Überhyped Ultrabooks Underperform

The latest iPad killer has yet to take off | “This is one product where the PC guys have a fighting chance”

Bruce Einhorn

Ever since the launch of the iPad, PC companies that specialize in old-fashioned laptops have been searching for a way to win back lost customers. That’s why big names in the industry have been working closely with Intel to develop ultrabooks, a new category of thin laptops that weigh as little as 2 pounds. These laptops are supposed to appeal to iPad enthusiasts and hold their own against Apple’s sleek MacBook Air.

For companies accustomed to eking out the thinnest of margins, the new machines, with prices ranging from $650 to more than $1,600, offer the promise of healthier, if not huge, profits. Computer makers hope ultrabooks’ lower price will give them an advantage over the MacBook Air, and the machines’ Windows operating system — and physical keyboard — will make them a better option for business than the iPad. “This is one product where the PC guys have a fighting chance,” says Kirk Yang, managing director at Barclays in Hong Kong. “They really have to make this work.”

So far, at least, the response has been disappointing. Ultrabooks, which first went on sale in late 2011, only accounted for about 5 percent of all laptops sold in the second quarter, according to Barclays, less than half of what manufacturers had been expecting. Says Bryan Ma, associate vice president at market research firm IDC: “The industry is under assault — from tablets and smartphones and the gloomy global economy.”

The high cost of the machines’ parts, especially Intel’s Ultraprocessor chips-which account for 25 percent of the total cost of an ultrabook — has driven prices for many models to well over $1,000, hurting sales.

That’s taken its toll on the stock prices of PC companies. In Asia, Acer’s shares have dropped 39 percent in the past six months, compared with a 7 percent fall in the Taiwan electronics index. Lenovo is down 9 percent, and Toshiba is off 19 percent. U.S. companies haven’t been spared: Dell has fallen 32 percent, and Hewlett-Packard has declined 34 percent.

Of course, the whole PC industry has been in the doldrums as consumers and corporate IT planners hold off on purchases until Microsoft launches its latest operating system, Windows 8, in October. Although Acer Chief Executive Officer J.T. Wang warned in a call with analysts on Aug. 17 that “big, explosive growth [from] Windows 8 will not happen,” companies are expecting that the new Microsoft OS might get buyers off the sidelines.

David McCloskey, Intel’s Asia-Pacific director of operations, says Intel expects sales of these lightweight gadgets to pick up soon as companies introduce more models and suppliers ramp up production of components. In June, Intel introduced Ivy Bridge, a new processor that’s 20 percent faster, and through a $300 million fund is helping suppliers develop software, hardware, and less-expensive materials for ultrabooks. “The reality is, it’s a multiyear journey,” he says of the ultrabook’s slow start. “We are committed.”

The next step for mass-market acceptance is for prices to come down. Dell recently added a midrange machine, the Inspiron, that sells for $700. In May, Lenovo announced superthin laptops that start at $720. Peter Hortensius, a senior vice president for Lenovo, predicts that lower prices resulting from less-expensive components will help ultrabooks account for about 25 percent to 30 percent of Lenovo’s laptop sales next year.

As prices drop, though, the PC vendors face a challenge. Apple can enjoy fat profit margins on its products not just because of its elegant design and high performance but also because of its admired brand. That’s not something other computer makers can match. Asian rivals run the risk of falling into the same sort of commodity trap they were aiming to escape. “Everybody is going to be fighting on price,” says IDC’s Ma. “They’re not Apple.”

The bottom line Intel and PC makers are hoping that lower prices and a new operating system will improve the lackluster sales of their superthin laptops.


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