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Net devices face challenge from free PC wave

With the advent of the subsidized PC, makers of TV set-top boxes and other Net appliances are being deprived of one of their chief messages.

The recent spate of "free" or subsidized PCs are a hit with customers and another headache for the nascent "Internet appliance" industry.

With the advent of the subsidized PC, in which consumers get free or discounted computers when they sign multiyear Internet access contracts, makers of TV set-top boxes and other Net appliances are being deprived of one of their chief messages: Namely, that their devices constitute a cheaper way for most consumers to jump online.

"It definitely hurts their proposition, but it doesn't destroy it," said James Staten, an analyst with Dataquest, who predicted that the free PC movement would impact future Net device sales.

Net device makers, of course, can point to a number of potential advantages their new products have over standard PCs. TV set-top devices remain much simpler to use and don't require a lengthy boot-up sequence. Internet service via set-top satellite boxes can also significantly speed up Web surfing and provide viewing and multimedia experiences ordinary PCs can't.

These devices, say proponents, complement, rather than compete, with desktop PCs. And who says Net device makers can't cut deals with Internet service providers, just like the PC makers?

Still, the growing subsidized PC movement has reduced the economic advantages and will force these companies to innovate, cut costs, and rethink some of their more ornate hardware dreams.

"It certainly changes the market for the $700 screen phone," added Sean Kaldor, a consumer electronics expert from IDC.

A recurring nightmare
In many ways, PCs have become a recurring bad dream for Net device advocates. Every time, it seems, that devices appear ready to gain currency as simple and inexpensive alternatives to the lumbering desktop computer, PC prices decline and neutralize the debate.

In 1995, Larry Ellison and other high-level executives began to promote the Network Computer, or NC, as the cheaper and easier-to-manage successor to the traditional desktop. Just as NCs appeared to be headed for production in 1997, the sub-$1,000 PC took off.

Consumers were the initial customers for cheap PCs, but price erosion later headed for the business market. Although price parity wasn't the only problem, NCs flopped in both consumer and business markets.

One indication of the uphill battle Net device makers face is the relative paucity of venture capital going into device start-ups. "There are not a lot of people making the venture leap of faith into the device market," said Steve Jurvetson, managing director of venture capital at Draper Fisher Jurvetson. "It hasn't been a great category."

Intelligent TV set-top boxes can in some degree be considered the logical successors to network computers. In fact, one of the leading set-top software providers, Liberate Technologies, is the old Network Computer, the prime NC advocate.

On a purely dollars-and-sense basis, PC backers have already closed the gap with Net devices. For instance, under a subsidized deal from Circuit City, consumers pay zero, after rebates, for select Emachines PCs as long as they agree to sign up for three years of Internet service for $21.95 a month. For $100, customers can get a printer and a monitor.

By contrast, WebTV boxes, which cannot perform the same panoply of computing functions as a PC, range from $99 to $199, while standard ISP service ranges from $19.95 to $24.95 a month. After three years, the full PC in the Circuit City deal, with monitor and printer, costs $207 less.

Cost, however, is not the only consideration. Set-tops, Kaldor notes, are much easier to use than PCs and can be turned on rapidly.

"The low-cost PC market does eat into the value proposition of the information appliance market, but for a host of reasons, it shouldn't be significant," he said. "Did the Yugo eat into the motorcycle market?"

High-speed Internet connections will also serve to enhance the set-top experience. Satellite delivery costs more than standard ISP service, but it can deliver Web content at a faster rate to homes. Another benefit: Consumers can improvise their own "interactive TV" experiences, because they can switch from TV programming to Internet viewing fairly rapidly.

A number of companies, including WebTV, are in the process of rolling out such services, which will also include "digital VCR" capabilities that will allow users to record and store movies.

Convergence or distinct markets?
Paul Liao, Panasonic's chief technology officer and president of Panasonic Technology, said that ultimately, the market for PCs and TV-centric entertainment devices like set-top converters or game consoles will not converge or impinge much on each other, even though both are increasingly intertwined through common technology such as hard disk drives and Internet connections.

"I don't think you're seeing a convergence of the markets. The market represented by the family room is not merging with the market of the office and home office. Nobody really wants to run an Excel spreadsheet on their TV," Liao said. Likewise, nobody talks about watching a PC, he said.

But costs and technology remain an issue for these fancier access services, said Staten. To get Internet via satellites, consumers have to buy a dish, and the monthly service package costs more. Satellite providers also have yet to work out all of the kinks in their technology, which can hamper or limit Internet use. Cable service remains subject to geography.

There is also the multiple-access issue. A number of families already have PCs hooked to the Internet. Are they really going to want to invest in a second device and subscribe to additional monthly services? Likewise, will new users be drawn to PCs, which are promoted as business tools and education aids, or a box designed largely for entertainment? WebTV, for instance, currently only has around 800,000 subscribers, Kaldor points out.

In the face of PC popularity, Net devices increasingly may have to become home servers, predicted Staten, a device that can also provide Internet connections to other appliances or link up various machines.