Net appliances: The next frontier

Equipment makers take different paths to reach the hearts and minds of potential Web appliance consumers

For some time, analysts have predicted that Internet appliances may be the computer industry's next frontier. But blazing a trail through uncharted territory is never easy.

The recent withdrawals of information appliance pioneer Netpliance and Virgin Entertainment Group give some indication of the obstacles that lie ahead for a market that IDC has pegged to be worth $17.8bn by 2004.

What are other companies doing to create a successful model in the nascent Net appliance market? Just about everything. They're tinkering with prices, service plans, and marketing strategies, hoping to find the winning combination of consumer appeal and revenue.

PC powerhouse Gateway, former graphics chipmaker Sonicblue, with its newly formed frontpath subsidiary, and former networking giant 3Com have recently logged onto the idea of information appliances.

But, for all their efforts, consumers have been cool to Web players.

One reason, according to industry IDC analyst Bryan Ma, is that consumers aren't sure what to make of the devices. Manufacturers have simply not made a strong case for net appliances, he said.

In order to appeal to consumers and to keep from competing with low-cost PCs, analysts have said Net appliances should be priced below $300.

EMachines -- one of the top five PC manufacturers and a recent entrant to the Net appliance market, with three new units released for the holidays -- shows just how competitive the two markets can be.

The least expensive eMachine PC is its eTower 600is, which comes with a 600MHz Celeron processor, 32MB of RAM, and a 40x CD-ROM drive for $399. Its most expensive Net appliance lists for $349.

Other hardware manufacturers are teaming with ISPs to tap into existing user bases and lower consumer costs. Even so, their approaches differ.

While Gateway has teamed with America Online for its $599 Connected TouchPad device, eMachines and Compaq have teamed with MSN Companion to subsidise the cost of the hardware.

"AOL is the preeminent ISP in the United States. With their 25 million users, they are a terrific partner," said Gateway's manager of corporate communications, Greg Lund.

"Manufacturers don't have to be partnered with an ISP to be successful," said IDC's Ma. "It depends on who your target customer is."

Gateway has a tremendous installed base of PC users, but AOL could discourage consumers outside that realm, according to some analysts.

Hardware and ISP packages will only succeed in low-end or novice markets, said Milosz Skrzypczak of the Yankee Group.

"Novice users don't care about who their ISP is -- just give them the package that gets them online," Skrzypczak said. "AOL is not that strong with early adopters who have moved past the superficial AOL universe."

For users who already have an ISP, tying hardware to an ISP can be a hard sell. 3Com's Audrey appliance, which can be used with a number of ISPs, can be a better fit for those consumers.

"You want people to be able to use their existing ISP in an ideal world for mainstream adoption," said Gartner analyst PJ McNealy.

According to Ma, there is room in the market for both models. But the survivors will need staying power, and that will take lots of cash.

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