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Profit tricky in information appliance market

Information appliances represent a huge opportunity for PC manufacturers, but making money over the long term is--as always--the difficult part.

TAIPEI--Information appliances represent a huge opportunity for PC manufacturers, but making money over the long term is--as always--the difficult part.

Consensus among high-tech executives is that the market for simple, stripped-down information appliances is set to explode. Some estimates project that these devices will outstrip PC shipments by 2002, said Brian Halla, chairman of National Semiconductor. "The PC continues on, but the information appliance takes over rapidly. It could happen," he said.

Unfortunately for manufacturers, these See special report: 
When worlds collide items will also carry small prices. "The free PC is not a sustainable business model," said Chintay Shin, president of the Industrial Technology Research in Taiwan. "The purpose of the free PC is to generate revenue from services. But how can the service provider generate revenue from an unreliable PC?"

Indeed, integrating specialized software and emphasizing services sound good, but few concrete examples other than handheld computers enjoy a booming market. Still, box manufacturers must begin to act now or risk being left behind the latest important consumer trend.

Acer will move forward on its "XC" concept--that is, building specialized devices with integrated software that emphasize ease of use. Crucial infrastructure for software has yet to be built, but the groundwork appears to be proceeding.

Around six months ago, Ulead became the first software company to launch a public stock offering in Taiwan. To spur the process, the government is also now providing tax breaks to venture capital firms, which has helped increased the number of VC funds from around 30 to 130 in a year. The amount of VC investing here is second only to the United States.

"In the future, the [profit] margin in hardware will be minimal. The margins will be in software and services," said Stan Shih, chairman of Acer. "Acer has to continue to develop a higher value on top of our current strengths."

Intel is also investing in software companies here, said John Davies, the chipmaker's vice president for Asia. Manufacturers have to "build complete solutions and get them ready for e-commerce...This is where APAC needs to go," he said.

Companies such as Inforia, which has developed a Chinese browser and a local version of ICQ, and Migosoft, which makes photo and imaging software for the Net, are also generating a buzz.

Taiwanese software may seem distant for the U.S. market, but, as nearly everyone at the Computex trade show points out here, U.S. manufacturers rely on companies in Taiwan to design products. What gets created here serves often as the basis for domestic goods.

System-on-a-chip
For silicon providers, integration is the future. Semiconductor technology is proceeding at such a rate that many of the internal components will be merged into one. NEC is working on a "system-on-a-board" chip that will contain a processor, memory, a digital signal processor, and more through 11 million transistors, said Tadahiro Sekimoto, senior member of the board of NEC.

"The fusion of computers and communications is a fact of life," he said. The megachip he spoke of will go into TV set-top boxes.

Through this process, manufacturers will be able to "create a supercomputer in a watch," by 2005, Halla said. A single fabrication facility will be able to produce all of the world's demand for Pentium-class chips by then, he added.

Convenience and communication provide a different course, Halla noted. National, among others, is following a strategy where the company will develop a basic processor core and then integrate components depending on the application. A chip for a corporate machine, for instance, will contain integrated networking. A chip for consumer devices will emphasize video.

"The difference will come about on the products that produce the best experience on the Web," he said. Booming cell phone usage won't hurt either, he added.

How it all will play out, however, is anyone's guess. "There are going to be appliances in the middle that I can't forecast the role that they will play," Davies said. "I can see the cell phone, and I can see the PC, and some access devices, but I can't pick winners and losers."

Kevin Chen, a reporter with Tricast, contributed to this story from Taiwan. Tricast is a licensee of CNET.