Netpliance Responds Quickly to Hardware Hack

Netpliance Responds Quickly to Hardware Hack
L. Taylor - May 9, 2000

Event Summary

Netpliance's stock took an 18% dip after a slot machine engineer in Las Vegas hacked a procedure to turn the network device into a full-fledged PC. Netpliance, Inc., (Nasdaq: NPLI) which only went public on March 17 at a price of $18.00 a share, was down to $14.00 a share by market close on March 21. The Netpliance, which retails for $99.00, was designed to simply do web-surfing using Netpliance's i-Opener Internet service. Netpliance's revenue model is based on the assumption that every user will sign-up for the i-Opener service which offers content, applications, and services.

Ken Segler, the engineer who posted the exploit on, said that he was able to turn the i-Opener into a Linux PC for about $200 of extra hardware.

Market Impact

Upon report of the exploit, Netpliance's stock dropped $4.00 a share as it became apparent that the incredibly low-priced device could be used without using the i-Opener Internet service at all. Should shareholders be concerned about this exploit? In the long-term, this won't affect Netpliance's market cap, even if it did create a rough and tumble beginning for the new service provider. All Netpliance has to do is strengthen their service contract declaring that modification of the hardware device is a violation of the terms and conditions of the service contract. Though preventing the hack may be hard for Netpliance to enforce, all it will take is one lawsuit to keep the hardware hackers at bay.

Austin based Netpliance was fast to react, and by the end of the week, had already stated that they had found a way to prevent the hardware hack, and further, required all buyer's to sign-up for the i-Opener service. As long as they are getting users to sign-up for the service, they will do well, even if some people do figure out away around the hack fix.

Findings and Recommendations

It has become quite clear that security compromises can affect a corporation's market cap. Whether they OEM hardware, software, or services, Information Technology companies need to exercise due diligence when it comes to security.

Essentially, the Netpliance is what Scott McNealy and Larry Ellison were touting as the "NC" or Network Computer four years ago. Unfortunately, four years ago their vision was ahead of their market, and their development efforts. Today, the time is right, and real "NCs" are emerging in both the consumer and enterprise market segments.

The Netpliance leads the consumer market as a low-cost and technically viable method for accessing the Internet. At $99.00, you can't beat the price. It's perfect for kids, or people who are afraid of real computers. With no locally stored operating system, there is not much to break. With its ease-of-use and low-cost, even Granny will want one.

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