SAN FRANCISCO (09/01/2000) - Now appearing on department-store shelves, between the blenders and the microwaves, is a new class of device known as Web appliances. They range from clunky, Jetsons-esque machines to cool, futuristic tablets. One, designed for the kitchen, combines a TV, Web browser, DVD player and baby monitor, so that parents can cook, Net-surf, watch movies and keep an ear for Junior at the same time. The variety of these new devices is testament both to human ingenuity and to wishful thinking.
Web appliances are cheap, easy-to-use terminals that offer Net access with the flick of a switch. Designed to lure the technologically inexperienced online, they embody much of the promise and risk of the Net Economy.
After a successful IPO just before April's stock plunge, first-to-market Netpliance has accumulated losses to date of $168 million in a perilous bet that the demand for Web appliances will one day be huge. Selling for half the price of the Netpliance iOpener is the iPaq, cobranded by Microsoft and Compaq and hardwired to the MSN.com Web portal. Oracle's Larry Ellison has entered the fray, as well. AOL is on its way. And as-yet-unknowns crowd the margins.
Netpliance President and COO Kent Savage sums up the principles of the Web appliance market: "People don't want more. They want less on more enriching terms. The market for simplicity is infinitely deep."
But the entrance of companies like AOL and Microsoft, which can afford heavy upfront losses, may soon drain the pool for underfunded startups. The next 12 months will be crucial; Netpliance, thanks to its spring IPO, has the cash to survive. Others, like Seattle-based ePods, are tottering on the edge. Before the "market for simplicity" has proved itself, a shakeout looms.
Research firm IDC projects shipments of only 1.5 million units worldwide by 2002. It remains to be seen how many Web-appliance companies that will support.
Savage cofounded the Austin, Texas-based Netpliance in 1998 along with John McHale, now the CEO. Both are veterans of broadband startup NetSpeed, which McHale sold to Cisco in 1998 for $236 million in stock. In 1995, McHale had sold his previous company, NetWorth, to Compaq for $372 million in cash.
The Netpliance iOpener has a sleek, swiveling, flat-panel liquid-crystal display screen with built-in speakers. Plug it into a power outlet and a telephone jack, and the iOpener's ready to go. That's all there is to it.
Savage says 44,000 iOpener users have signed up for the $22-per-month access service. For those subscribers - "50-year-olds and above and the female community are our two predominant markets," Savage notes - the iOpener provides a built-in portal and a row of one-touch keys for access to different information areas. The walled-garden feel of the community would frustrate a more savvy Web surfer, but Savage says Netpliance customers are happy to have information organized.
"We're doing some hand-holding," says Savage. "They like to be serviced."
In this volatile market, pricing on the iOpener has swung wildly since the launch - it's currently $299. Netpliance takes a substantial loss on every device sold. To build revenue, Savage plans to make Netpliance "the first ASP [application service provider] to the home," selling subscribers access to extra software services and Internet apps. Its stock has dropped from a high of $22 to less than $6, but Netpliance still has $130 million in the bank.
Rival startups that didn't make it to the public markets have hit a funding wall. EPods, which offers Internet access on an elegant tablet-style appliance with a touch-screen, laid off 24 employees in June and 50 more in early August. About two dozen employees remain.
"In the middle of our fundraising is when the market headed downward," says ePods' CEO, 23-year-old Shae Hong. "Plus, nothing's been proven in our space. A lot of VCs are uncertain about it."
Hong aims to save the company by outsourcing much of the work. Money dried up just as his product, the ePodsOne, was due to ship to stores, priced at $199, plus a $25-per-month access fee. Two weeks after the layoffs, it went on sale in the kitchen appliance department of Bon Marche stores in Seattle.
Distribution through department stores, rather than the typical Netpliance outlets such as Circuit City and CompUSA, was secured through an unlikely partner: Mount Prospect, Ill.-based Salton. Known for its range of kitchen gadgets, including the Juiceman juicer, Breadman breadmaker and George Foreman Grilling Machine, Salton invested an early $2 million in ePods and has exclusive distribution rights in North America.
Salton also backs a different Seattle Web-appliance company, CMi Worldwide. CMi was started by the inventors and marketers of the Juiceman and Breadman. CEO Bob Lamson and CTO Bob Harrison founded the company to create and sell a "convergence device" that would switch at the touch of a button from a TV to a DVD player to an Internet appliance to a baby or security monitor.
A Samsung-made countertop version of CMi's appliance, the $699 Icebox, is due in retail stores in October. The wireless keyboard and remote control are not only waterproof but also washable. The Icebox's monitor is a traditional cathode-ray tube, which makes it bulkier and heavier than Netpliance's iOpener. It looks much like, and indeed it is, a small TV.
CMi has only 12 employees and outsources all aspects of the enterprise, including software and hardware development, systems integration and distribution. Third-party ISPs will provide Web access. The company will devote its energy solely to marketing the hardware.
"It's not so different, except on a larger scale, from bringing a juicer to market," says Russ Whitman, the company's 31-year-old president and COO. CMi refers to its target demographic as "household CEOs" - in other words, homemakers.
"If you try to design this for a man it would not serve the consumer as well," says Whitman bluntly. "Women have traditionally used technology differently; it's a tool set vs. a toy."
That's why CMi built a DVD player into the Icebox, and it has produced a line of accompanying videodiscs that demonstrate cooking techniques and recipes.
Although Microsoft has never sold a single juicer, it's the first big tech company to deliver a consumer Web appliance. Made by Compaq, the iPaq Home Internet Appliance (which Microsoft calls an "MSN Companion") has a flat-panel screen and a wireless keyboard. One key opens MSN's instant messaging service. The appliance costs $199 with a three-year commitment to the $22-per-month MSN access service.
At that price, and with Microsoft's deep cash reserves, Compaq's distribution channels and MSN's established services, the iPaq could hurt Netpliance and blow away smaller startups still trying to come to market.
Worse news for the smaller players: Before the holiday season, AOL is expected to ship its own Web appliance. With its established family-friendly content services, AOL could be even more of a threat than Microsoft if it gets the hardware right.
Intel already seems to have gotten the hardware wrong. The chipmaker is selling its new Linux-based Dot.Station Web appliance along with back-end system management software not to consumers but to service providers. Using a cathode monitor set in a silver case with a translucent blue front, the Dot.Station resembles an Airstream recreational vehicle or some hefty 1950s vision of the computer future. It's as bulky as a PC - only dumber.
Another contender is Oracle CEO Larry Ellison's New Internet Computer. Ellison funded the Oracle spinoff and serves as its chairman. The San Francisco-based company has only 17 employees and is run by former ABC News tech reporter Gina Smith. Outsourcing everything, NIC is already shipping early units. Priced at $330 with a cathode monitor, the Linux-based NIC machine comes with a NetZero free ISP account. After a software upgrade due in October, it will offer a choice of ISPs. However, NIC devices are not like other Web appliances: There's no hand-holding, because the NIC is not designed for unsophisticated users.
In fact, the NIC's purpose is to further Ellison's longtime dream of the network computer: a basic terminal that stores data on and runs applications from the network. It didn't work in 1995, when the target was business networks. But with the focus shifted to the Internet, Ellison's vision is in line with the buzz about the ASP model and software by subscription. By now, even Bill Gates has admitted that's where the future lies.
Trouble is, it is still in the future. "We will see a whole industry crop up around ASPs," says Smith. "We're six to eight months from an explosion in this industry."
In the meantime, with no popular Linux-based apps for rent, NIC users can only browse and get e-mail. Of course, once Sun's StarOffice and other such applications are ready for prime time, the NIC may have its day. Until then, it may be less a consumer product than a way for Ellison to nip at Microsoft's heels.
"I benefit from Ellison's eloquent dialogue in the marketplace," allows Netpliance's Savage. "I can only suspect he's not creating a real business but being a thorn in Gates' side."
Mind you, Ellison is hardly alone in being ahead of his time.
The whole Internet-appliance market is beset by a severe cost crunch because of the worldwide shortage, and consequent high cost, of LCD technology. Companies must either choose a bulkier cathode monitor or add at least $200 to the cost of the device for LCD screens. Both ePods and Microsoft have priced their LCD devices for just that amount - meaning they're selling the devices for less than cost.
That one factor could undermine the entire market. According to Bob O'Donnell, IDC's research director for device technology, the cost of building most Web appliances is as much as that of notebook computers, but they're priced much lower.
"The information-appliance market will get creamed," says O'Donnell. "People are dreaming."