Goodbye PCs, Hello Appliances?

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Event Summary

February 7, 2000 [Reuters] - The U.S. market for Internet appliances is entering a period of rapid takeoff, and the new devices are expected to surpass consumer personal computer shipments in 2002, a leading technology market research firm said.

Internet appliances are easy-to-use, lower cost devices designed solely for accessing the Internet. They do not typically have hard disk drives or some of the functions of more costly but harder to use personal computers.

As an even broader group of companies seek to address the "Post-PC" era with these new devices, market research firm International Data Corp. (IDC) said it expected the worldwide market for information appliances to exceed 89 million units, or $17.8 billion in 2004 vs. 11 million units and $2.4 billion in 1999.

In general, appliances are low-cost and generally are priced under $500, depending on the type of device and ideally, they cost way under $500, IDC said.

According to IDC, it includes the shipments of Internet gaming consoles (such as the Sega Enterprises Ltd.'s Dreamcast), Internet accessible TVs (like Microsoft Corp.'s WebTV Networks), Internet smart handheld devices (such as 3Com Corp.'s Palm VII), Web terminals, e-mail terminals and screenphones.

As these and other new devices arrive in the next few years, the Framingham, Mass.-based IDC predicted that U.S. unit shipments of appliances would outnumber those of consumer PCs by 2002.

U.S. consumer information appliances are forecast to reach over 25 million units in 2002, while PCs are expected to hit about 23 million units in the United States.

Two groups of users

"There will be two ways it will evolve," said Kevin Hause, an analyst with IDC and one of the authors of a new IDC report on the Internet appliance market. "One group will be people who don't have PCs and who are intimidated or for whatever reason, don't want a PC. This is where many companies are targeting today, i.e., 'Let's get this for our grandparents, who don't have a PC but want to get on the Web.'"

The other group, Hause said, is currently techno-savvy individuals, who already have a PC in their home, but would like to have Internet access in their kitchen for recipes, or in other parts of the house for many uses. He said these customers might pay a few extra dollars a month, in addition to their current monthly Internet service charge, to have an appliance in another room.

Market Impact

First, we want to get some terminology straight: we're not talking about Dreamcast and WebTV. We're talking about appliances that may have a business use, but need not be used exclusively for business purposes.

This prediction is a continuation of the shift from PC-centric computing to Web-centric computing, especially for the home market. Even with the proliferation of PCs in recent years, a large percentage of households still do not have one, leaving a large home population "Web-free". Continued growth of a consumer-focused Web economy will require tapping into this market, so we expect this field to get more crowded in the next year.

Microsoft is presently losing the battle for the palmtop (with Palm OS holding approximately 80% of that market). We expect them to make a big push into the appliance space through the "MSN Web Companion", which runs the Windows CE OS. Web Companions are presently not expected to appear until August, 2000, so non-WinCE appliances will need to ratchet up their sales in the meantime.

Customers may also get tired of the "pre-announce" tactic, popularized by IBM years ago, and adopted by MS. ["Pre-announce" is usually applied as follows: Company A ships a new/innovative/different product. Company B, a market leader in many areas, announces that they will have their own, better version of Company A's product "real soon now". Consumers, not wanting to buck the market leader, wait however many months/years for Company B to ship their product, while Company A's once-promising product languishes.]

In the short term, there will be market/vendor proliferation, until the marketplace figures out which segments make sense.

The appliance market has already started to heat up, and will continue to do so over the next two years. How long this continues depends on two factors: initial market penetration and technological advancement. We expect relatively slow growth over the next six-nine months. Once the MSN Web Companion becomes available, we expect increased growth, but not as great as Microsoft would like. The technological advancement component refers to whether functionality is increased and price is decreased sufficiently to entice a new class of user. It's obvious that this (functionality up, prices down) will happen, it's just a question of to what extent and how soon.

User Recommendations

As with similar previous events, this announcement is of more interest to the home user than to the corporate/business user. Corporate users will have limited present use for appliances of this nature. We can envision a day when handheld (i.e. cell phone size) appliances will have greater ubiquity. We do not believe the "inflection point" (similar to when CDs finally passed vinyl LPs) is here yet, but see it coming within three years (70% probability). We think it unlikely that this market will grow 50% per year, though.

Those corporate users willing to try this "new" technology should evaluate their needs against the functionality provided. For example, users committed to the Application Service Provider (ASP) model will have far more interest than those corporations whose employees are primarily "power" users, i.e. applications reside on the user's desktop for performance reasons. Power users will have little interest in appliances, because they already have what they need to perform their jobs and surf the 'Net.

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