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Intel's Atom: Too much of a good thing?
May 7, 2009 / 7:58 PM / 9 years ago

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

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.

An Intel Atom sticker is shown next to a Windows XP sticker on an Acer Netbook in Encinitas, California April 13, 2009. REUTERS/Mike Blake

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.

Chief Executive Paul Otellini said in April the netbook, handheld and embedded markets will be “at least as big as the PC market for us in the not too distant future.”

“The screens are small and the keyboards are small. They’re not going to take over PCs,” said Intel co-founder Gordon Moore, famous for Moore’s Law, which states the number of transistors on a microchip doubles every 18 to 24 months.

Intel spokesman Bill Calder said it’s hard to compare margins for new products like Atom with established ones. Cheaper manufacturing costs and the sheer volume of sales would boost Intel’s overall net profit, he said.

But with netbook demand ballooning, it will be hard for Intel to regain the gross margins it had prior to the economic downturn -- in the mid to high 50s percentage range -- said Patrick Wang at Wedbush Morgan Securities. Intel in April posted first-quarter gross margins of 45.6 percent.

And as more applications move online to remote data centers, the device matters less than a speedy Internet connection.

“As the Atom and other low-cost computing platforms continue to advance, we believe they will become more viable as a primary PC,” BernsteinResearch analyst Toni Sacconaghi wrote.

An Atom-powered netbook can already meet the needs of more than half of consumers, analysts say.

“A Porsche 911 wasn’t designed to be driven at 55 miles-per-hour,” Brookwood said.

“A lot of today’s computers have been designed to do really intensive tasks: image processing, manipulation, lots of things going on concurrently. Then you get someone driving them 55 miles per hour: going to Facebook, maybe watching a video, checking their email, surfing the Web.”

“And the processor is getting used at only 5 or 10 percent of its rated capabilities.”

An experiment in Australian schools may show precisely how effectively Atom-powered netbooks might replace notebook PCs.

The state of New South Wales plans to buy more than 200,000 Lenovo netbooks for students and plans to have the basic machines run top-end applications like the graphics-intensive Adobe Photoshop Elements and Premiere Elements. These are tasks the netbooks should not be able to handle easily, some analysts say.

“It’s absolutely something to watch,” JMP Securities’ Alex Gauna said, when he learned about the experiment. Intel “wants you to pay up for performance and the netbook allows you to pay down for good enough performance.”

Reporting by Clare Baldwin; Editing by Edwin Chan and Steve Orlofsky

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