November 15, 2000 4:00 AM PST

PC powers gear up for consumer electronics market

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November 10, 2000
LAS VEGAS--PC manufacturers have tried, and often failed, to carve out a niche in the consumer electronics market, but this time the effort could pay off.


Meta Group says PC manufacturers have tried to carve out a niche in the consumer electronics market, but a huge gulf separates today's reality from the vision of a totally integrated, digital, PC-driven home entertainment center..

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History has not looked kindly on the convergence of computing and consumer electronics. Both Compaq Computer and Gateway sold PC-TVs in the past that eventually left the market following extremely poor sales. Web terminals and Web-on-TV devices have mostly stagnated.

This time, however, the marriage may work because of the rise of digital media and the proliferation of computer technology. Simply put, music and videos are already in a digital format, so they can be put on networks, and the networks are constantly improving, allowing files to be passed around with relative ease.

Gateway and America Online last week debuted the Touch Pad, an Internet access appliance, as well as a home MP3 player. In the future, the computer company will likely move into video gateways and phone systems as well as possibly consider televisions again, executives said at the Comdex trade show here.

Meanwhile, Hewlett-Packard in mid-2001 will come out with "Superdrive," a DVD and CD recorder/player that could serve as a vault for video and music, said Pradeep Jotwani, president of the consumer business organization at HP.

"If you hook this up to broadband, it becomes a digital vault in the house," Jotwani said. "It could become your digital purchase place for (rented) video."

Big PC companies continue to emphasize the shifting role of the personal computer. "The PC is kind of becoming the entertainment center of the home," said Michael Dell, CEO of Dell Computer. "If you look at what we are doing with digital music, you've got a much better solution with a wireless LAN (local area network) and digital music pumping through a computer than (with) a CD changer."

Added Jotwani: "People started sharing email. Occasionally they are sharing music. With broadband, there is also the ability to share streaming video."

Changing the plan
In addition, PC companies, especially the direct companies like Gateway and Dell, are morphing into full-service retailers.

"Gateway is a retailer. They happen to make a few computers, but they really are a retailer, as Best Buy is a retailer and Dell is a retailer," said Steve Ballmer, Microsoft CEO.

Comdex 2000: Back to the future Currently, Gateway appears to be one of the more aggressive players. The company's threshold test determining whether to sell a particular device is fairly straightforward: If it can be sold with a service plan, Gateway is intrigued. The Touch Pad Web tablet, for instance, requires buyers to obtain an AOL account or add incremental service.

"Everything has a service component," said Peter Ashkin, Gateway's chief technology officer. "One of the things we want to do is create recurring revenue streams."

Initially, Gateway will focus on PC-like derivatives, such as improved versions of the Touch Pad with more applications. Later, expect to see networking products developed in conjunction with Broadcom. One Gateway prototype demonstrated at Comdex converts digital signals to analog. In practice, this would allow consumers to use the DVD player in a PC to play movies or make it easier to watch home digital video on a PC.

This also opens the door for AOL and Gateway to sign deals with pay-per-view broadcasters using the converter as a conduit, he said. Eventually, the digital/video converter could be incorporated into the television, which could lead to Gateway-labeled sets.

"It is all about the brand. RCA has a better brand about consumer electronics and TV sets," Ashkin said. "But once (the converter) gets integrated into the TV, it might make sense to co-brand it."

AOL and Gateway also have a phone/switch prototype that allows consumers to set up a phone network using voice-over-Internet Protocol. With this, consumers could drop or add phone lines with relative ease. "We could sell it in conjunction with Pac Bell or AT&T," Ashkin said. Hooking all this up will take some instruction and training, which is offered at Gateway Country Stores.

Gateway also is involved in cellular marketing in Europe.

"Stay tuned for what we are going to do in North America," Ashkin said. Branded minispeakers and cameras are possibilities, other Gateway executives said.

By contrast, Dell's approach is more incremental, said Greg Nakagawa, an executive in the Internet unit at Dell. Dell has come out with a home MP3 player, but it will continue to concentrate on PCs. The company will sell digital gateways on its Web sites, but they will come from other manufacturers, such as 2Wire, he said.

And the company will not venture into TV land. "I don't have any plans to get into the TV business. I don't have any plans to get into the set-top box business."

I feel pretty
Coming up with interesting products, however, isn't easy, said Gateway's Ashkin, a veteran of both Apple Computer and Toshiba. Gateway's first attempt at fashion came with the Profile, an all-in-one computer with a thin flat-panel screen. Sales weren't great, he acknowledged. A second version brought the price tag down but sold only slightly better. It has since been replaced by the Profile 3.

"What we want to focus on is classic good design, but at the same time not make them look silly," he said. Laughing, he added, "I'm proud to say that we didn't fall for that color fad."

As far as design principles go, Gateway is taking more of the Bauhaus philosophy. The Touch Pad comes in silver to match other appliances in the kitchen, said Keith Hell, a Gateway executive. Gateway thought of white but then considered the potential for stains. The unit runs on a Transmeta processor, which helps eliminate the need for a noise-causing fan. Relatively large speakers allow it to be used as an MP3 player.

The company remains modest about the initial prospects as well. "Our phones aren't ringing off the hook with people asking, 'Do you have Internet appliances? Can I order one of those?'" Ashkin said.

Who wins
At this point it is difficult to pick a dominant company. HP, Compaq and Sony are the best-positioned to excel in this market, noted Steve Baker, an analyst with PC Data, because of their huge product portfolios and their enormous brand recognition. Sony is the largest consumer electronics company in the world by far, reaping $34.1 billion in games and device revenue in 1999.

"You are going to start to see a Big Three--HP, Compaq and Sony," Baker said. HP's strengths lie in PCs and printers, while Compaq is strong in PCs and home networking. Sony has been relatively weak in PCs but strong in everything else. To date, Gateway has done a better job than the other two in attaching Internet service provider service to PC sales, Baker added.

These companies also will not always directly compete against one another. HP, for example, won't get into cell phones or game players, Jotwani said. It won't make or brand handheld MP3 players, but it will package handhelds from other makers with its CD-RW drives.

"The challenge here is to pick the focal points and pick the one where HP can win," he said.

 

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