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Information/Internet Appliances

Written By: R. Krause
Published On: March 28 2000


Market Overview

Information appliances (also called "PC appliances" and "Internet appliances") are the latest name for the type of computing similar to that pushed by Oracle CEO Larry Ellison a few years ago under the name of "Network Computer". Whatever you call it, this market is new and growing. In recent months, most of the large hardware vendors (Compaq, Dell, Gateway, IBM) have started to announce products or plans for products. In addition, COMDEX '99 highlighted a slew of new PC appliances, from Microsoft, Intel, AMD, IBM, and others.

This market has grown due to the desire to reduce the price of computing, primarily from a hardware viewpoint, but also with respect to desktop support. Hardware cost reductions are expected to come from lower equipment and maintenance prices, support cost reductions are expected to come from the centralization and standardization of application software available to the user/client. A subtext to this is an attempt by some vendors to move away from a Windows-centric computing model and loosen Microsoft's control of the desktop. Presently, the primary target buyer for these products is the business/corporate user looking to control cost at the desktop. The secondary target is the consumer market segment where budgets may be limited.

The market is immature and pricing is still largely undefined, but estimates run from $299 for a low-end model from Netpliance, up to more than $1600 for a fully loaded Dell WebPC with monitor. The sales cycle is still largely unknown, but we expect it will be equal to or shorter than that of a traditional desktop machine. The percentage of revenue derived from service will be smaller than for a traditional PC, since these products will be significantly less expensive than traditional desktop devices, as well as less complex and more "commoditized".

What do you get for your money? Presently, there is no single answer. Some have suggested that the information appliance market can be segmented into three groups: stripped-down PCs, Internet appliances, and thin clients. Although we understand the rationale, we hesitate including thin clients in this area, except as a comparison. In general, appliances include a CPU, operating system or browser (or both), memory, network card, keyboard/mouse, and sometimes a media device (CD, floppy, or hard drive) and (less often) I/O slots. However, as more storage and I/O capability is added, it becomes an anorexic PC, not an appliance. Appliances are generally small - a typical footprint is 6" wide and 10" deep.

What you generally do not get is a graphics card, more than one or two I/O slots (if at all) or more than two drives of any type (HDD/CD/DVD).

The present market size approximately $600 million [Source: IDC], but we expect it to grow beyond $5 billion by the end of 2002, a compound annual growth rate (CAGR) of more than 100%.

Expected Market Leaders

This is an emerging market, the "failed" Network Computer effort notwithstanding, with no clear leader yet. However, Compaq has already announced its Windows-based iPAQ Internet device, and Dell and Gateway are expected to ship Windows-free devices in early 2000. These companies will have a head start on the rest of the field. In addition, if Gateway leverages its relationship with AOL and its tremendous network, it will gain instant market share - as long as it ships a product within six to nine months.

Compaq: As mentioned above, Compaq had a head start on the most of the rest of the field, as the business-focused iPAQ started shipping in mid-January, 2000. Since Compaq has recently lost PC market share, this move should help it regain market share, as well as restore lost sales revenue. The unit's small footprint (6.4" by 10.5") means a customer can keep it on the desktop, away from dust and within easy reach, and its "MultiBay" hot pluggability and compatibility with its counterpart in the Armada notebook line should allow easy transport of data between the notebook and appliance. Compaq is also focusing on "deployment speed" (how quickly a customer can be up and productive) and extended product life (up to a year vs. the typical 90 days for a Celeron CPU), although we do not necessarily see the one-year timeframe as being a "killer" benefit.

On the negative side: Compaq announced this product as an Internet Device, but this appears to be just a stripped-down PC. For example, the base model ($499) has a 4.3GB hard drive, the system can take up to 256 MB of SDRAM, and it runs on an Intel Celeron with an Intel 810e chipset. Compaq's use of the term "legacy-free" is limited to: no PCI/ISA slots, and USB for the keyboard/mouse. Although it is small and low cost, those two factors alone are insufficient to make this an appliance.

Dell: Dell has recently started shipping its "WebPC", marking its consumer-oriented entry into this market. Dell's traditional strength, delivering low-cost product of above-average quality, will give it a built-in advantage. The original base price of $999 was high enough to make this product fall into the realm of "stripped-down PCs", rather than Network-Computer-like appliances. However, Dell has now reduced that to $699 (including monitor), making it now competitive with Compaq's iPAQ vis--vis price and functionality. We still viewed it as a re-packaged PC, though.

Gateway: Gateway presently has the #4 PC market share position, but focuses more on the consumer market than the corporate market. However, its recent alliance with America Online (AOL) should provide it with access to the largest ISP in America. It will be up to Gateway to provide the low-cost hardware for the appliance. One area of weakness: Gateway's servers (gained from their acquisition of ALR) are not considered serious market share contenders in corporate America.

IBM: IBM's thin client Network Stations have been around for some time, but IBM is also developing an appliance under the EoN codename. The Network Station series has good features and emphasizes network/communications and versatility, with a minimal focus on storage media. However, the price structure is high, with the Network Station costing approximately $999. As mentioned earlier, IBM is expected to release a new appliance early in 2000, but neither features nor pricing are available at this time.

Netpliance: Currently, Netpliance's consumer-oriented "I-Opener" is one of the few true Internet appliances. It does nothing but connect to the Internet - no Windows applications, or anything else. If all you want is Internet access, this will do it for $99/$199[See Note] plus a dial-up fee ($21.95-$26.95 per month). It has additional limitations, such as dial-up being the only access method. For the consumer (i.e., home user) only wanting to surf the 'Net, this may be enough, and the price is extremely attractive. However, we feel this is not a viable long-term strategy, and expect that Netpliance will enjoy about 12-18 months of independence before losing market share to one of the big players, or getting bought.

[Note: Netpliance recently changed the price from $199 to $299 to $99 (special deal through 6/20/00) then back to $199. Netpliance has found that demand for the I-Opener is "not inelastic", which in English means that which means that the market was willing to pay $199, but not $299, for the I-Opener's functionality.] .

Market Challengers

Oracle/Liberate/NIC: Although Oracle/Liberate was an early, vocal proponent of this general computing style, we believe they will be at a market disadvantage. Liberate was among the first players (under the name Network Computing, Inc.), but its $1 Million in revenues in 1998 are still minimal. In addition, although Larry Ellison has been very vocal about the NC, there is no hardware product from Liberate other than the TV-top unit, which is more like a cable TV unit than a PC/NC.

Recently, Oracle has "spun off" the New Internet Company, with its ostensible purpose to develop and ship an Internet appliance. Finally, we believe Ellison's focus (sometimes characterized as an obsession in print media) on beating Microsoft and its CEO Bill Gates, will distract Oracle from focusing on the job at hand. [Note that although Liberate is in fact a separate company from Oracle, its genesis is from Oracle, and Ellison is on Liberate's board of directors.]

Hewlett-Packard: Hewlett-Packard had announced their Entria line of thin clients. However, the Entria has now been cancelled due to HP rethinking their strategy - they'll be focusing more on delivering product through their NetServer Division. Although we commend HP management for killing a potential loser before committing significant resources to it, the delay in entering this market will hurt HP's chances for grabbing a large share of the market. But, given HP's ability to deliver quality products, we believe it will still have a credible entry in this space - if it can deliver within six to nine months. [HP's recently-announced "e-Vectra", its corporate entry into this space, came too late to be included in this article. This product is due to ship in April, 2000.]

"Seems Like but Really Isn't" Market

General: Terminals (as in terminal/server computing, precursor to client/server computing) are not really Internet appliances, and probably should not be called information appliances. They can be small and feature-poor (similar to some I-appliances), but they run off of a mainframe or large server, as opposed to connecting to an ISP or ASP. Note that there can be some terminology overlap, to wit: isn't the ISP/ASP acting as the server? We make the distinction that an I-appliance does not require a centralized, in-house server to work, and has an Internet component as a key feature, rather than as an afterthought.

Sun Microsystems: The "Sun Ray" does not fit the term "Internet appliance". It is small and relatively inexpensive, but is essentially a dumb terminal, having only enough "intelligence" to repaint/refresh screens (when commanded by the server) and interpret keystrokes. This is evidenced by the need to connect to the server to run any programs/applications - there is no OS resident in the box, only a Java Virtual Machine. In addition, except when connected to the 'Net through the main server, there is really no Internet component to this unit. Although the Sun Ray does have some interesting features, such as its "Hot Desk" feature, we do not feel it fits here.

Market Predictions

This market will grow significantly over the next 3 years. We believe that Internet devices/appliances will ship more than 5 million units by 2002, for a CAGR of more than 100%. This growth will come at the expense of traditional PCs. We also believe that this market will help grow the rental PC-software market (also called "subscription computing"). Microsoft's announcement that it will start renting software meshes very well with the Internet appliance and Application Service Provider (ASP) model.

We believe a large part of this growth will be driven by a herd mentality, catalyzed by: (1) financial managers looking for a PC infrastructure cost "magic bullet"; and (2) Microsoft pushing the rental model for application software such as Microsoft Office. We do not believe this is due to this computing model being fundamentally better than the existing model(s).

Market Scenarios:

Complete Failure (10% probability): This would result from a combination of excessively high pricing and excessively slow service delivery through the network or excessively bad performance. Complete Acceptance (<2% probability): This would result from Microsoft abandoning its present licensing structure (i.e. applications sold/licensed through retail, one to a machine), combined with the failure of alternatives such as Linux (an suitable applications) to penetrate the desktop market. Partial Success (60% probability): In this scenario, the greatest acceptance will be in corporate managed computing environments and in consumer low-end markets. Mainstream computing (as it exists today) will exhibit a slower acceptance rate than these niches. Big Success (25+% probability): Would require a major attitude shift in the computing marketplace, combined with major acceptance by those (potential) users who currently have no access to computing and the Internet.

Areas of Likely Success:

As mentioned above, we believe the areas most susceptible to acceptance of this computing model will be the low-end consumer market and the managed-PC corporate market. We believe resistance to computing-model change will delay acceptance (though not necessarily implementation, i.e. through management dictum) in other areas.

Vendor Recommendations

Vendors should provide both Windows-based and non-Windows appliances, and make each as low-cost as possible without sacrificing quality. [Of course, the regular Windows license fee, combined with the hardware overhead required, should drive the price of a Windows-based machine $50-$100 higher than a Linux-based machine, even more if running Windows 2000. This would drive Windows-based appliances toward the Windows CE operating system, rather than Windows 98/NT/2K.] However, the most important factors at present are time-to-market and grabbing market share.

We believe that Linux will find another home in these appliances, and we also expect BeOS will gain market share at Windows's expense.

We suggest that vendors try not to have "one box fit all". This leads to market confusion ("It's a floor wax! No, it's a dessert topping! Wait, it's both!") which leads to lost sales opportunities.

User Recommendations

Users should pay attention to this market because it will grow significantly in the next three years. Since this computing model is not for everyone, customers should analyze their computing needs thoroughly - it is a mistake to assume that all end users will accept this model with open arms, no matter how beneficial management believes it to be. The effects of end user resistance (and training) are rarely given sufficient attention by management, so users should exercise caution. Spending extra time before committing to this course of action will prevent false starts, or, in extreme cases, dumping the network device model and returning to the "traditional" server/thick client model.

Customers who find that many of their users are so-called "power users" - using many different applications, or applications which are considered "compute intense" - will find the appliance model unsuited to their needs. Customers whose users stick to the basics - e-mail, web surfing/research, some mid-range word processing or spreadsheet usage - will find greater use for this computing model.

Once the user has decided that the network appliance model is the best solution, the type of device (or devices) should be chosen. Customers need to determine if fully functional Windows is a necessity, or if Linux, Unix, or Windows CE will be sufficient. (The distinction is made, not to imply that Linux or Unix is less functional, but because of the applications and market share present on the corporate desktop.)

Once the device type has been chosen, users should focus on whether the applications will be served from within their company, or from an external ASP or ISP. If the choice is an external A/ISP, then the user should determine which package/suite of applications and functionality bests suits his needs. Presently, with the exception of Micron (who has no thin client offering per se, only a PC with "subscription computing"), there is no provider market clearly defined. If the applications will be provided internally, then the user needs a vendor who can provide a full client/server solution bundled with a high bandwidth network infrastructure. The only large vendors who provide that currently are Compaq, IBM, and Dell.



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