Wednesday, July 08, 2009

Race to the PC-Client Bottom

News: Google is bringing out a web-centric operating system next year. The Chrome OS has an open-source Linux kernel with a Google-supplied graphical user interface. Chrome will run on X86 and ARM processors, and will be optimized for netbooks.

1. The fastest growing segment of the computer industry is thin and light, low-horsepower netbooks (a term from Intel). Netbooks powered by Intel's Atom processor were meant, Intel thought, for emerging, price-sensitive markets and for Nth computers for those who already have "real" laptop and desktop computers. Netbook configurations are expanding rapidly into traditional mainstream form-factors such as 12"+ screens. Unfortunately, netbooks as a category are now displacing consumer laptops which contain higher-profit microprocessors. Microsoft has also been squeezed, resisting the notion of a full-function Windows OS on a $400 netbook where Microsoft has to take a price haircut to make OEM margins work.

2. Thin clients were first brought to market 15 years ago. I used one. They worked OK, given the technology of the time. Fast-forward to 2009. Chrome on netbooks will create the logical client needed by the big-iron trend of the year, cloud computing. Fact is, HTML 5, Ajax, and a whole raft of web standards are now embedded in open source software. That makes Chrome's development a low-risk development project for Google. As the iPhone has proven, a web-centric computer can be a market winner -- without the cost handicap of a mainstream microprocessor and operating system from Intel and Microsoft, respectively.

3. Cost-conscious buyers are already flocking to netbooks for use primarily in web-based activities such as browsing, email, and social interaction. The largest performance inhibitor of a netbook is not the microprocessor or OS but the wireless network. These consumer usage models do not require the power of mainstream microprocessors or the full functionality of Windows.

4. As the netbook volumes grow into the tens of millions of units a year, and I believe they will, Intel, AMD, and Microsoft will have to compete in this lower-margin market segment. To a to-be-determined degree, lower margins will lead to fewer product choices and slower technology introductions. Intel can certainly use some product-line rationalization, but AMD would lose (precious) revenues and Microsoft would lose its vaunted profit margin in this scenario. But the bottom line of low-margin netbook success, accelerated by Google's Chrome, will be less and slower innovation.

5. The issues here are not new. But Google Chrome announcement is drawing the line in the sand. Intel and Microsoft have got to get drop-dead serious about why consumers need the computing power of mainstream microprocessors and full-function operating systems in an increasingly web-centric world.

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