Inside CES: Gadgets, netbooks vs. notebooks, HP vs. Dell

This year’s Consumer Electronics Show (CES) seems to be all about netbooks. Attendance was down significantly for CES 2009 compared to previous years amid a slumping economy. Technology companies seem to be more interested in evolutionary improvements in performance and form factor.than hardcore R&D as little game-changing technologies were found at the show.

All about Netbooks

Investment bank Deutsche Bank attended CES last week in order to assess new products and near- term CE demand. The firm writes attendance at the show was down significantly versus previous years, reflecting the weak global economy. Credit Suisse also attended the show and shares some insight into some new gadgets / technology amid relatively low expectations on both fronts.

New gadgets

There were relatively low expectations for new hardware at CES 2009 and it is probably a fair description to say the trade show did not disappoint lowered expectations. Below Credit Suisse lists a few of the relative standouts in what was a fairly mediocre crowd of products:

• Palm has a pulse: The new Palm Pre generated significant attention at the show last week as was clearly reflected by a 75% move in the stock from Thursday afternoon through the close on Friday. The phone is due out later this year and integrates a full touch screen along with a slide out QWERTY key board and new operating system. Investment bank Credit Suisse believes Qualcomm is the baseband supplier for this CDMA phone and TXN OMAP is the apps processor amid conversations indicating a family of models is set to come from Palm’s restructured management team.

• 3-D TV 2.0 looks interesting: While this was not the debut year for 3-D TV, version 2.0 generated significantly more interest this year than last. All major FPD producers including (Sony, Panasonic, Sharp, Samsung etc) as well as graphic chip companies (Intel and NVIDIA) had 3-D demos at the show. Gamers and sports enthusiasts will be the most likely early adopters but timeline is still unclear.

• Touch screens all the rage: Touch screen technology continues to gain steam within the handset market, but at this year’s show Credit Suisse saw further penetration into the PC segment. Indeed, touch screen tablets and high-end desktop systems garnered quite a bit of attention at various OEM booths. Windows 7 is designed to provide broader support for touch screen systems, and as a result, this bank expects to see more touch screen technology in PC  systems in 2010 and beyond.

• Blu-Ray products broaden and add networking, product cycle strength muted by pricing and alternatives: CES saw the introduction of about 20 new Blu-Ray models (still mainly in the $200 to $400 list price range vs. < $50 for basic DVD players) from most of the leading consumer electronics OEMs including a portable from Panasonic and TV with Blu-Ray from Sharp. To counter the threat of networking, Blu-Ray players are incorporating streaming video, Internet connections for online multimedia updates to movies, and WLAN for in-home streaming.

• Wireless touch accelerates: The wireless and consumer space continues to drive toward more devices incorporating touch, with Motorola adding its first 3G smartphone with touch, HTC displaying multiple touch devices and Palm’s Pre incorporating a touch display with slide-out QWERTY screen.

An alternative Wall Street bank attending the show, Deutsche Bank, says that in the electronics hardware sector, most of the new product introductions at CES represented evolutionary improvements of form factor and performance. However, netbooks seemed to garner the most attention from vendors and attendees. As the firm discussed in previous industry reports, it expect netbooks to cannibalize low-end notebooks and get more competitive through 2009 due to the strategic and growth implications of the segment for electronics OEMs.

Not surprisingly, demand for consumer electronics sounded weak, with areas like notebooks, inkjet printers and digicams all suffering from slowing end demand. Furthermore, the new products seen at the show seem insufficient to stimulate incremental demand. With consumers in de-leveraging mode, the bank feels a subdued CES show is indicative of continued weak consumer electronics demand, which will likely last through the bulk of 2009.

Subdued show

Deutsche Bank opines it was obvious from the minute the team exited the airplane that CES would be different this year. The cab line at the airport was short.

Casinos were empty and dinner reservations were easily obtained.

Attendance from both presenters and attendees appeared to be down significantly from last year…probably over 20%. The bank believes reduced attendance reflects the weakening global economy, increased scrutiny of budgets, and waning consumer hardware demand. Unfortunately, little game changing technologies were found at the show as most new products seen were evolutionary improvements in performance and form factor.

Netbooks compete with notebook market

The product area garnering the most attention in the sector covered by the bank at CES was netbooks. The firm believes their combination of adequate performance and attractive price points will support strong growth of the netbook segment in 2009 (at the expense of low-end notebooks).

While netbooks lack some features commonly found in traditional notebooks (i.e., DVD drive, CPU power) the firm believes many consumers are more willing to sacrifice performance and screen size for price in this economy. Over time, its believed the lower cost of entry to mobile computing will stimulate total units (driving some incremental volume).

However, in the short term, Deutsche Bank expects increased substitution and average-selling-price / mix pressure to more than offset any incremental unit demand.

Many in industry point to lower performance and the small keypad / screen size as major obstacles to netbook adoption. However, existing netbooks have adequate power for most computing tasks such as digital media playback, video game play, web-surfing and email. In addition, Microsoft indicated Windows 7 will be geared to run efficiently on Netbooks, providing its support to this emerging hardware platform. To boot, the firm tested 10 inch and 12 inch netbooks at CES (running XP, basic Vista), which it found perfectly adequate for full-time use (from a size / comfort standpoint).

In a weak consumer spending environment, the firm expects netbooks to cannibalize lower-end notebooks and become a larger percentage of the total notebook mix. In Q3, netbooks represented 14% of total global notebook shipments, up from 3% in Q2.

Deutsche Bank expects netbook share of the notebook market to increase to 20%+ by 2010, suggesting traditional notebook unit shipments will decline meaningfully over the next 18-24 months. As a result, the bank expect incremental price / mix pressure in PCs as this product category grows.

On the positive side, OEMs will likely have two strong CPU suppliers in this segment: Intel’s Atom chip and Qualcomm’s Snapdragon.  Although all netbooks are currently Atom-based, its expected OEMs (including HP) to ramp netbooks powered by Qualcomm in the second half of 2009. The competition between Qualcomm and Intel may help insulate margins as this segment gets more competitive through 2009.

Digital imaging

There was little excitement in the digital photography segment with few noteworthy new product announcements.

Most of the digital cameras featured incremental improvements to existing technologies, like megapixel count, etc… In addition, there was an abundance of digital picture frames on display with none offering compelling differentiation. This product area has commoditized quickly.

Industry contacts at CES suggested digital camera demand has weakened meaningfully in the past several months. Additionally, retailers experienced a weak holiday selling season and have been actively reducing inventory levels entering 2009. In addition, inkjet printer demand sounds weak across the industry. However, contacts at Kodak indicated they experienced healthy unit demand in calendar 4Q, aided by significant promotional / discounting activity.

Visiting the HP booth / management meeting While at CES, Deutsch Bank had the opportunity to catch up with HP representative Jim Burns and tour HP’s booth. Key conclusions from those meetings include:

• HP expects 2009 to be a difficult year for hardware sales due to the slowing global economy and weaker demand. For instance, HP acknowledged that customers continue to delay printer hardware upgrades (both consumer and enterprise) and that PC demand is slowing.

• Regarding PC channel inventory, HP believes the excess channel inventory Intel referenced on its recent pre-earnings announcement belongs to Acer, Asus and perhaps Lenovo. HP indicated it is comfortable with its channel inventory levels but did suggest end demand is weak.

• Netbooks are an emerging category that HP will participate and play in, but HP is not willing to chase Acer and Asus down to extreme price points. HP will balance strategic interests and protect margins when participating in this segment. The netbook portion of HP’s booth garnered the most attention from the crowds.

• Also, HP did say Acer and Asus have been gaining netbook shelf space in the retail channel.  The bank believes HP is in early negotiations with carriers around distribution / subsidy deals.

• Windows 7 is getting decent reviews as less buggy than Vista and requiring less memory.  It is being optimized for netbooks, which could suggest lower hardware requirements than Vista for adequate performance.

• The EDS integration is tracking ahead of plan from both a customer leakage and headcount reduction perspective. Also, both the deal funnel and signing trends sound strong.

• Although x86 server demand has softened, pricing in this segment appears to be relatively normal. Server virtualization deployments are slowing, and more customers are adopting Microsoft’s solution because of its low price point and because…’it’s good enough’.

• Printer hardware demand appears like it remains weak as customers extend the life cycle of current machines and defer purchases.

Dell talking points

Dell hosted its CES presentation at the Palms Hotel, offsite and a short taxi ride away from the main convention center. The offsite location resulted in low traffic on Thursday. However, Dell’s press event and sneak-peek of its new ultra-thin notebook appears to have created some buzz on Friday. Other key points include:

• Dell had a significant showing of netbooks, consumer notebooks and gaming PCs available for hands-on use. Like HP, Dell is driving toward sleeker, thinner designs in its consumer notebook line. Overall, its believed Dell’s consumer notebook line is the most competitive it has been from a form factor standpoint in years.

• One interesting new feature Dell is offering on its consumer notebook line is customizable paint. For an incremental $75, consumers can customize exterior paint on notebooks, creating personalization for minimal incremental cos

• Dell netbooks were prominent with many models on display in both 9 inch and 12 inch versions. While the 9 inch netbook products are somewhat uncomfortable for users due to its small keypad, its believed Dell’s12 inch products offer enough real estate for typing and most computing tasks. It believed Dell will launch a 10 inch netbook sometime soon.

Deutsche Bank, Credit Suisse, VentureOutsource.com, January 2008

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