PC makers ready to throw out the Windows

Web appliances could hurt Microsoft

Major personal-computer makers are quietly working on a wave of products that won't use Microsoft's Windows PC-operating system, the source of the software giant's market power.

The desktop machines, which are expected early next year, will be designed primarily to surf the Internet and be priced far below standard PCs running Microsoft's ubiquitous Windows 98 operating software, industry executives said. These Internet computers, or "appliances," won't soon supplant Windows PCs, which will likely dominate the market for years. But if they take off, they could begin to erode Microsoft's dominance of the desktop.Major PC makers are taking a variety of approaches to the emerging market.

Gateway is building a line with no Microsoft software at all, and may jointly market it with America Online (AOL), which recently invested £480 million in Gateway, people familiar with their plans say. Compaq hasn't decided what basic software to use in its Internet line, which it will preview at next month's Comdex computer show, other industry executives said.

Dell also plans to bring out a line of Internet computers, some using Microsoft software and some without, people close to its efforts said. Microsoft, meanwhile, is scrambling to keep PC makers in the fold. It is working with some of them to make MSN Web Companion, an Internet machine which will be tied to Microsoft's MSN Internet service. It is based on Windows CE, a stripped-down Windows version that has had limited success in the market so far.

Computer makers have tried selling appliance-style devices before. But the Internet changes the landscape, reducing the need to buy a full-fledged version of Windows to get email and even such applications as appointment calendars and personal-finance software, some of which are now available on Web sites. The new Internet computers also signal independence among PC makers that have long served as captive distributors for Windows.

Spokesmen for Gateway, Compaq and Dell said they won't comment on unannounced products. But on Tuesday, Compaq Chief Executive Michael Capellas hinted at the new approach after announcing earnings. "There will be dramatic shifts in how people perceive the product," he said. "Longer term, our opportunity is to redefine Internet access" in a new generation of products, he said. "Every PC manufacturer is thinking hard about and working on a lot of these devices in their labs," said Kevin Hause, an analyst who tracks the market for International Data Coporation.

While surging consumer interest in the Internet was the catalyst for non-Windows machines, the heightened scrutiny of Microsoft's business practices resulting from the pending federal antitrust lawsuit emboldened PC makers to bring out non-Windows products, a second industry executive said. The outcome of the case could directly affect their ability to continue experimenting with new products, he said. But the main factor is the Internet. "The Internet gives people a platform to do most of the things they need to do on a PC without a cumbersome and expensive operating system," the executive said.

Since the initial Internet products planned by Compaq and Gateway won't run Windows 98, they can't carry out many of the tasks general-purpose PCs can. Later versions of these products may include some basic office software, industry executives said. Apple, the only major PC maker that doesn't use Windows, already has a huge hit with its iMac computer, and handheld Internet-access devices are selling briskly. In Microsoft's antitrust trial earlier this year, the software giant cited Apple and the handheld Internet devices as proof the market remains competitive.

A preliminary ruling in the suit by the Justice Department and 19 states is expected shortly in US District Court in Washington. One issue at trial was Microsoft's alleged power to force PC makers to accept its demands because they needed access to Windows; Microsoft forcefully countered those charges. If the government prevails, it is expected to seek safeguards that cut Microsoft's power over the PC makers. Microsoft views the shift to consumer Internet devices as part of its broader struggle with AOL. "I think we have the lead on them," said Yusuf Mehdi, MSN's director of marketing. "We also have the jump on them in partnerships. We understand how to work with hardware makers."

Microsoft's goal is to make getting on the Web as simple as making toast-and to tie users to Microsoft's Internet service and MSN.com "portal" service. PC makers, too, are expected to use the new machines as way of winning customers for their online partners. Depending on the quality of components, such as screens, and on particular marketing deals, the price for many of the desktop machines should range from £119 to zero, if sold in combination with monthly Internet service. Most will consist of a screen and wireless keyboard and probably won't contain a disk drive or use Intel processors. They also will offer an "instant on" feature, eliminating the annoying PC "boot-up" sequence, and automatically connect to the Web.