The Austin, Texas-based Internet appliance company, which sells the inexpensive "I-opener," said it now requires customers to sign up for at least 90 days of Internet service at $21.95 a month. Customers can return the unit within 30 days if dissatisfied but otherwise face a $499 cancellation fee if they drop service within the 90-day period.
Customers who paid for their I-openers, which sell for $99, before March 31 are not subject to the new terms, said Munira Fareed, director of marketing at Netpliance. Those who ordered before the policy came into effect but had not yet paid have the option of canceling their orders.
Nonetheless, the relatively innocuous-looking policy change has spawned complaints among would-be consumers. It also illuminates the conflicts between a sometimes absolutist view of consumers' rights among hard-core technology consumers and a start-up company's need to make money.
The situation has turned into a consumer relations fiasco. Several customers have posted messages to the Internet and have sent letters to news agencies to complain about what they consider high-handed treatment. The company's stock has remained largely flat since its IPO.
The controversy emerges because of the nuances in Netpliance's business model and technology. Like nearly all other device companies, Netpliance expects to earn its profits from service rather than hardware. Analysts estimate that the company's $99 device actually costs approximately $300 to make. The company expects to make up the difference with profits from the $21.95 it charges for Internet access.
Netpliance did not initially require consumers to sign long-term service contracts, however. Instead, it engineered the I-opener so consumers would have to subscribe to the company's Internet service provider.
But Las Vegas slot machine mechanic Ken Segler threw a wrench into the plans. Segler figured out how to graft a hard drive onto the I-opener and transform the box into a cheap Linux-based PC that could be used in conjunction with any ISP account. Customers flocked to Netpliance's Web site and to Circuit City stores, according to sources.
The company quickly re-engineered the box to prevent Segler's hack. The mandatory 90-day subscription is a way to ensure a more solid revenue stream, Fareed said.
"We really felt that we needed to make a change to our business model," she said.
Potential customers see it differently. Consumers subject to the new terms are sending angry emails riddled with complaints. Some of them have also forwarded an internal email from Netpliance that discusses "suspect hacker customers."
"To me, this is serious misrepresentation," customer Michael Griego wrote on his I-opener-Linux Web site.
In the past, e-commerce customers have complained about online deals that are canceled before all orders are filled.
Fareed acknowledged the existence of the complaints but said Netpliance acted reasonably. As a common policy, PC companies are offering $400 rebates but only if customers sign up for three years of Internet service.
"Obviously it was an unpopular decision for people who wanted to use the hack to use the I-opener as a computer," she said.
Netpliance's hardware modifications have created something of a gray market for the original I-opener. eBay had three listings for "hackable" I-openers, with bidding up to $255.
News.com's David Becker contributed to this report.