It Slices, Dices, Blends — and Surfs - Industry Trend or Event

Industry Standard, The, Sept 4, 2000 by Dominic Gates

Web appliances, designed for seniors and women, look for a place on kitchen shelves.

NOW APPEARING ON DEPARTMENT-store shelves, between the blenders and the microwaves, is a new class of device known as Web appliances. They range from clunky, Jetsons-esque machines to cool, futuristic tablets. One, designed for the kitchen, combines a TV, Web browser, DVD player and baby monitor, so that parents can cook, Net-surf, watch movies and keep an ear for Junior at the same time. The variety of these new devices is testament both to human ingenuity and to wishful thinking.

Web appliances are cheap, easy-to-use terminals that offer Net access with the flick of a switch. Designed to lure the technologically inexperienced online, they embody much of the promise and risk of the Net Economy.

After a successful IPO just before April's stock plunge, first-to-market Netpliance has accumulated losses to date of $168 million in a perilous bet that the demand for Web appliances will one day be huge. Selling for half the price of the Netpliance iOpener is the iPaq, cobranded by Microsoft and Compaq and hardwired to the MSN.com Web portal. Oracle's Larry Ellison has entered the fray, as well. AOL is on its way. And as-yet-unknowns crowd the margins.

Netpliance President and COO Kent Savage sums up the principles of the Web appliance market: "People don't want more. They want less on more enriching terms. The market for simplicity is infinitely deep."

But the entrance of companies like AOL and Microsoft, which can afford heavy upfront losses, may soon drain the pool for underfunded startups. The next 12 months will be crucial; Netpliance, thanks to its spring IPO, has the cash to survive. Others, like Seattle-based ePods, are tottering on the edge. Before the "market for simplicity" has proved itself, a shakeout looms.

Research firm IDC projects shipments of only 1.5 million units worldwide by 2002. It remains to be seen how many Web-appliance companies that will support.

Savage cofounded the Austin, Texas-based Netpliance in 1998 along with John McHale, now the CEO. Both are veterans of broadband startup NetSpeed, which McHale sold to Cisco in 1998 for $236 million in stock. In 1995, McHale had sold his previous company, NetWorth, to Compaq for $372 million in cash.

The Netpliance iOpener has a sleek, swiveling, flat-panel liquid-crystal display screen with built-in speakers. Plug it into a power outlet and a telephone jack, and the iOpener's ready to go. That's all there is to it.

Savage says 44,000 iOpener users have signed up for the $22-per-month access service. For those subscribers -- "50-year-olds and above and the female community are our two predominant markets," Savage notes -- the iOpener provides a built-in portal and a row of one-touch keys for access to different information areas. The walled-garden feel of the community would frustrate a more savvy Web surfer, but Savage says Netpliance customers are happy to have information organized.

"We're doing some hand-holding," says Savage. "They like to be serviced."

Although the iOpener's price was recently doubled to $399, Netpliance takes a loss on every device sold. To build revenue, Savage plans to make Netpliance "the first ASP [application service provider] to the home," selling subscribers access to extra software services and Internet apps. Its stock has dropped from a high of $22 to less than $6, but Netpliance still has $130 million in the bank. Rival startups that didn't make it to the public markets have hit a funding wall. EPods, which offers Internet access on an elegant tablet-style appliance with a touch-screen, laid off 24 employees in June and 50 more in early August. About two dozen employees remain.

"In the middle of our fundraising is when the market headed downward," says ePods' CEO, 23-year-old Shae Hong. "Plus, nothing's been proven in our space. A lot of VCs are uncertain about it."

Hong aims to save the company by outsourcing much of the work. Money dried up just as his product, the ePodsOne, was due to ship to stores, priced at $199, plus a $25-per-month access fee. Two weeks after the layoffs, it went on sale in the kitchen appliance department of Bon Marche stores in Seattle.

Distribution through department stores, rather than the typical Netpliance outlets such as Circuit City and CompUSA, was secured through an unlikely partner: Mount Prospect, Ill.-based Salton. Known for its range of kitchen gadgets, including the Juiceman juicer, Breadman breadmaker and George Foreman Grilling Machine, Salton invested an early $2 million in ePods and has exclusive distribution rights in North America.

Salton also backs a different Seattle Web-appliance company, CMi Worldwide. CMi was started by the inventors and marketers of the Juiceman and Breadman. CEO Bob Lamson and CTO Bob Harrison founded the company to create and sell a "convergence device" that would switch at the touch of a button from a TV to a DVD player to an Internet appliance to a baby or security monitor.