Gateway letting go of appliance dreams

\ As part of its renewed focus on maximizing PC sales, Gateway is rethinking its role in the nascent market for Internet appliances.

Although the San Diego-based company will continue selling its two existing appliances, it is taking a second look at plans for future products, such as a wireless Web-surfing tablet slated for mid-2001. Gateway currently sells a digital music player and the Touch Pad, a Web-surfing appliance tied to Internet service from America Online.

"We still see a role for Internet appliances, but we think the immediate opportunity relates more in PC-to-PC networking," Gateway spokesman Brad Williams said Monday. Gateway's two current products "are allowing us to keep a hand in the Internet appliance space, and they're selling...But we really think that, for the time being at least, the center of the digital universe is going to remain the PC."

Meanwhile, Gateway has temporarily shaved $100 off the Touch Pad, selling it at $499 for the past four weeks.

Gateway's rethinking of its appliance strategy arises from a lack of widespread high-speed Internet access and a lack of consensus among consumers about what they want from Internet devices, he said.

And at a meeting last week with financial analysts, Bart Brown, the head of Gateway's consumer business, said that most standalone Internet appliances are overpriced and underpowered.

"Their value is, frankly, questionable," Brown said.

With Gateway's new focus, the company is reevaluating its plans for the Web tablet. "We're taking a look at that product specifically," Williams said. "We haven't made any decision."

Gartner analyst Brian Riggs says the largest impediment to the widespread adoption of Web appliances in the home is consumers' lack of awareness of them as a class of products. see commentary

Last year, Gateway announced plans to come out with the Web tablet, which looks somewhat like an Etch A Sketch. Taiwan's Quanta, sources said, would serve as Gateway's contact manufacturer. AOL would offer Internet access for it. Transmeta would provide a Crusoe processor.

To date, Gateway is the largest U.S. manufacturer to adopt Crusoe, which is already in its Touch Pad.

Other internal challenges
The shift away from appliances comes amid a major shake-up, as founder Ted Waitt returned to the company as CEO in late January after Gateway experienced sluggish sales and laid off 3,000 workers.

IDC analyst Bryan Ma said Gateway faces the same challenge as others in bringing out a portable Web tablet, namely that such units typically cost more to manufacture than a cheap PC.

"That makes it challenging to bring to a consumer," Ma said.

In general, Ma said, it is difficult to sell Internet appliances whose main ability is to surf the Web and get e-mail.

"The PC does a great job of Web surfing already," Ma said.

He added that other companies may find they just don't have the stomach to stay in the Internet appliance market.

"I certainly wouldn't be surprised to see either other companies exiting the business or divisions within large companies exiting the business," he said.

A number of corporate giants have come out with a variety of Web-surfing devices. Compaq Computer and Emachines offer products tied to Microsoft's MSN Internet service. 3Com launched the Audrey in October. And Sony has announced its own Net appliance, the eVilla, which is due out in April.

Redefining the connected home?
Gateway was one of the first PC giants to come out with a full-fledged appliance strategy. Unlike the companies trying to reach households that don't own PCs, Gateway designed its products as complementary to the PC, such as the Touch Pad that debuted in November.

When it launched the Touch Pad, Gateway and partners Broadcom and AOL touted the device as part of a connected home that would feature a number of networked digital devices. Gateway executives, some of whom departed in the recent management shake-up, posited that the company would even market its own brand of speakers and telephone equipment.

For its part, Compaq said its two MSN Companions have lived up to expectations.

"They're meeting our sales projections," a representative said, although the company would not say how many of the machines it has sold.

Netpliance, an early pioneer with its I-opener Web-browsing appliance, said in November that it would stop selling the device itself amid investor reluctance to keep funding a business model that sold the units below cost. The company has since sold its subscriber base to EarthLink.

Ma said many companies are meeting their sales expectations, although they're falling short of the hype that had become associated with the new product category. Two years ago, IDC forecast that sales of Web-browsing appliances, which it calls Web terminals, would reach 200,000 in 2000.

"We're a little short, but we're in that range," Ma said of preliminary results for last year.

He added that many people wrongly interpreted reports that the broad category of Internet devices would out-ship PCs by 2002 to mean that sales of Web-browsing devices would explode. Instead, Ma said, most of those appliances will be game consoles, handheld computers and set-top boxes--not PC replacement devices such as the I-opener.

"That's where people were disappointed," Ma said.