The company appeared to be unfazed earlier this week when Las Vegas slot machine mechanic Ken Segler revealed that the company's i-opener Internet appliance could easily be modified to function as a Linux-based PC. But in a tersely worded statement today, the company said it has reconfigured the i-opener to prevent unauthorized upgrades.
Netpliance sells the i-opener, which is designed to offer simplified Web access and email, for $99, plus $21 for monthly service. The cost of manufacturing is closer to $300 or $400, but the company plans to recoup the deficit with the ongoing service revenue.
Segler's discovery, which involved outfitting the device with a hard drive loaded with the Linux OS, presented a problem for the company's business plan, as buyers wouldn't necessarily have to subscribe to the service to find a use for the i-opener.
Although Netpliance shares sunk as word of the hardware hack spread, the company initially expressed interest in harnessing the creativity of people like Segler and the Linux development community to enhance the i-opener. It gave no indication of plans to block the unauthorized modifications.
Netpliance declined today to elaborate on the nature of the new hardware fix, but the alterations likely involve blocking the method engineers were using to add a hard drive to the device.
For its part, Netpliance says its stance on the situation hasn't changed. Although the company still says it wants to work with outside engineers and developers, it needs to do so in an organized manner, which makes the hardware change necessary.
Netpliance said that it does not endorse the hardware reconfiguration. "We want to protect our customers," said Munira Fareed, a spokeswoman for the company. "At the same time, let's figure out an organized fashion, so that when developers come to us we give them all the info they need instead of making them have to go through the backdoor."
Towards that end, Netpliance has added a "Developer's Corner" to its Web site and is considering instituting some type of formal developer support program. "We certainly don't want to resist any kind of innovation, but we think the best way to leverage this is to develop a program where we become the authoritative resource for developers."
Relatively few people have bought the device and opted out of the service, Fareed said. "The reality is that the vast majority of customers sign up for the service and never get off," she said, explaining that the technical labor involved in adding the necessary hardware to the box is way over the heads of most of Netpliance's target market. "It requires a whole bunch of things my mother will never be able to do."
After reports of the unauthorized hardware upgrades surfaced, Netpliance, which only went public last week, watched its shares sink quickly as investors questioned the impact of the news on the company's business model.
The company offered its shares at $18, raising $144 million in its IPO last week. The stock was as high as $26 on the opening day but closed at $18.13 today, up $2.19 from yesterday.
Investors feared the company would be taking a significant loss on each unit outfitted with the Linux upgrade, because users would not necessarily be paying for the monthly service. Further, there were reports the product had become scarce as news of the hack hit the Web.
The company said today it doesn't expect to be hurt financially by the situation.
"The company believes the reported unauthorized reconfiguration of the i-opener Internet appliance has not had a material impact on its operating results or general product availability," it said in the statement.