PC heavyweights bet on Net appliances

Compaq Computer Corp. (cpq), Dell Computer Corp. (dell), Gateway Inc. (gtw), eMachines Inc. (eeee) and Microsoft Corp. (msft), whose bread and butter have been PCs, are preparing to turn to Internet appliances for the coming era, when the PC is no longer their No. 1 source of revenue.

"Market penetration of PCs is getting close to 60 percent, and increasing share has gotten more difficult," said Bob Visse, product manager at Microsoft.

"We've seen that there are a whole set of users that want just the basics."

In other words, simplicity is the pitch when it comes to Internet appliances. An Internet appliance can be any device -- such as the all-in-one Web terminal or the set-top box -- that provides Internet and e-mail access and isn't a PC.

Low cost, ease of use and instant-on are the catch phrases appliance manufacturers have been using to attract customers to these new devices. However, up until now, most consumers haven't been interested.

The entry of the PC makers could change this, though.

While the likes of Gateway and eMachines have made noise about Internet appliances, Compaq jumped into the fray last week -- announcing that it will be the first heavyweight PC player to market when it ships, in two weeks, an Internet appliance based on Microsoft's MSN Companion platform. But it won't be the last.

Another PC player, Gateway, plans to deliver three appliances. Based on a recently announced relationship with America Online Inc. (aol), Gateway will bring an Internet access terminal and a kitchen counter-top device to market before the end of the year. The third appliance -- a wireless Web pad -- is due out early next year. eMachines also plans to ship an MSN Companion device before the end of the year.

Dell, meanwhile, is putting together a plan to deliver a set of offerings, ranging from Net access to networking hardware, that will allow PCs and appliances to interact and share content over a network.

Dell (dell)"There are going to be a bunch of appliance (categories) that we are going to play in," said Stephan Godevais, vice president of Dell's Home and Small Business Group.

The first category is music. Dell's Digital Audio Receiver, priced at $199, will ship later this month. The device attaches to a network and uses it to download and play audio files, such as MP3. Dell is also investigating similar appliances in such categories as video, photography and gaming, Godevais said.

According to sources, Hewlett-Packard Co. (hwp) is also eyeing the consumer appliance market -- drawing up a business plan that includes creating a new business unit that reports directly to CEO Carly Fiorina.

Why are so many tech heavyweights mobilizing to enter a hitherto lightweight market? Clearly, as Microsoft's Visse pointed out, PC makers foresee that the PC market will not sustain its current levels of growth forever. Moreover, PC penetration hovers at about 50 percent of U.S. households and even less in European and Asian countries.

As a result, PC manufacturers have begun changing their product mixes to deliver more appliancelike offerings. None of the PC makers interviewed by ZDNet News believes the appliance will displace the PC. However, they do believe the appliance market will augment the PC while simultaneously augmenting their revenues.

Gateway saw 40 percent of its second-quarter earnings come from non-PC-related products, namely training; its Internet service provider service, Gateway.net; and financing through YourWare. However, Net appliance revenues could boost this percentage as Gateway offers AOL's some 22 million members alternate devices with which to access their e-mail and other services.

Still, is the market for Internet appliances large enough to support the many major players that are about to enter into it and inundate it with devices?

The entire appliance market -- including handheld devices, set-top boxes, game consoles and Web terminals -- has the potential to grow into a $17.8 billion, or 89 million unit, market by 2004, predicts Bryan Ma, an analyst with International Data Corp.

Get ready for Internet appliance 2.0. But this time the cadre of startups seeking to stake a claim in the emerging market are joined by heavyweight PC makers and software developers.

Compaq Computer Corp. (cpq), Dell Computer Corp. (dell), Gateway Inc. (gtw), eMachines Inc. (eeee) and Microsoft Corp. (msft), whose bread and butter have been PCs, are preparing to turn to Internet appliances for the coming era, when the PC is no longer their No. 1 source of revenue.

"Market penetration of PCs is getting close to 60 percent, and increasing share has gotten more difficult," said Bob Visse, product manager at Microsoft.

"We've seen that there are a whole set of users that want just the basics."

In other words, simplicity is the pitch when it comes to Internet appliances. An Internet appliance can be any device -- such as the all-in-one Web terminal or the set-top box -- that provides Internet and e-mail access and isn't a PC.

Low cost, ease of use and instant-on are the catch phrases appliance manufacturers have been using to attract customers to these new devices. However, up until now, most consumers haven't been interested.

The entry of the PC makers could change this, though.

While the likes of Gateway and eMachines have made noise about Internet appliances, Compaq jumped into the fray last week -- announcing that it will be the first heavyweight PC player to market when it ships, in two weeks, an Internet appliance based on Microsoft's MSN Companion platform. But it won't be the last.

Another PC player, Gateway, plans to deliver three appliances. Based on a recently announced relationship with America Online Inc. (aol), Gateway will bring an Internet access terminal and a kitchen counter-top device to market before the end of the year. The third appliance -- a wireless Web pad -- is due out early next year. eMachines also plans to ship an MSN Companion device before the end of the year.

Dell, meanwhile, is putting together a plan to deliver a set of offerings, ranging from Net access to networking hardware, that will allow PCs and appliances to interact and share content over a network.

Dell (dell)"There are going to be a bunch of appliance (categories) that we are going to play in," said Stephan Godevais, vice president of Dell's Home and Small Business Group.

The first category is music. Dell's Digital Audio Receiver, priced at $199, will ship later this month. The device attaches to a network and uses it to download and play audio files, such as MP3. Dell is also investigating similar appliances in such categories as video, photography and gaming, Godevais said.

According to sources, Hewlett-Packard Co. (hwp) is also eyeing the consumer appliance market -- drawing up a business plan that includes creating a new business unit that reports directly to CEO Carly Fiorina.

Why are so many tech heavyweights mobilizing to enter a hitherto lightweight market? Clearly, as Microsoft's Visse pointed out, PC makers foresee that the PC market will not sustain its current levels of growth forever. Moreover, PC penetration hovers at about 50 percent of U.S. households and even less in European and Asian countries.

As a result, PC manufacturers have begun changing their product mixes to deliver more appliancelike offerings. None of the PC makers interviewed by ZDNet News believes the appliance will displace the PC. However, they do believe the appliance market will augment the PC while simultaneously augmenting their revenues.

Gateway saw 40 percent of its second-quarter earnings come from non-PC-related products, namely training; its Internet service provider service, Gateway.net; and financing through YourWare. However, Net appliance revenues could boost this percentage as Gateway offers AOL's some 22 million members alternate devices with which to access their e-mail and other services.

Still, is the market for Internet appliances large enough to support the many major players that are about to enter into it and inundate it with devices?

The entire appliance market -- including handheld devices, set-top boxes, game consoles and Web terminals -- has the potential to grow into a $17.8 billion, or 89 million unit, market by 2004, predicts Bryan Ma, an analyst with International Data Corp.

Despite the current level of enthusiasm for it, the weakest segment of the appliance market is the Web terminal. Analysts have attributed the limited success of Web terminals, in part, to unclear business models and the inability to communicate to consumers the benefits of an appliance over a similarly priced PC.

PC manufacturers, so far, have made efforts to more clearly define their target audiences. Gateway and AOL have said that they are pursuing the multiple-PC household, while Compaq, MSN and other MSN manufacturers will go after homes that don't have PCs.

Despite these more specific business models, Ma projects that Web terminals will make up only 5.5 million units of the 89 million-unit appliance market expected by 2004. (Ma's data was released prior to the announcement that Compaq was joining the Web terminal game. Ma said IDC reports these numbers annually and will not be revising them in light of the announcement.)

Does that mean that other Internet appliances will be hot?

Compaq subscribes to this theory. The company, in addition to its iPaq Home Internet Appliance Web terminal, launched a new MP3 player, a new two-way pager and a residential gateway under its iPaq brand.

"Everybody's talking about appliances ... and some companies have a device, but I think you'll see that we have a range of devices," said Mike Larson, senior vice president and general manager of Compaq's Consumer Products Group. "It's difficult to predict what the largest segment will be. If I was going to rank the three products we introduced on Tuesday, I think we're going to sell the most audio players and Net appliances next. Residential gateways are more of an early adopter product."

The next generation of widely adopted appliances, as Larson sees it, will combine capabilities of several devices into a cellular phone.

"The next big product would be a combination of a phone, a Pocket PC and the (Research in Motion) BlackBerry pager," he said.

Work to develop such cellular phone platforms is proceeding at Microsoft, Palm (palm) and Symbian, which is developing such devices based on the EPOCH OS from Psion handhelds.

Dell, for its part, sees opportunity in networking infrastructure for the home and small business. It is investigating, for example, providing intelligent network gateways for home and small businesses. It also supplies home networking products, including a wireless network based on the 802.11 standard.

Despite the lack of success of the Web terminal to date, Matt Sargent, an analyst at ARS, says he's encouraged by Compaq's entry into the market segment.

Compaq brings "credibility" to the Web terminal segment, he said. "It helps the category to have Compaq in the game because there hasn't been a strong name behind it before."

But not everyone thinks the Web terminal is going to take off right away. While Dell is bullish on purpose-specific appliances, the company is unlikely to ship a Web terminal anytime soon.

"No one has found the recipe to make it competitive with the PC in terms of cost," Godevais said. "The real dilemma for consumers is with spending $400 or $500 for a single-purpose device vs. buying a general-purpose device for a few more (dollars) that's a PC."

Right now, Godevais says he believes consumers will choose PCs over Web terminals. However, once the cost of Web terminals, especially mobile Web terminals, comes down, Dell will likely jump into the market.

"I think ultimately the model is going to work," he said.

One Web terminal vendor, Sageport, may have carved out a niche. Sageport's Sagevision Web terminal targets a previously neglected audience: the senior citizen. (The U.S. Census and Nielsen data suggest the market for seniors is, as yet, untapped. About 47 million of the total 55 million seniors are not online.)

The device, based on Intel Corp.'s Dot.Station hardware, features an ergonomically designed keyboard and a link to Sageport.com, a Web portal developed as a "senior-friendly" community and marketplace.

Sagevision still has plenty of challenges, said Andrea Leon, research director at Gartner Group's eCommerce Group. A clear business model helps, but, like any Net appliance, it must be competitive on price, she said.

"It will be PC households, the kids of these seniors, that will be buying these systems for seniors," Leon said. "They'll be doing a lot of comparison shopping with PCs."

But it's not just seniors who will be comparison shopping with PCs. Analysts say that Web terminals have to be priced significantly lower than a low-end PC.

Price is one of the major appealing aspects of the iPaq Home Internet Appliance, according to Ma. Compaq's pitch includes a heavy discount. Gateway is also likely to offer the same with its devices.

Compaq's device costs $599 but comes with an offer for a $400 rebate on the system with a three-year subscription to the MSN Companion ISP service. "This is the sort of advantage a big player brings to consumers. They can afford to subsidize up front and make it up later, but smaller companies can't do that," said Ma.

Microsoft officials have said that the rebate program has been so popular that the company has no immediate plans to end the promotion.

Despite the current level of enthusiasm for it, the weakest segment of the appliance market is the Web terminal. Analysts have attributed the limited success of Web terminals, in part, to unclear business models and the inability to communicate to consumers the benefits of an appliance over a similarly priced PC.

PC manufacturers, so far, have made efforts to more clearly define their target audiences. Gateway and AOL have said that they are pursuing the multiple-PC household, while Compaq, MSN and other MSN manufacturers will go after homes that don't have PCs.

Despite these more specific business models, Ma projects that Web terminals will make up only 5.5 million units of the 89 million-unit appliance market expected by 2004. (Ma's data was released prior to the announcement that Compaq was joining the Web terminal game. Ma said IDC reports these numbers annually and will not be revising them in light of the announcement.)

Does that mean that other Internet appliances will be hot?

Compaq subscribes to this theory. The company, in addition to its iPaq Home Internet Appliance Web terminal, launched a new MP3 player, a new two-way pager and a residential gateway under its iPaq brand.

"Everybody's talking about appliances ... and some companies have a device, but I think you'll see that we have a range of devices," said Mike Larson, senior vice president and general manager of Compaq's Consumer Products Group. "It's difficult to predict what the largest segment will be. If I was going to rank the three products we introduced on Tuesday, I think we're going to sell the most audio players and Net appliances next. Residential gateways are more of an early adopter product."

The next generation of widely adopted appliances, as Larson sees it, will combine capabilities of several devices into a cellular phone.

"The next big product would be a combination of a phone, a Pocket PC and the (Research in Motion) BlackBerry pager," he said.

Work to develop such cellular phone platforms is proceeding at Microsoft, Palm (palm) and Symbian, which is developing such devices based on the EPOCH OS from Psion handhelds.

Dell, for its part, sees opportunity in networking infrastructure for the home and small business. It is investigating, for example, providing intelligent network gateways for home and small businesses. It also supplies home networking products, including a wireless network based on the 802.11 standard.

Despite the lack of success of the Web terminal to date, Matt Sargent, an analyst at ARS, says he's encouraged by Compaq's entry into the market segment.

Compaq brings "credibility" to the Web terminal segment, he said. "It helps the category to have Compaq in the game because there hasn't been a strong name behind it before."

But not everyone thinks the Web terminal is going to take off right away. While Dell is bullish on purpose-specific appliances, the company is unlikely to ship a Web terminal anytime soon.

"No one has found the recipe to make it competitive with the PC in terms of cost," Godevais said. "The real dilemma for consumers is with spending $400 or $500 for a single-purpose device vs. buying a general-purpose device for a few more (dollars) that's a PC."

Right now, Godevais says he believes consumers will choose PCs over Web terminals. However, once the cost of Web terminals, especially mobile Web terminals, comes down, Dell will likely jump into the market.

"I think ultimately the model is going to work," he said.

One Web terminal vendor, Sageport, may have carved out a niche. Sageport's Sagevision Web terminal targets a previously neglected audience: the senior citizen. (The U.S. Census and Nielsen data suggest the market for seniors is, as yet, untapped. About 47 million of the total 55 million seniors are not online.)

The device, based on Intel Corp.'s Dot.Station hardware, features an ergonomically designed keyboard and a link to Sageport.com, a Web portal developed as a "senior-friendly" community and marketplace.

Sagevision still has plenty of challenges, said Andrea Leon, research director at Gartner Group's eCommerce Group. A clear business model helps, but, like any Net appliance, it must be competitive on price, she said.

"It will be PC households, the kids of these seniors, that will be buying these systems for seniors," Leon said. "They'll be doing a lot of comparison shopping with PCs."

But it's not just seniors who will be comparison shopping with PCs. Analysts say that Web terminals have to be priced significantly lower than a low-end PC.

Price is one of the major appealing aspects of the iPaq Home Internet Appliance, according to Ma. Compaq's pitch includes a heavy discount. Gateway is also likely to offer the same with its devices.

Compaq's device costs $599 but comes with an offer for a $400 rebate on the system with a three-year subscription to the MSN Companion ISP service. "This is the sort of advantage a big player brings to consumers. They can afford to subsidize up front and make it up later, but smaller companies can't do that," said Ma.

Microsoft officials have said that the rebate program has been so popular that the company has no immediate plans to end the promotion.