January 26, 2009
$200 Laptops Break a Business Model
By BRAD STONE and ASHLEE VANCE
New York Times

SAN FRANCISCO — The global credit crisis may have caused the decline
in consumer and business spending that is assaulting the giants of
high tech. But as the dominant technology companies try to emerge from
this slump, they may find themselves blaming people like David Title
just as much as they blame Wall Street.

Mr. Title, a 35-year-old new-media manager at a film production
company in New York, has dropped his cable subscription and moved to
watching most of his television online — free. While shopping for a
new laptop for his girlfriend recently, he sidestepped more expensive
full-featured computers and picked a bare-bones, $200 Asus EeePC
laptop, also known as a netbook.

"We've reached one of those moments in tech history when there are
low-priced and free alternatives that are both user-friendly and
reliable enough to make the switch," Mr. Title said. "Then there's the
extra bonus of saving some cash."

Silicon Valley has been gripped by a growing sense that the economic
retreat might do more than depress earnings. There is too much
ingrained optimism here to think that the tech sector will not bounce
back, stronger than before.

But the fear now is that consumers like Mr. Title, and businesses
operating with the same cost-cutting mind-set, will erode the
high-margin businesses of the information technology industry —
slowing some technologies and companies but giving new momentum to
others.

A normally confident Steven A. Ballmer, chief executive of Microsoft,
expressed this very fear last week after announcing the company's
first big reduction of its work force. "Our model is not for a quick
rebound," he said. "Our model is things go down, and then they reset.
The economy shrinks."

This has happened before. The dot-com bust earlier in the decade
dragged down high-fliers like Sun Microsystems and America Online but
set the stage for a new generation of Web powerhouses like Google and
other innovative Internet software companies like Salesforce.com,
founded on disrupting the status quo.

The recession of the early 1990s sent I.B.M., then the dominant force
in technology, into a five-year tailspin. But it also propelled
Microsoft and Compaq, later acquired by Hewlett-Packard, and Dell to
the forefront of computing.

Indeed, Silicon Valley may be one of the few places where businesses
are still aware of the ideas of Joseph Schumpeter, an Austrian
economist who wrote about business cycles during the first half of the
last century. He said the lifeblood of capitalism was "creative
destruction." Companies rising and falling would unleash innovation
and in the end make the economy stronger.

Recessions "can cause people to think more about the effective use of
their assets," said Craig R. Barrett, the retiring chairman of Intel,
who has seen 10 such downturns in his long career. "In the good times,
you can get a bit careless or not focused as much on efficiency. In
bad times, you're forced to see if there is a technology" that will
help.

So who's up, who's down and who's out this time around? Microsoft's
valuable Windows franchise appears vulnerable after two decades of
dominance. Revenue for the company's Windows operating system fell for
the first time in history in the last quarter of 2008. The popularity
of Linux, a free operating system installed on many netbooks instead
of Windows, forced Microsoft to lower the prices on its operating
system to compete.

Intel's high-power processors are also under assault: revenue tumbled
by 23 percent last quarter, marking the steepest decline since 1985.

Meanwhile, more experimental but lower-cost technologies like
netbooks, Internet-based software services (called cloud computing)
and virtualization, which lets companies run more software on each
physical server, are on the rise.

Penny-pinching shoppers like Mr. Title could have the most immediate
effect on the tech industry, particularly if more people consider
canceling their cable subscriptions to watch video online, or drop
their landline telephones to depend on their cellphones or on Internet
calling services like Skype.

Many consumers appear ready to abandon the costly desktop computer
altogether. Analysts expect PC sales to fall in 2009 for just the
second time in the last two decades, with desktops falling even faster
than they did in 2007 or 2008.

The only bright spot in the PC industry is netbooks. Analysts at the
Gartner research company said shipments rose to 4.4 million devices in
the third quarter of 2008, from 500,000 units in the first quarter of
last year. Analysts say sales could double this year despite a deep
worldwide recession.

Two lumbering giants, Hewlett-Packard and Dell, missed the first wave
of these tiny, stripped-down machines, allowing Acer of Taiwan to grab
market share. Acer pushed Apple out of the No. 3 spot behind H.P. and
Dell as sales soared 55 percent. Dell and H.P. are making the devices
now.

Even the mighty Apple, whose iPod and iPhone revenue had helped
insulate it from the first phase of this recession, reported last week
that revenue from its desktop line fell 31 percent from the same
period a year ago.

"The day of the Rolls-Royce laptop and the high-end computer may not
be totally over," said Charles King, an independent technology
industry analyst in Hayward. Calif. "But certainly the audience for
that type of product is getting smaller and smaller."

Companies have also started to examine what they can do without and
what they can do differently, and their choices may alter the
competitive and lucrative landscape of business computing.

Hoping to save money, Arista Networks, a start-up based in Menlo Park,
Calif., has much of its internal technology processes online, or "in
the cloud." Instead of buying its own hardware and software systems
from the likes of Microsoft and Oracle, it opted for e-mail and online
document services from Google and online sales and manufacturing
software from Netsuite, based in San Mateo, Calif.

It is spending a fifth of what it would be for traditional technology,
said Jayshree Ullal, Arista's chief executive.

She smells a trend. "I think 80 percent of the new high-tech and small
to mid-size companies are doing what we're doing," she said.

A spate of start-ups have seized on cloud computing. Companies like
Intacct offer online accounting software as an inexpensive alternative
to Microsoft's products, and giants like Amazon.com sell access to
data centers for business operations. Amazon has outpaced the
traditional hardware makers with such services.

The number of virtualized new servers has doubled over the last three
years, which has driven the revenue of VMware, one of the leaders in
this cost-saving technology, to an estimated $1.88 billion last year
from $387 million in 2005.
Roger:
 Feel free to post and use this as your research topic Sat. It is
significant enug to have its own wiki page.

The makers of open-source software also continue to benefit from the
growing appeal of their often cheap, if not free, products. Sun
Microsystems distributes 65,000 downloads a day of its MySQL database,
which has turned into the favored business software of new companies.
The job search engine Indeed.com shows a thriving job market for MySQL
and Linux developers.

Linux has proved popular as well on a new crop of smarter devices — be
they phones, TVs or set-top boxes — that have captured software
developers' imaginations. The new products they build will undoubtedly
challenge the status quo.

"Companies like Intel, Qualcomm and Texas Instruments that make chips
for these devices are hiring Linux talent as quick as they can," said
Jim Zemlin, executive director of the nonprofit Linux Foundation.
"They know the future is netbooks and mobile Internet devices."