Web devices arrive but read the fine print

Scott Hillis

SEATTLE: Want to get on the Internet but the big, bad computers make you
nervous?

A growing collection of devices - variously dubbed "pads,"
"appliances," "companions" and one even named
"Audrey" - may be a low-cost ride to the information superhighway.

But just as that base model subcompact car will get you where you want to go
without power windows, leather seats and air conditioning, don't expect these
machines to give you more than basic Web surfing and e-mail.

The so-called Internet appliances have been in the market for more than a
year, but most were made by start-up firms with little financial or branding
clout to make it big.

Now heavyweights such as top PC maker Compaq Computer Corp. and Internet
services giant America Online Inc. are jumping in the ring.

Backed by some of the deepest pockets in the industry and popping up in
thousands of retail stores across the country, these devices are ready for prime
time, manufacturers say.

Analysts, however, are more cautious, noting that customers are either
reluctant to shell out $500 for a dumbed-down computer, or feel restricted by
the typical 3-year contract with an Internet service provider, or ISP, that
subsidizes the devices to keep the up-front cost down.

"It's still really, really, really early for this market and this
industry is really struggling with the business model to make this work right
now," said P J McNealy, an analyst with the Gartner Group, a technology
consultant.

Like their name implies, Internet appliances are nothing fancy - basically a
computer stripped down to just a chip, a screen and a modem for connecting to
the Internet.

The devices are supposed to free users of the hassle of a PC. That means no
long start-up times. No messy upgrades. No crashes.

But right now, that can also mean no way to choose your ISP - your gateway to
the Internet - and no way to install other software like financial planners or
games.

Several devices will be on store shelves in time for the holiday shopping
season, but analysts said it will be another two to three years for the products
to win wide acceptance.

"These guys have to place stakes in the ground in order to declare their
leadership positions and develop partnerships to guarantee their success,"
said Tim Bajarin, an analyst with Creative Strategies.

Continued...

Take software giant Microsoft Corp., a company rivals love to bash as
hopelessly behind the curve on major trends, but which has gotten a head start
in this market.

Teaming up with Compaq, Microsoft beat major rivals to the punch in August
with the MSN Companion, declaring that such machines are a big slice of the
post-PC pie.

"Category creation takes a lot of expenditure and investment but once
you get over that hump the payoff is good," Yusuf Mehdi, vice president of
Microsoft's MSN division, said.

"The upside is huge. This easily could be tens of millions of units as
it scales up and you get beyond the novice users," Mehdi said in a recent
interview.

"There is a large majority of people who don't buy PCs today. For
Microsoft, this is a great way to get people on the Web and closer to
technology," Mehdi said.

Compaq is making two devices with Microsoft - one with a flat-panel display
and one with a regular monitor that is bulkier but cheaper. Budget PC maker
eMachines Inc. makes the third device in Microsoft's line-up.

Microsoft is offering the machines with enough rebates to make them free or
nearly free - if the customer agrees to use its MSN Internet service for three
years.

Of course, Microsoft competitors aren't standing still. AOL and Gateway Inc.
are to start selling their "Touch Pad" on Dec. 1, saying it will be
more "plug and play" than anything before it.

3Com Corp., drawing on its experience in fueling the handheld computing boom
with Palm devices, has unveiled "Audrey" - a $499 tabletop device
targeting women and families. 3Com is trying a different business model, hoping
that buyers will pay more for the freedom to choose their ISP.

In the end, analysts say companies like Microsoft and AOL may be forced to
let people switch services, because research shows that users actually don't
change that much anyway. That still makes it worth subsidizing the machines.

"People will stay with the path of least resistance," McNealy said.

Microsoft's Mehdi agreed it will take time to win converts, saying,
"This is really a new category. Consumers don't know how to think about
these devices."

Analysts also said the big market isn't in getting grandma online.

"It's a matter of the big players figuring out that their market is the
Internet PC household that understands the value proposition of having a second
device without having to buy a second PC," McNealy said.

Microsoft, for its part, says it is already looking ahead to that.

"The first generation targeted those who are not on the Web, or seniors,
or people who liked WebTV," Mehdi said. "The next generation will sort
of expand on that, trending more toward the advanced user with multiple devices
in the home."

(C) Reuters Limited 2000.