December 22, 2000 4:00 AM PST

Will Net-surfing appliances reach adulthood?

Still in its infancy, the Internet appliance market went through its fair share of growing pains this year.

Internet appliances--inexpensive, simplified devices for scampering about the Internet--have been touted by some as a successor to the PC. But the high cost of attracting customers, a muted acceptance and a shortage of capital hurt the nascent market in 2000.

Year in
review special report The first born of the group, the I-opener, had an especially rough year. Netpliance, the I-opener's parent, decided to stop direct sales of the machine beyond January 2001. Instead of bearing children itself, the company will serve as a midwife to other Internet service providers looking to deliver appliances to their customers.

Virgin took back its Internet appliance after only six months when its co-parent, Internet Appliance Network, decided to get out of the business of providing Net appliances and services. In November, Virgin was forced to recall the 10,000 units it had given away free in exchange for the right to track online activities.

Despite such setbacks, 2000 brought several other new products, including the first offspring from the marriage of Gateway and America Online, called the Touch Pad, as well as others such as the New Internet Computer (NIC) and 3Com's Audrey.

"I don't know if maturing is the right word to use," IDC analyst Bryan Ma said of the Net appliance business, "but it's growing up."

3Com hopes to produce siblings for Audrey. The company has been showing Audrey's baby pictures to anyone who will take a look, although her price tag may limit the number of households looking to take her in this holiday season.

Bill Gates also witnessed the birth of several Internet appliance babies, bringing to market the MSN Web Companions he first showed off at the 1999 Comdex trade show.

Compaq launched two models, one using a flat-screen monitor and the other a traditional screen. A third unit is offered by Emachines.

Meanwhile, Gina Smith, chief executive of the New Internet Computer Co., said she's also thinking about more baby computers, though these days she's more interested in providing NIC with additional toys. A $399 flat-screen monitor should show up soon, with other knickknacks likely to follow.

Smith said there is more than enough opportunity in the immature market for several Net appliances to succeed.

"There's room in the sandbox," she said. Plus, with Oracle CEO Larry Ellison pouring dough into NIC's trust fund, Smith appears able to provide child care for the foreseeable future.

However, the question of how to raise one of these Web-surfing babies without breaking the bank remains a tough issue for many contemplating launching an Internet appliance. It costs nearly as much to build a personal computer as it does to crank out a smaller Internet appliance, but consumers typically will shell out only a couple hundred dollars for a Web-surfing machine.

Netpliance
I-opener In addition, Netpliance found out the hard way that investors have soured on its subsidy model. Investors were once willing to fund companies that lost money on the initial sale of a Net appliance but that had a plan to bring in money as an Internet service provider. That willingness shifted during the spring, when investors lost patience with Net-related companies that bled money.

Nonetheless, IDC's Ma predicts a continued baby boom for Net appliances in 2001, even though only the young companies with rich parents are likely to make it to adulthood.

"I don't think there is going to be room for everyone," Ma said.

 

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