PC makers warned of handheld attack

SAN FRANCISCO--Internet appliances and handheld devices are emerging as viable and inexpensive alternatives to traditional desktop computing, several analysts warned yesterday, which could cut into the market for PCs.

Analysts speaking at International Data Corporation's Directions conference here yesterday hammered home the idea that the way consumers and businesses access the Internet and conduct basic computing chores will change dramatically as consumer electronics and start-up firms begin aggressively pushing set-top Internet boxes, screen phones, low-priced handhelds, and home networking equipment.

PC sales, particularly in the low end of the market, will continue to grow, but PC makers will need to focus on adding services and value to compete against low-priced devices capable of basic computing functions.

Many PC vendors are already looking for new revenue streams, such as Gateway with its YourWare program, said Bruce Stephen, a PC analyst. Dell today expanded its online offerings with a new Internet store.

"Products equal revenue, but services equal profits," Stephens said, calling Internet services "the new battle ground."

Of course, the device makers have their work cut out for themselves as well.

To effectively compete with PCs, Internet devices should focus on specific targeted applications and markets, said Sean Kaldor, IDC vice president of developing markets and technologies, instead of integrating too many functions into one product. Television set-top box providers must focus on enhanced television viewing, rather than offering full-fledged Web browsing.

"On TV, watching television is the killer app," he said, pointing to interactive yellow pages and address books as the "killer app," for screen phones.

Disputing the notion that consumers are reluctant to use the television interactively, Kaldor pointed to electronic programming guides as an example of entry-level two-way services already popular among viewers.

As an e-commerce platform, television also offers an immediacy that traditional retail and even online commerce via the PC do not offer, he said. For certain products like music, video, and broadcast content on demand, e-commerce over the television offers "instant gratification," although he conceded that the platform is not ideal for true Web surfing.

There is a huge opportunity for consumer electronics manufacturers amid the transition "from analog to digital," according to Kevin Hause, another IDC analyst, who spoke about next generation consumer devices.

"For as much opportunity as there is, there is an equal amount of uncertainty," Hause said. "Expect a spectrum of devices, not one integrated product."

Unlike PCs, which until recently commanded relatively high profit margins, consumer Internet devices will have to be priced under $400 to appeal to consumers who typically have an $800 budget for appliances and technology. Hause noted that VCRs did not begin to take off in sales until prices came down to this range.

The upside is that the Internet encourages creative business models which allow for incremental revenues. Additionally, consumer electronics companies are already well schooled in the importance of simple designs and easy-to-understand instructions manuals, an area PC makers have not yet learned to emulate. In a telling example, Hause noted that the WebTV user manual is 10 pages long, while an instructions booklet for a PC add-on part is over 100 pages long.

Consumers rarely need a "Device for Dummies book," Hause said, referring to IDG's popular line of how-to books. "That would be a bad sign."

Screen phones are another little-known, but growing area, he said. These phones, which offer limited Internet access and address books, are hindered by a lack of infrastructure and few end-to-end solutions. Still, screen phone shipments outdid WebTV shipments last year, he said.

Handhelds on the rise
While newfangled devices like screen phones and set-top boxes are a couple of years away from mass acceptance, handhelds are already a popular alternative to desktop computing. But there is also much more market stratification in the mobile space than in the desktop world, said IDC's mobile analyst Randy Giusto.

Enterprise customers favor stability in corporate notebook lines as they allocate most of their technology budgets to Year 2000 readiness, while smaller companies demand expanded Web support and individual mobile professionals look for innovative and cool designs, he explained.

"Certain areas of [the handheld] market are exploding," Giusto said, pointing to palm-size devices like 3Com's PalmPilot. Palm-sized devices are poised for even larger growth as enterprises and small to medium-sized businesses sales take off. The PalmPilot is a unique case, Giusto noted, gaining entry to the enterprise through back-door sales to individuals, much like a Trojan horse.

Mobile vendors need to focus on non-traditional markets for growth, Giusto advised, such as vertical markets, consumers, and the education markets.

Although historically there has been a hefty price premium for mobile devices, Giusto noted that there has been some significant price compression affecting both notebooks and handhelds. The highest-end notebooks are now priced below $5,000, but low-end notebooks have bottomed-out at $1,300, as an oversupply of components like LCDs has slowed low-end price drops.