and vice versa, as user functionality advances.

Another product that might fall into this category is Amazon's (NASDAQ:AMZN) hugely successful Kindle, the upmarket electronic book reader, and pure web-based tool. Besides clearing space in travel bags, the Kindle is also familiarizing its users, mostly high-end consumers, with the ease and convenience of a web access-only devise.

Let's not forget, too, all the mobile devices targeting the health care industry. The federal government has earmarked billions of dollars for health IT. Hardware will need to evolve to support docs on the hoof, mostly in the form of tablets and handhelds. This entire system and its various components are likely to utilize web-based architecture.

Computing in the business world, generally, could transform, as processing and applications shift in the same fashion, from the desktop to a central server, or a virtualized desktop. What's left is a simple access terminal, or thin client.

The netbook category is also attracting high-caliber software developers. Just recently, Google (NASDAQ:GOOG) announced the development of Chrome OS, an open source, lightweight operating system, which will address the netbook market specifically: "people who live on the web — searching for information, checking email, catching up on the news, shopping or just staying in touch with friends".

What stops (or limits) its growth? Economic recovery could do so short-term – depending on how long it sustains. Replacement cycles and wealth effects will likely favor traditional categories, especially if the recovery is deep and long-lasting. (Four times as many notebooks are expected to ship this year, making it a much bigger category in the way that practitioners currently define it.)

Longer-term, consumers could see data control as a severely limiting factor. The reality of Google or Microsoft storing personal data in one of its vast server farms might unnerve folks enough that they'll want to keep the old, reliable desktop close at hand.

Then again, consumers unveil themselves constantly, whether in social networks or in their online search results. De-sensitization to personal information might be high enough that people don't really care.

If consumers continue migrating to Web-based services, and computers merely provide access, then netbooks will accelerate industry transformation (anticipated by some), though not without other Web-access devices also contributing.

In this environment, product design and ease of use are still likely to determine pricing differences as before, except now the hard drive plays an inconsequential role, if any at all.

(Skeptics, on the other hand, will point to the deep-rooted market inertia that constantly bogs down the computer industry, and protects the incumbent business model.)

Now and then, economic conditions and technology do conspire to create major inflection points.

This looks to be one such occasion.

Disclosure: No Positions