Intel's Atom: Too much of a good thing?

By Clare Baldwin

SAN FRANCISCO (Reuters) - Intel Corp's increasingly popular Atom may turn out to be a double-edged sword, assuring the leading chipmaker a big footprint in an exploding netbook market but potentially taking a chunk out of its margins.

Intel has embraced netbooks -- ultra-light notebook computers that cost a few hundred dollars and were popularized by Taiwanese companies like Asustek, which launched the phenomenon 2007 with Intel's Celeron chip.

Now, Intel's Atom processor is set to ride a potential doubling of demand for the mini-laptops in 2009, while that for traditional notebook computers decreases.

Analysts say it's too early to gauge impact, but Intel data shows the margin for the Atom, which has 85 percent of the netbook market, is about 11 percentage points below the margin for dual-core processors.

Executives and industry experts argue netbooks will never become mainstream because of their inability to run much beyond word processing. But analysts say the ample power of Intel's Atom may cannibalize the market for its higher-end processors.

In the face of a prolonged recession, analysts say, consumers may ultimately choose netbooks as their primary PCs.

Many wonder whether beefier chips are necessary: a standard Intel Core 2 Duo processor costs $133 versus $43 for the Atom and $53 for the older Celeron, according to BernsteinResearch.

Long-time Intel partner Microsoft in January partly blamed netbooks for disappointing earnings, but analysts hesitated to draw sweeping conclusions.

"It's really going to be hard to say until we have a couple of quarters of data to look at. Right now all you get is anecdotal stuff," said Insight 64 analyst Nathan Brookwood.

"If sales of notebooks were to trail off and netbooks were to continue to zoom, then that would suggest you're losing sales. And that's big."

LITTLE COMPUTERS THAT COULD

Worldwide shipments of netbooks have rocketed while demand for PCs has fallen. Netbooks went to 8 percent of the portable market in 2008 from nearly zero, according to IDC.

Intel's Atom revenue should mirror this. Barclays Capital's Tim Luke sees it rising $260 million to $760 million in 2009.

But the average selling price of its notebook chips will slide. In 2009, it's expected to fall to $80 from $90 in 2008 due to more Atoms sold, Luke wrote.

Intel and Microsoft say netbooks are not capable of performing all of the tasks of a PC. They say Atom-powered netbooks are not an alternative to or replacement for notebook PCs, so their sales should simply add to turnover.