October 24, 2003 9:46 AM PDT

Look homeward, PC maker

PC makers usually use the holiday season to tout the greatest and latest desktops and notebooks, but this year they will be hawking something different: consumer electronics.

Gateway, Dell and even, to some extent, Hewlett-Packard will be clamoring for the attention of U.S. families looking to outfit their homes with interconnected electronics gear, ranging from flat-screen televisions to DVD players, music players and multimedia PCs.

Before the end of the month, for instance, Dell plans to start selling LCD TVs and a portable music player with a small hard drive.

The companies have developed the new class of electronic devices, which can all share multimedia files, in an effort to sway those families to choose hardware and services sold under their brands, rather than giving their electronics dollars to the likes of Sony, Samsung or Best Buy.

It's not the first time North American PC companies have tried to elbow their way into the consumer electronics market. Over the last six or seven years, companies like Gateway and Compaq, which is now part of HP, have tried at least three times. But this time might be the right time, they say.

"What's different (now) is that it's all come together," said Ted Waitt, Gateway's CEO. One factor he pointed to in particular is that "you have a huge number of people downloading music from the Internet that didn't (exist) before...and they want to take (the music) with them."

Indeed, the ease with which devices can now connect and the availability of content for them to share has increased markedly in recent years. Wireless networks provide a common method of connecting different devices. Online stores like Musicmatch and Apple's iTunes have ironed out many of the problems of distributing music, allowing PC companies like Dell and Gateway to market both music players and the digital music that plays on them.

The price is right?
Meanwhile, prices on home electronics devices like digital televisions, MP3 players and digital content receivers have all come down. Gateway's $199 Connected DVD player can play movies and transfer content over wireless connections from a PC to a TV, for example. HP offers a similar device also for $199, well below the $999 price of the $999 Digital Entertainment Center it once sold, which linked a PC and a home stereo.


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The invasion of your
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New Wi-Fi technology is set
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The living room is also now in sight. PC makers' digital home products will allow families to place a large, flat-screen TV in the living room and complement it with smaller screens in the kitchen and the den. These screens can be connected to PCs, and devices like Gateway's DVD player can fill them with content such as television shows and movies, or Web pages, pictures and videos.

Although it is still losing money, showing a loss of $139 million, or 43 cents per share, in the third quarter, Gateway says that its fourth-quarter revenue should climb to between $925 million and $975 million and that its net loss should narrow to between 9 cents and 15 cents a share, excluding restructuring charges, thanks to increasing sales of product like its TVs and digital cameras.

Dell's strategy, which the company outlined in September, also includes TVs and MP3 players.

The companies will face Sony, which enjoys the position as the incumbent, with a proven name in TVs, PCs, digital cameras and other digital home products. Still other companies such as Samsung have numerous digital home products, while brand name Motorola and companies like it are also getting into the game.

"We see this holiday season as really introducing the mainstream consumer to digital media--broadly defined as the ability to migrate from the passive listening to music, or watching TV, to manipulating content and telling to go where you want it, when you want it," said Mike George, Dell's chief marketing officer. "We're past early adopters and into the more technology-experienced mainstream. By next holiday, it's really going to become more the norm. Whether it's MP3 players or flat-panel displays...there will be more adoption."

HP is somewhat more conservative in its view.

"We think this holiday season, digital photography is going to be big, and the personal entertainment stuff is going to be popular in 2004," said Chris Morgan, vice president of sales and marketing for HP's Imaging and Printing Group.

HP this year will focus on getting consumers started with tasks such as photo editing. Its Imaging and Printing Group has geared up for the holidays by introducing more than 150 new printing and imaging products, including new digital cameras, printers and even a "photo PC."

If not now, when?
Despite promising predictions--a recent iSuppli report projects that worldwide consumer electronics revenue will grow from $222 billion this year to $259 billion in 2007, with digital TVs, audio players and DVD recorders leading the charge--analysts agree that it still might take some time for the digital home to establish itself.


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Hello, consumer electronics
For Dell and others, success in selling
consumer electronics devices will depend
on device integration, in-store presence
and the shift to home networks.


"The issue is going to be (managing) consumers' expectations and the different speeds at which the technologies move. To do this optimally, you need everything to be on the same technological curve. But not everyone has a TV that will work. Not everyone has broadband, and not everyone has a connected DVD," said Steve Baker, an analyst with NPD Group. "To really get to mass volumes--what a company like a Dell really wants--is going to be difficult in the next couple of years."

But no one wants to miss the boat, either. HP, for one, is likely to offer TVs and music players in late 2004, Morgan suggested.

"You'll definitely see HP moving more and more into the music space...(and) into the viewing space," he said. "(But) to go source something like that is easy. We're looking at how we are going to innovate in that space."

Innovation, here, comes down to finding the right mix of ingredients that will allow consumers to access all sorts of content, including telephone calls, and even to manage systems like lighting and heating from a number of devices throughout the house.

"I don't think it's going to be about the next great device. It's going to be about that (content) flow and management of rich digital media," Morgan said. As for the timing, he said, "it's going to come in pieces. I don't see where we're going to go from where we are today to the completely integrated home model overnight."

The industry's past failures support that assertion. As early as 1997, Gateway and then Compaq Computer sold TVs, but withdrew them due to slow sales. The movement cropped up again in 2000, when Dell, Compaq, Gateway and others sketched out strategies to sell music players, home networking equipment and other devices.

Most of those products, including Dell's music player, were eventually canceled due to slow sales. The companies largely disbanded those home electronics efforts after the PC market downturn took hold.

This time around, the outcome could well be different, if for no other reason than because the concepts used by the digital home, such as sharing files, are more ingrained in people's minds.

But getting it right may not involve creating the best cost structure or the sleekest products. Instead, success may be measured in the way a company's products serve up the content that consumers want, when and where they want to view it.

"We're starting to see the next wave...of people that want that functionality, and they have the money, but they don't necessarily have the time or expertise to do it themselves," Waitt said. "We'll be able to demonstrate it very simply and clearly in our stores this holiday season."

 

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