Emachines sees future in Net devices

The company, which reported a surprise profit this week, is working on two lines of inexpensive Internet appliances to be released next year. One will be a version of Microsoft's MSN Web Companion. Additionally, Emachines will release one or more devices based around America Online's online service, similar to models already announced by Gateway, according to CEO Stephen Dukker.

The low-cost PC maker reported earnings of $737,000, or 1 cent per share, for the first quarter. That compares with losses of $831,000, or 1 cent per share, for the same period last year. Analysts expected a loss of 5 cents per share this past quarter. Revenue came to $249.8 million, an 82 percent increase over revenues of $137.4 million.

The shift toward devices seems inevitable given the company's history. Emachines emerged in 1998 and quickly became a presence on retail shevles with computers that cost $399 and up. After rebates, some cost $1.

Many critics have viewed the company's long-term prospects with skepticism, especially as many other cheap or free PC companies, including Packard Bell and Microworkz, folded under increased competition for ever-decreasing profits.

But rather than scrape by on the margins of sub-$500 PCs, Emachines says it is looking to Internet service revenues and e-commerce deals to make up the bulk of its profits. Although no company has yet to really find commercial success with Internet appliances, these scaled-down hardware boxes might dovetail better with the company's strategy. Devices cost less to make than computers and would seem to appeal to Emachines' audience of first-time PC buyers.

"We're a hardware portal. Essentially what we're doing is taking the traditional services of a portal and building it into hardware," Dukker said. "(Internet appliances) are absolutely a natural extension."

Internet appliances, including TV set-top boxes, handheld computers and gaming consoles, are expected to grow from 11 million units shipped in 1999 to 89 million units in 2004, according to International Data. The market will grow from revenue of $2.4 billion last year to $17.8 billion in 2004.

America Online, which has equity stakes in both Gateway and Emachines, will power at least one of the devices, Dukker said. The Emachines appliances will be similar to those announced by Gateway, which include a Web tablet, a device resembling a desktop PC, and a counter-top appliance with wireless keyboard. The devices are expected to include popular AOL software like Instant Messenger.

Emachines is hedging its bets by developing an MSN Web companion, which was announced last year. Similar in concept to AOL's devices, the Web Companion will connect directly to Microsoft's MSN online service and feature only Microsoft software.

"We have a strategic relationship with AOL," Dukker said. "But it's clear that MSN and AOL are emerging as two major brands on the Internet. Our mission is to reach those users and we will partner with anyone, just as we sell through both Circuit City and Best Buy."

The company receives revenues for every company who pays for placement on the keyboards of Emachines computers, along with a cut from ISP contracts with AOL and CompuServe. Emachines recently broke into the top five PC makers, according to IDC, but Dukker says he expects that in future quarters almost half of all revenues will come from the Internet.

"We are anticipating that for this year over 40 percent of our income will come from the sale of advertising properties," he said.