In the past week, the Austin, Texas-based firm has gone from charging $99 to nearly $400 for the I-opener, an all-in-one Internet access device that combines an Internet terminal, keyboard, built-in mouse and 10-inch liquid crystal display (LCD).
Netpliance president Kent Savage said the $99 price was always designed as a promotional tool. He said company research shows people are willing to pay between $299 and $499 for a Web appliance.
However, analysts are questioning whether minor upgrades to the Netpliance unit--which include improved chat capability and the ability to have up to four email accounts--justify a price comparable to a low-end PC.
"That's not a compelling offer versus the original," said Envisioneering Group's Richard Doherty, who credits Netpliance for showing there is a market for low-end Web-surfing appliances that don't connect to a television.
Along with the iChime direct messaging service and added email accounts, the Netpliance 2001 membership kit, as the new offering is dubbed, adds a gathering place for sharing photos and other activities, access to stock portfolios, and a community center where people can gather with other I-opener customers.
The price hike makes the I-opener costlier than many of the cheapest Internet appliances, including Microsoft's WebTV, which often sells for $99 in its most basic configuration.
At the same time, the appliance market is becoming more crowded.
Last month, Intel unveiled its Dot.Station, a Linux-based Internet appliance. Low-cost PC maker Emachines, among others, plans to sell an MSN Web Companion, a countertop appliance built around Microsoft's online service, staring this fall. Doherty said other consumer electronics firms will enter the market later this year.
Many of these other devices cost about the same, and sometimes more, to manufacture, but the retail price is kept artificially low through subsidies provided by the monthly service fees.
Microsoft, for example, subsidizes the cost of WebTV boxes. ISPs selling the Dot.Station are expected to subsidize the hardware costs. Similarly, CompuServe, among other ISPs, has offered consumers a $400 rebate on new computers when they agree to a three-year subscription.
By contrast, Netpliance has no subsidy plans at the moment. The company charges $21.95 a month for Internet access but does not require consumers to subscribe for any specified time period. The I-opener will not work with other Internet service providers, however, making a subscription effectively mandatory.
Soon after the I-opener was released, hackers found a way to add a hard drive to the machine, turning it into a fully functional PC. Savage said the hacker issue had nothing to do with the price hike.
Savage acknowledged that the company could see a slowdown in sales for the third quarter under the new pricing.
"Simply for seasonality reasons, and at same time with the price increase, we'll see some tapering of the actual demand," Savage said. "That will be offset very quickly with the holiday buying season."
Savage said the company plans to boost its marketing efforts in September and also plans to launch an iPal referral service in which members can earn free months of Internet service, trips and other prizes for recruiting people to the I-opener service.
The new pricing comes amid what Savage described as very strong demand for Netpliance devices. Savage would not say exactly how many subscribers the company has gained since the end of the first quarter, when it counted 20,000, but indicated the subscription rate continues to be strong.
"We continued to be in awe at the market demand," Savage said.
Netpliance shares have tumbled since the company's public offering in March. Shares closed today at $7.25, down nearly 16 percent for the day and off nearly 60 percent from their initial offering price of $18 a share.
But Savage shrugged off the role of the hackers and concerns that the higher price will make it difficult for Netpliance to compete. Savage said Netpliance has the best experience for new Internet users, as well as the advantage of being first to market.
"We've had the luxury and the challenge to define the category," Savage said. "The market came after us. The big challenge we've had is trying to keep up with demand."