It's undeniable: The Internet is all about waves.
In late 1994-early 1995 we had the access/ISP wave, followed by the search engine wave, the portal wave, the e-commerce wave, and, most recently, the outsourcing wave. I predict that the next wave to become part of the Internet vernacular will be appliances and devices, which are fast becoming the focus of not only public companies in the Internet space, but private, emerging companies as well.
The questions that remains are why, and why now?
The desire for miniaturized computers and other electronic devices has become as insatiable as the desire for processing power in that consumers can never get enough, and it is the Internet that has fueled this mainstream demand. The ability to connect a portable electronic device to the Internet backbone and access corporate or personal information from anywhere is significantly more appealing to mainstream consumers than the capabilities of standalone preprogrammed gadgets.
Whether the devices are personal planners, game consoles, television set-top boxes, or cable modems, all are natural extensions of the Internet. The hunger for appliances that deliver Internet access on demand is rampant, and will only continue to grow furiously.
From an investment perspective, there are numerous constituencies that will benefit from this trend, including:
Hardware manufacturers. Hardware manufacturers of the actual devices will be the most direct beneficiaries of the Internet appliance uptake. Ironically, though, I believe they will be beneficiaries more of the real estate they can control rather than the devices they manufacture. Given that the devices market is based on high-volume sales, the likelihood of being able to sell units for more than $99 and still achieve mainstream penetration isn't very high. Similar to the cell phone market, the great majority of Internet devices either will be provided to the customer at subsidized rates or will be given away for free. As is the case with deals that both Compaq and Dell have announced recently, in which they have sold either real estate on the start-up screen or default keyboard functions, device manufacturers can be expected to generate more revenue and significantly more profit from deals struck with various content and service providers than from OEM sales.
Software manufacturers. As one would suspect, the underlying software used to operate Internet devices represents a significant opportunity. Similar to the client-server and PC space, certain key software providers will generate higher margins than their hardware counterparts by being an integral part of the operation of these devices. Given the limited processing power and memory of the devices, the winning software vendors will provide a client-server solution. The work of companies such as NCI and the recent launch by Microsoft of its Megaserver strategy point up the role of a thin client that has the majority of the heavy lifting occurring at the server level.
Internet content and service providers. While hardware and software manufacturers will be focusing on providing the underlying platform capabilities necessary to run Internet devices, the real winners will be the Internet content and service providers that either have optimized their offerings for universal accessibility on these Internet appliances, or that have created unique content and services for them. This is because they will have direct and continuous contact with the customer.
Unlike standalone appliances with prepackaged applications, the concept of Internet appliances is based on connecting to a network. Consequently, customers will subscribe to content and services and will pay incrementally for personalization, enhanced features, and content. Without the killer content and services, devices and appliances always will be limited in terms of their adoption. The America Onlines, EarthLinks, Nintendos, WebTVs, and Yahoos of the world will need to offer intelligent content and services for these appliances going forward.
Unfortunately, there is a gating factor at work. For universal access, universal standards must be embraced. Not only must these standards be agreed upon, they have to work to begin with and must be scalable with demand. Furthermore, synchronization capabilities for connecting remote devices and applications will be necessary. While the success of the PalmPilot is a strong example of successful synchronization, the handheld product's universality and relevancy remains limited.
Price, of course, will be another issue. The ability to provide the right price point for mainstream uptake certainly will be a gating factor, and likely will be the single most important indicator as to when a majority of consumers will catch the next Internet wave.