October 23, 2000 5:00 AM PDT

Net appliances find niches, not profits

The idea of a device that captures the power of a PC without the complexity of one has been a dream for some time.

Actually, it's mostly been a nightmare, considering that most of the companies that have tried to sell stripped-down boxes have lost money. But with the rise of the Internet has come the promise that the bad dream may yet have a happy ending.

Companies like


Gartner analyst Kevin Knox says Internet-surfing appliances have an important role to play, even though they've been slow to gain a foothold in the market.

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Larry Ellison's New Internet Computer Co., with its $199 Linux-based Web-surfing machine, and Netpliance, with its sleek I-opener, have found some niche markets.

NICC, for example, has found a small following among hackers, said chief executive Gina Smith. The company, backed by Oracle CEO Ellison, also recently inked a deal to sell 15,000 of the units to a start-up that will put them in hotels across the country.

"To be in 15,000 rooms--what a commercial," Smith said.

PC heavyweights such as Compaq Computer, Intel, Acer and Emachines have also developed PC-like devices whose sole functions are to surf the Web and handle email.

But many within the tech industry say the devices are not yet ready for prime time.

"They're not yet exciting products," said Dataquest analyst Martin Reynolds, noting that many cost nearly as much as a cheap PC. "They're still nibbling around the edges. The PC is a formidable competitor."

Apple Computer CEO Steve Jobs aired similar concerns in a conference call last week but at the same time conceded that Apple, too, has development efforts under way.

"To make an Internet appliance that is going to have flexibility and longevity...is a tough challenge," Jobs said. "I think we'll see some carnage before it's all over."

Others, including Intel CEO Craig Barrett, have posited that such devices could find acceptance in developing countries, where PC penetration and income are low.

The first wave of devices, products such as Sun Microsystems' JavaStation and Oracle's Network Computer, were launched in the late 1990s. They were designed as stripped-down alternatives to Windows-based computers and were supposed to be easier to use. But they lacked the versatility of PCs and never caught on.

Now a second wave of devices, including the successor to the Network Computer--the New Internet Computer (NIC)--are trying to make a go of it, with companies billing them as Web-browsing appliances.

Among the start-ups offering Internet appliances, several have found a niche or two, though none have proven they have a business model that will last.

The pioneer of the current generation, Netpliance, has reported more than 44,000 people using its I-opener. However, the company is said to be running low on cash, as it has been heavily subsidizing the units in hopes of getting money from selling Internet access.

One of the problems Netpliance faced was hackers who were buying the units for $99, adding their own hard drive, and thereby avoiding Netpliance's $21.95 monthly fee for Internet access. Netpliance responded in July by hiking the price to $399, but analysts wonder whether that will limit sales. The unit currently sells for $299.

Hackers have also created ways to expand the NIC, including adding a hard drive, but Smith sees that as a positive.

"If they like it, they recommend it to their less technical friends," Smith said. Seeing the ways that hackers have modified the units, she added, has given the company ideas for future add-ons, such as support for an external Zip drive.

Unlike the I-opener, the NIC works with a number of Internet service providers. As a result, the hacker issue is less of a threat to the bottom line, although Smith's company does get bounties of $2 to $100 each when its customers sign up with an Internet service provider.

Although the I-opener and the NIC are trying to replace the PC, others are marketing similar devices as complementary to a home computer. This week, 3Com debuted its Audrey countertop appliance, while Gateway will release its America Online-branded unit later this quarter. Both are targeting tech-savvy "early adopters."

Even those who are skeptical of today's appliance market say that once homes have speedy broadband connections to the Web, the market for Net appliances will become substantial. As for the types of devices that will succeed, Reynolds pointed to fixed-function and room-specific devices, such as a telephone-like device that makes phone calls over the Internet.

"That's where we'll see appliances take off," Reynolds said.

 

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