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Web Appliance Market Empties Under Stress Of Slow Sales

NEW YORK — One year after 3Com, Netpliance, Compaq and Gateway charged into the Internet appliance market, only Compaq has not lost faith and continues to bull ahead in what has become a slowly developing category.

The expectations of great sales for the Internet appliance market are quickly being downgraded as vendor after vendor decide the market, as originally envisioned, will not attain the success expected just six months ago. 3Com and Netpliance have abandoned the race, while Gateway has shifted its focus back to its core PC business, although it still fields the Gateway Connected Home TouchPad appliance and Internet radio.

However, instead of simply giving up, the industry is redefining exactly what an Internet appliance is. Is it a TV set-top device, a poor man’s PC or one of the myriad handheld devices now coming onto the market that connect to the Web in one fashion or another?

Compaq, maker of the only Internet Appliance still found in abundance at retail, believes these products will be available in several formats and is not daunted by the dismal overall performance of the category.

James Ganthier, Compaq’s director and general manager of interconnected products, did not deny the category has undergone a tough opening phase, but said this was to be expected. In addition, the bail out of so many firms has left Compaq as the category leader.

Steven Baker, director of research for NPD Intelect, agreed. “In the early stage of any market, guys come in and go out. 3Com and Gateway pulled out because the market did not take off as expected. Nobody really hit the right feature set with these yet.”

Compaq is quickly making adjustments to make its iPaq more appealing.

“We learned a lot since we first entered the category — mainly that for every Palm, there is a Newton,” he said. “But we do feel the category has been validated even if we wished it would have taken off faster.”

Compaq has taken its lessons learned to heart. It has shifted the target customer from PC neophytes who do not own a computer to more advanced users who will look at an Internet Appliance to complement their home’s PC system. On the technical side, this means the devices should not be presented as a simple and inexpensive way to get a computer into a home, but something more complex featuring broadband Internet connectivity and the ability to be networked with a PC, he said.

Compaq last week reduced the suggested retail price of the iPaq IA-1 Home Internet Appliance $100 to $399 and is offering six months of free MSN Internet service. The company also introduced the IA-2, which includes most of the lessons learned, such as the addition of broadband connectivity for home networking. The IA-2 was expected to ship yesterday with a suggested $299 retail.

Gateway’s decision to put its appliance on the back burner could help it become success down the road, said Shauna Smith, an analyst with ARS, La Jolla, Calif.

“I do predict the TouchPad will take a back seat for some time, but it will hopefully still be around when the IA market is ready to take off,” she said.

Baker said Internet appliance makers face a tough market from a value/price perspective. Appliances are competing against the low-end of the PC market where a consumer can get a full-fledged 1GHz powered PC with 128MB of RAM for under $800.

To avoid the issue of competing against PCs, some vendors are simply broadening the category’s definition. Now, any non-PC device, such as radios, white goods, analog televisions and email devices, that connect to the Web is considered an Internet or Smart Appliance.

Cahners In-Stat, the research firm based in Scottsdale, Ariz., defines this category as any device that accesses the Internet as its primary function. In-Stat is expecting sales to start gathering speed and hit 20 million by 2005. Despite this rosy outlook, vendors still have some serious work ahead to spur sales.

“They [manufacturers] will have to educate consumers on the new capabilities of these devices,” said Wolf Cindy, In-Stat’s research analyst for Internet access devices.