Internet appliances have not lived up to hype

At last year's PC Expo, Internet appliances were generating buzz. Next week at the exhibit, which is now part of the Technology Exchange Week New York (TechXNY), participants are apt to be more sober-minded about the devices.

The loosely defined term covers both Net-connected devices with limited functionality targeted at users who don't need a full-fledged PC, and stripped-down gadgets designed for away-from-the-desk "pervasive" computing.

The Internet appliance market has fielded more misses than hits in the last year. 3Com's much-hyped, well-reviewed Audrey died mere months after its splashy launch, as did Virgin Entertainment's Webplayer. Netpliance pulled the plug on its I-opener and lost its Nasdaq listing.

IBM, Intel, and America Online, in partnership with Gateway, showed off their Internet appliances at last year's show. This time around, AOL is skipping the show altogether, and Gateway and Intel won't be demonstrating their devices on the exhibit floor.

Intel is targeting the Dot.Station to ISPs (Internet service providers). The device isn't available directly to consumers; instead, Intel markets its Dot.Stations to service providers for resale to their customers. One year after its launch, the device has garnered only a handful of takers. Intel signed a deal in March to sell 250,000 Dot.Stations to AOL Avant, a joint venture between AOL and Banco Santander Central Hispano SA, which plans to market the Dot.Stations in Spain later this year as part of an Internet services bundle.

The AOL Avant deal is the first major deployment for the Dot.Station, Intel spokeswoman Shannon Burris said. "Quite frankly, we haven't seen the interest we'd hoped," she admitted.

AOL closely aligned with Gateway to develop the Gateway Connected Touch Pad -- which makes AOL Avant's decision to use the Dot.Station as its device of choice particularly puzzling. A representative for AOL's Latin American unit could not be reached for comment.

Announced in October 1999, AOL and Gateway's original intent was to develop a trio of Web appliances, including a countertop unit and a laptop-like device that would pair with a base station to create a wireless home network. At last year's PC Expo, Gateway and AOL demonstrated a prototype Web appliance, but a final product didn't reach the market until November 2000 -- and it hasn't been a hit with consumers. Gateway recently knocked US$100 off the Touch Pad's selling price, bringing the unit's cost down to $499.

"Gateway is still committed to the vision of the connected home, but we think it's really going to take off when broadband takes off more in the home," Gateway spokeswoman Lisa Emard said.

Gateway is current "re-evaluating" its Internet appliances strategy, but will continue producing and marketing the Touch Pad, Emard said. For the time being, Gateway has no new Internet appliances in the works.

Just before PC Expo 2000's start, research firm eTForecasts predicted that Internet appliances' penetration would skyrocket within five years. The firm estimated that 2.3 percent of U.S. Internet users were currently accessing the Net through Internet appliances, but forecast that figure would jump to 14.2 percent by the end of 2002 and 55.4 percent by 2005. By 2005, the company predicted that 221.9 million PCs would be in use in the U.S., along with 115.4 million Internet appliances.

But the predictions now look aggressive. Analysts say the big problem with Internet appliances is that manufacturers misjudged what consumers are looking for in an Internet device -- and what price tag they'll accept.

Even bullish eTForecasts has toned down its expectations since last year. Last June, the firm predicted that 115.4 million Internet appliances would be in use in the U.S. by 2005; in a report issued last month, it cut its forecast to 54.2 million. The firm also slashed its worldwide outlook, from 596 million devices in use by 2005 to 322.5 million.

"Consumers haven't really rushed to embrace Internet appliances because of the price," said Brian O'Rourke, a senior analyst with Cahners In-Stat Group. "A low-end PC has more functionality, and costs about the same."

"There's a mismatch between what consumers are willing to pay for the device and what the device they want to buy will cost," agreed Giga Information Group Inc. research fellow Rob Enderle. "(Manufacturers) are still exploring what an Internet appliance needs to be. They really haven't found the right device yet."

Faced with a shaky consumer market, several companies are tapping the corporate sector to make their research and development expenditures pay off. Sun Microsystems Inc., which skipped PC Expo last year and said it won't have an official presence this year either, aims its Sun Ray appliances at the government, financial, education, and industrial designs sectors of the market.

IBM plans to show its similarly enterprise-focused NetVista Internet Appliance at PC Expo again this year. The NetVista device is targeted at vertical markets -- IBM pitches the appliances to call centers, hotels, retailers, and other "task-oriented" industries. Royal Caribbean Cruises Ltd. recently installed 500 NetVista Internet Appliances in its crew cabins.

Howie Hunger, IBM's business director of Net devices, said IBM's vertical-focused Internet appliances strategy "evolved to that over time." Initially, IBM thought its strategy would be more in line with Intel's, a "business-to-business-to-consumers" supply chain.

"But we learned that what our customers really want, and what we're strongest in, is focused-use devices," Hunger said. "There's a great market for these in vertical applications."

Analysts O'Rourke and Enderle agree that enterprise is where the market is at, for the moment.

Enderle said IBM's NetVista Internet appliance is "a niche product, but a good one." Noting that electronic terminals existed before PCs, he commented, "If IBM had come out with this a couple of decades ago, we might not have PCs on our desks at work."

"In the enterprise space, Internet appliances can be cheaper than PCs, and they don't have nearly the complexity of PCs," said O'Rourke. Still, he said that both the consumer and enterprise markets are "tiny" at the moment: He estimates that the Intel/AOL Avant deal will represent 65 percent of all Internet appliances sold in vertical applications in 2001.

Still, not all manufacturers have lost their Internet appliances faith. Sony Electronics caused a splash last week with the launch of its eVilla Network Entertainment Center, a $499.99 Internet appliance that will start shipping to consumers by the end of the month.

"This is probably the best device out there so far. It's the closest to matching price and the user experience," Enderle said. He said the eVilla still has a number of drawbacks to its technology, however, including its bulk.

"Every device gets a little closer. This is the closest, but I'm not convinced it's close enough yet," he said.

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