PC heavyweights bet on Net appliances

Why are the likes of Compaq, Dell, Gateway and Microsoft backing the fledgling Internet appliance market? 'We all realise that the PC is all over'

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, Dell Computer, Gateway, eMachines and Microsoft, 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 number one 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 email 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, 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. "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 is also eyeing the consumer appliance market -- drawing up a business plan that includes creating a new business unit that reports directly to chief executive Carly Fiorina.

Why are so many tech heavyweights mobilising 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 US 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 email and other services.

Still, is the market for Internet appliances large enough to support the many major players that are about to enter 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 $17.8bn, or 89 million unit, market by 2004, predicts Bryan Ma, an analyst with IDC.

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