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Internet appliance boom hampered by high display costs

The cost of display screens, among other components, is keeping the price of Web pads and other next-generation Internet devices relatively high.

TAIPEI, Taiwan--What's holding up the Internet appliance market proponents say will revolutionize computing as we know it? Glass.

The high price of display screens, among other components, is keeping the price of home terminals, Web pads and other next-generation Internet access devices relatively high, makers here said. As a result, these products carry price tags that are roughly equivalent to--or higher than--low-priced PCs, putting device manufacturers at a competitive disadvantage.

The cost dilemma is an oft-repeated refrain among manufacturers. On one hand, device makers have strong motives to create a market for new appliances. Designed to be easier to use than PCs, appliances can potentially attract new users to the Internet.

Also, while such non-PC devices are just catching on with consumers, analysts predict a rosy future for device makers. 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 Corp. The market will grow from revenue of $2.4 billion last year to $17.8 billion in 2004, IDC predicts.

Many devices also use the Linux operating system rather than Microsoft Windows, which means hardware makers or Internet service providers can ink deals to sell screen space for advertisements and other promotions. Linux is an open-source operating system that can be freely modified by manufacturers. Microsoft tightly restricts any modification of its operating system by manufacturers.

On the other hand, consumers expect appliances to be both cheap and stylish--and it's hard to achieve both. A 10-inch screen, for instance, costs manufacturers about $250, according to a number of product managers interviewed here. A 13-inch TFT flat panel, those ultra-thin panels found on notebooks, costs $500.

"Many people say what they want is a flat panel," said Albert Shen, vice president at Advanced Scientific Corporation (ASCO), a contract manufacturer and design firm in Taipei. "It makes a difference" in the overall price.

The Aqua Web Pad from First International Computer is one of the more heavily touted products at Computex, a trade show taking place here. The Aqua, which should be ready for volume production by November, comes with a Transmeta Crusoe processor, a Linux OS and a Sony Memory Stick port, said Julia Kuo, a project manager for the company. The 1.5-pound device will connect directly to the Internet through a wireless modem.

The Aqua will also come with a 7-inch screen that costs manufacturers approximately $150, she said. This leaves Aqua with a target retail price of $599, more than a full-fledged budget PC. A version with a thinner 8.2-inch TFT screen will go for $699.

The Aqua, although sleek and portable, also doesn't contain a hard drive.

Even devices that use more standard monitor technology are only able to show limited cost savings. Proview, among others, is developing all-in-one countertop appliances that combine a regular CRT monitor, a version of Linux and a National Semiconductor processor into one package. These machines will sell for around $299 without a hard drive. Versions with a hard drive and more robust features go for $499.

Some device makers stressed that much of the cost of manufacturing will be absorbed by ISPs, which likely will subsidize hardware costs through service fees. Historically, hardware manufacturers couldn't do this, although nearly all PC makers now combine with ISPs on subsidy deals.

"The channel is totally different. We will provide it to the ISPs," said a representative of one manufacturer.

Still, work remains. James Lin, with the sales and marketing division of Quanta Computer, said most of the product development work is done. Major computer makers, however, are still working out the details on how to market them.

"The question is when to launch the product," Lin said.

Like FIC, Quanta is working on a Transmeta-based Web pad. The company manufacturers notebooks for Gateway and is involved in that company's efforts to bring out a Transmeta pad in early 2001.

PC makers, too, are affected by screen prices. It's possible that notebook manufacturers could come out with $899 notebooks this year, said Wen Chi Chen, CEO of chip maker Via Technologies, but "it depends on the glass."