Dell has retired their 12-inch Intel Atom-powered netbooks, they said today. The official reason – “It really boils down to this: for a lot of customers, 10-inch displays are the sweet spot for netbooks…Larger notebooks require a little more horsepower to be really useful.”

That makes absolutely no sense, since it requires no additional hardware horsepower to power a 12-inch netbook v. a 10-inch netbook. The only difference is power usage from the bigger screen. And the two extra inches more than makes up for the shorter battery life or slightly heavier device from packing in more batteries. It only costs a few more dollars to build a 12-inch v. a 10-inch netbook, and users get a bigger screen with the same performance.

In fact, Intel’s official position on 10-inch netbooks is almost exactly the opposite of Dell’s. Intel says “If you’ve ever used a Netbook and used a 10-inch screen size–it’s fine for an hour. It’s not something you’re going to use day in and day out.”

So why is Dell really discontinuing 12-inch netbooks?

Probably a couple of reasons. First, Intel doesn’t like 12-inch netbooks because they are deep into dual core territory, where Intel has much healthier profit margins. For casual users a 12-inch netbook with an Atom chip works just fine, and they are buying these devices instead of more expensive dual core machines. Intel has put pressure on OEMs to build netbooks that have 10 inch or smaller screens.

This includes direct pricing pressure – Intel prices Atom chips based on the size of the device screen. Anything over 10 inches is priced higher than devices with 10 inch or smaller screens. We think this is an inappropriate way to price Atom chips.

Dell may also be seeing customers who would otherwise buy a dual-core 13-inch or 14-inch Inspiron choosing the lower priced (and less profitable) 12 inch netbook instead. That’s something they aren’t going to be happy about.

Netbooks should be getting bigger, not smaller. That’s what users want.

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