If there is any doubt that the long-talked about but never materializing
information appliance is about to burst onto the scene.  This week's
business Week's cover story describes the upcoming developments.

kelly


   BUSINESSWEEK ONLINE : MARCH 8, 1999 ISSUE

COVER STORY
   Beyond the PC
   Who wants to crunch numbers? What we need are appliances to do the
   job--and go online
   It's the end of a long day of crime-fighting, and Dick Tracy is cold
   and hungry. After turning up the collar of his trench coat, Detective
   Tracy climbs into his sedan and asks the voice-activated navigational
   system to tell him the best route home. He arrives and plops down on
   the couch, and touches the ad on the screen of his picture phone for
   free delivery of the local diner's blue-plate special. Just then, Tess
   Trueheart E-mails good news from her wireless phone: The rotten Sal
   Monella has been nabbed for selling tainted hot dogs. Relieved, Tracy
   turns on the news--his TV automatically stores his favorite shows for
   convenient viewing. But he's quickly bored and climbs into bed to
   read. Moments later, the ultimate crime-stopper is fast asleep, his
   paperless electronic book cradled in his arms.
   Sounds like another highfalutin vision of technology from the same
   gumshoe who gave us the high-tech wristwatch. But hold on. All of
   Tracy's gizmos are available today--from the Clarion Auto PC to the
   InfoGear iPhone to the electronic book from SoftBook Press. And
   they're just the edge of a digital tidal wave that will wash over the
   high-tech landscape, bringing us everything from gadgets straight out
   of a comic strip to Internet-connected versions of everyday products
   such as TVs, phones, and fax machines. ''We're entering the consumer
   era of computing,'' says Donald A. Norman, co-founder of consultancy
   Nielsen Norman Group and a leading apostle of so-called information
   appliances--simple devices that do one or two jobs cheaply and well.
   ''The products of the future will be for everyone.''
   That's a slap at the personal computer. But even Andy Grove and Bill
   Gates seem to know their companies' futures no longer depend solely on
   the PC. Intel Corp. (INTC) is putting its muscle behind new chips
   aimed at low-power gadgets and is even designing new appliances for
   the living room. And Gates, who believes more non-PC devices than PCs
   will be attached to the Internet within 10 years, has Microsoft Corp.
   (MSFT) creating software for easy-to-use products such as car
   navigation systems, set-top TV boxes, and electronic organizers.
   Gates and Grove are right to think beyond the PC. The high-tech
   industry is on the cusp of a new era in computing in which digital
   smarts won't be tied up in a mainframe, minicomputer, or PC. Instead,
   computing will come in a vast array of devices aimed at practically
   every aspect of our daily lives. Unlike complex desktop PCs, these
   information appliances--following on the lead of 3Com Corp.'s (COMS)
   handheld Palm computer and Microsoft's WebTV--will be simple and
   convenient.
   Think divergence instead of convergence. To become as ubiquitous as
   VCRs and microwave ovens, analysts say, information devices have to be
   much simpler than today's PCs. Rather than rolling more features into
   computers, newer devices need to be designed to perform only a few
   specific functions. After all, who needs a desktop PC that could land
   a spaceship on the moon if all they want to do is send E-mail? ''The
   PC is so general-purpose that very few of us use more than 5% of its
   capability,'' admits Hewlett-Packard Chief Executive Lewis E. Platt.
   Now, everybody from startup to industry giant is answering the call.
   The resulting scramble could turn high-tech's pecking order on its
   head. Until now, the PC was the only route to cyberspace--and PC
   makers had only to ride the Wintel standard based on Intel chips and
   Microsoft software to get in on the action. The future won't be so
   easy. Winning in the digital-appliance business will depend not on the
   latest geek-specs, like megahertz and gigabytes, but on identifying
   consumer needs--and satisfying them with products that hide their
   complexity.
   LOST CAUSE. Indeed, after a 20-year tear, the PC--one of the world's
   fastest-growing products--is already coming down to earth. And
   swiftly. PC prices are plummeting, and unit sales aren't making up the
   difference. While PC shipments should grow 15% this year, that's down
   from the heady 35%-plus rates in the mid-1990s. And with prices
   falling, analysts expect PC revenue for the industry to grow at an
   anemic rate--less than 5%. Meanwhile, market researcher International
   Data Corp. says Net access is now 94% via the PC; but that number will
   fall to 64% in 2002, thanks to set-top boxes, Web phones, and
   palm-size computers. By 2002, more information appliances will be sold
   to consumers than PCs.
   Gates's dream of putting a PC in every house may now be a lost cause.
   While 48% of U.S. homes now have a PC, analysts don't expect that to
   rise above 60% because information appliances will take on many of the
   jobs now handled by the PC. That means PC makers, for the first time,
   will have serious competition in cyberspace. And with the top five
   companies already selling more than 50% of all PCs, even stellar PC
   companies may have trouble posting the go-go gains of the past. Dell
   Computer (DELL) found that out on Feb. 16. That was when Wall Street
   pounded its stock after the company reported revenue for the fourth
   quarter ended Jan. 29 rose 38%, well below its typical 50%-plus clip.
   Not that the PC will disappear as the on-ramp to the Information
   Highway. For people with home offices or school-age kids, the
   versatility of the PC is still hard to beat--especially with prices so
   low. ''We're rapidly moving into the post-PC era,'' says Paul E. Horn,
   a senior vice-president and head of research for IBM. But ''the PC
   isn't going to go away any more than the TV made radio go away.''
   Indeed, analysts expect PC unit sales growth to remain in the low
   double-digit range well into the next decade. ''Consumers are pretty
   smart,'' says Steve Jobs, Apple Computer Inc.'s interim CEO. ''If for
   an extra 10% they can get something that does so much more than some
   single-function device, they'll take it.''
   Of course, that doesn't mean Jobs and other PC pioneers are standing
   still. Apple (AAPL), which made a major step forward in ease of use
   with the introduction of its elegant iMac PC last year, is expected to
   unveil a slick-looking handheld Mac this spring. Meanwhile, Microsoft
   has spawned a new generation of handheld products via its Windows CE
   technology, including the new Jupiter design for mini-laptop PCs that
   run up to 12 hours on one charge. Vadem Inc.'s $999 Clio, for
   instance, appeals to road warriors because the 3.2-pound device has a
   larger screen and is more comfortable for E-mail or Web browsing than
   3Com's popular Palm.
   What's going on? Most people don't believe there's a compelling reason
   to buy cutting-edge machines. After years of being swayed by claims
   that only the latest, most powerful machines will do, consumers are
   waking up to a new reality: Today's $400 PCs are good enough for most
   tasks--especially connecting to the Net. Pushing the latest
   high-octane machine just isn't working. ''People are realizing that
   whether you own a 300-Mhz PC or a 400-Mhz PC, it isn't going to change
   your life that much,'' says Alain Couder, CEO of Packard Bell NEC Inc.
   ''That's scary for us. We need to get real.''
   Such an admission would have been considered high-tech heresy two
   years ago. But today, there's a dazzling new spurt of innovation in
   Silicon Valley. St. Paul Venture Capital, Flatiron Partners, and
   Matsushita Electric have earmarked $140 million to invest in
   info-appliance companies. Nokia (NOK.A), Motorola (MOT), and at least
   five other phone makers are developing Web phones. And HP (HWP), IBM
   (IBM), Sun Microsystems (SUNW), and Sony (SNE), among others, are
   preparing a host of newfangled gadgets from palm-size scanners to the
   underlying chips and software that will power these devices.
   Meanwhile, scores of startups are spinning out whizzy new products
   ranging from a countertop Web browser for the kitchen that doubles as
   a TV and CD player, to a tiny gadget that health maintenance
   organizations will give chronically ill patients so doctors can check
   their vital stats online.
   NO TOASTER. It's not just this slew of gee-whiz devices that will make
   information appliances commonplace. Mundane products already found in
   many homes will also get far smarter. Cameras, TVs, cell phones, and
   cable boxes are going digital, making it far easier to add new
   features that let them take on jobs now done by the PC--including
   Internet access. By next year, for instance, some fax machines will be
   made to work over the Net so you won't have to rack up long-distance
   charges to zip a letter to London. And cell-phone pioneer Qualcomm
   Inc. (QCOM) will add ''microbrowsers'' to its phones to allow them to
   read online data. Says Paul E. Jacobs, president of Qualcomm's
   cell-phone division: ''People think cell phones are more like toasters
   than they are like PCs--but that's wrong.''
   What's feeding this explosion of innovation? You guessed it. The
   Internet. Computer scientists have been predicting the advent of
   information appliances for more than a decade. But now, the Internet
   has become a truly social phenomenon, with oodles of new information
   and hundreds of innovative services added on a monthly basis.
   Consumers want information appliances ''to access services on the
   Net,'' says Claude M. Leglise, who heads Intel's new home-products
   group. And more consumers are wondering if they really need a PC just
   to get wired. ''I haven't felt any compulsion to buy a PC,'' says
   Robert Anderson, a nurse from West Palm Beach, Fla., who is completely
   satisfied surfing the Net with his WebTV--and not at all envious of
   PC-using friends.
   Consumers like Anderson won't suffer from lack of alternatives to the
   PC. That's because software and chip technology has reached the point
   where it's possible to build inexpensive devices with enough memory,
   storage, and screen size to be useful. The explosion of information
   appliances will, in turn, boost the number of Net connections in the
   home. By 2002, predicts market watcher Jupiter Communications, 56% of
   U.S. homes will have a Net connection, up from 32% today. And more
   U.S. homes--13.9 million in 2002, vs. 1 million in 1998--will have
   faster Internet connections, according to IDC.
   MORE CLICKSTREAM. Translation: More people will spend more time
   online. In today's PC-centric world, cybernauts spend up to 40 hours a
   month online, says Sky Dayton, chairman of Internet service provider
   EarthLink Network Inc. But by giving consumers the devices to log on
   to the Web more often and more conveniently--say, to check the local
   movie schedule or even buy a car--that could rise to 200 hours. ''That
   kind of clickstream becomes incredibly valuable,'' Dayton says,
   referring to the number of Web sites consumers will visit or ''click
   to'' when online.
   To reach the masses of tech-shy users, though, companies need cheaper
   and easier-to-use digital devices. That's driving a fundamental change
   in how products are conceived. Instead of designing cool boxes and
   hoping they find uses, companies are dreaming up services--and then
   building devices that can deliver them. What's more, these devices
   will let companies lock customers into their services--and harvest
   rich new revenues from advertisers and E-merchants.
   Take Alcatel. The French phone giant spent a year surveying media and
   telephone companies before designing a phone that offers touch-screen
   Web access. They told Alcatel the phone had to show voice mail,
   E-mail, and faxes on one screen. The companies also wanted a
   laptop-style color screen rather than black and white. And to help
   telephone companies subsidize the $500 price of the phone, Alcatel
   (ALA) drummed up support from E-commerce companies such as Yahoo!
   (YHOO), Amazon.com (AMZN), and others to buy links on the phone's
   startup screen. The argument: This placement could be as valuable as a
   spot on the Windows desktop. By 2002, Alcatel expects to have sold 1.5
   million WebTouch phones, which will be offered to consumers for around
   $400 starting this September.
   Online companies are just itching for ways to snag more users. Yahoo!,
   E*Trade (EGRP), and Sportsline.com, for example, are eyeing new ways
   to deliver their services, particularly to smart cell phones. Doing
   business in Denver? Your phone could give you the traffic conditions,
   or tell you whether there are seats available at the Nuggets game.
   GeoVector Corp., a four-person Silicon Valley startup, even makes
   software that would let you point your phone at a restaurant to gather
   whatever info has been posted on the local online Yellow Pages--say, a
   free glass of wine with the early-bird special.
   Some online companies are doing more than scour the market for new
   devices: They're helping to create them. AT&T recently set up a lab in
   its Silicon Valley research and development center to build prototypes
   of new kinds of gizmos, including handheld devices that, among other
   things, could capture and play videos, or be controlled via voice. And
   online giant America Online Inc. (AOL) is working with
   partners--including Sun Microsystems--on new products tuned to its
   service. One possibility: a sub-$300 set-top box based on Sun's
   JavaStation computer now sold to corporations, according to analysts.
   AOL plans to unveil these devices, part of its ''AOL Anywhere''
   strategy, by this summer. ''We're going to play a major role in this
   next generation of non-PC connected appliances,'' vows Barry Schuler,
   AOL's president for interactive services.
   At stake is customer loyalty. Consider the experience of Tom Benton,
   38, of Claverack, N.Y. His engagement to his fiancee in Mexico was
   straining his budget until he bought a device from Aplio Inc. that
   lets him make free phone calls over the Net. The device, conveniently
   located next to the phone in his kitchen, is a snap to use. ''You just
   pick up the phone. It's natural,'' he says. Now, his monthly bill is
   back down to $20 from a wallet-crunching $200, and the marriage is on.
   A KITCHEN BROWSER. It's stories like Benton's that inspired
   entrepreneur Bob Lamson to go back into the kitchen. Lamson, who made
   millions inventing a line of home breadmaking machines in the 1980s,
   has built a new gadget that merges a 9-inch TV, CD player, and a
   one-touch Web browser into a contraption that attaches to the bottom
   of a cabinet. His company, CMi Worldwide, will produce the black gizmo
   at a price of $800, with an additional $20 monthly fee for Internet
   service. There's also a $1,500 to $2,000 countertop version that looks
   just like a small TV, with a 12-inch screen. ''More than 50% of
   [homemakers] are not PC-literate--and they're big shoppers,'' says
   Lamson, who has already signed up appliance maker Salton as a
   distributor. He's also talking with phone companies and online grocery
   service Peapod Inc. about supporting the gadget.
   Kitchen gadgets and Web phone-screens won't be the only new cyber real
   estate. The TV, a fixture in 98% of U.S. homes, is an obvious
   candidate. Roel Pieper, Philips Electronics' (PHG) top digital exec,
   points out that Americans spend 3.6 billion hours a month in front of
   the TV, vs. 300 million for the PC. ''Capitalizing on digital TV is
   the next big thing in Silicon Valley,'' says Michael Ramsay, the CEO
   of set-top startup TiVo Inc., whose backers include billionaire
   Microsoft co-founder Paul G. Allen. General Motors Corp. (GM) is
   already working with TiVo to figure out how to deliver targeted ads.
   Entrepreneurs and giants alike are tapping into a growing pool of
   chips and software aimed at info appliances. IBM, for example, has
   devised a disk drive half the size of a credit card that can hold 340
   megabytes of data--enough to store 80 full-length books. The
   microdrive, due out this year, will cost approximately $350, but IBM
   expects the price to fall below $100 once volume picks up in a few
   years. Meanwhile, startup iReady Corp. has created
   ''Internet-on-a-chip'' technology that lets manufacturers add Net
   access to everything from fax machines to TVs for less than $10. Seiko
   Epson Corp. is using the chip to make smart screens that can be
   dropped into fax machines or used as stand-alone Net browsers.
   NO MORE HAMMERLOCK? Progress is also picking up in the critical area
   of software. Sun Microsystems Inc.'s elegant Jini software, unveiled
   on Jan. 23, could become the lingua franca for devices ranging from
   coffeemakers to supercomputers. With Jini, devices tell a network what
   they are--and what they can do. That way, an advertiser could create
   different versions of an Internet promotion--say, a full video for an
   interactive TV vs. a one-line headline for a handheld gizmo--knowing
   Jini-enabled devices would grab the right one.
   Who's best positioned to make these cyberdreams come true? Intel and
   Microsoft are not sure bets. Indeed, no one company has all the pieces
   in place--yet. Startups tend to have ideas and technology but lack
   marketing and distribution muscle. Consumer-electronics companies are
   famously slow to adopt new technology and have to bridge decades-old
   divisions between product groups.
   But today's high-tech powers may have the most at risk. Since info
   appliances require inexpensive, highly focused technology, Microsoft
   and Intel could have a tough time maintaining the high-margin
   hammerlock they enjoy with their current PC technologies. As for PC
   makers, they'll need to do more than rush to market zippy new models
   chock-full of state-of-the-art technology that consumers have to learn
   how to use. Says Philips' Pieper: ''The PC companies move at a higher
   speed of innovation--and I'm not sure consumers like it. They'll have
   to slow down, and we'll have to speed up.''
   For now, all are focused on getting into the game--especially computer
   companies. Industry stalwarts such as National Semiconductor (NSM),
   disk-drive maker Quantum (QNTM), and modem and graphics board supplier
   Diamond Multimedia Systems, are investing heavily in
   information-appliance businesses. HP recently unveiled its Capshare
   handheld scanner, which by yearend will be able to wirelessly zip
   magazine articles through cyberspace. And Compaq Computer Corp. (CPQ)
   says it aims to sell set-top boxes and Web phones.
   A weak player in the PC era, Sony is scrambling so that it doesn't
   miss out on the post-PC age. The consumer-electronics giant is
   preparing a slew of innovative products, including a digital picture
   frame that displays 50 different color photos, and a 250-person
   software unit is working on smart home networks that will let your TV
   and stereo recognize you when you walk into the room--and fire up your
   favorite tunes or shows.
   Not all of these novel products will be blockbusters. But there will
   be plenty enough hits to make cash registers ring. Consider Diamond
   Multimedia's Rio. The 2.4-ounce, pager-size gizmo can store and play
   songs downloaded to a PC in a format called MP3 that makes it feasible
   to download music of CD quality through the Web. It's like a tapeless
   Walkman, and Diamond (DIMD) has sold 250,000 of the $199 units in just
   three months--and the Rio has become a major fad with music lovers.
   ''It's a viral kind of thing,'' says Diamond CEO William J. Schroeder,
   who hopes to sell 750,000 Rios in 1999. ''A year ago, I didn't even
   know what MP3 was!''
   That's O.K. Because in the post-PC era, most consumers won't need to
   know--or care--how their information appliances work.
   By Peter Burrows in San Mateo, Calif., with Andy Reinhardt in San
   Mateo, Heather Green in New York, and bureau reports
   _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

   What 'Beyond the PC' Means for PC Makers
   After years of being the shining star of high-tech products, the
   personal computer has suddenly become quite the whipping boy. At the
   TED9 high-tech gabfest in Monterey, Calif., from Feb. 17 to 20, for
   example, pundits such as Wall Street Journal technology columnist Walt
   Mossberg and MIT assistant professor Michael Hawley took turns
   pointing out the PC's many ills, all but relegating it to the
   trash-heap of digital history. "It's a product meant for office drudge
   work that fell off the back of a truck and landed in consumers'
   homes," said Hawley. "It's not fit for my mother to use. It's
   basically industrial waste."
   That's harsh stuff, but consider this: Even some PC makers are getting
   a bit frustrated with their product's inherent problems. In fact, by
   the end of 1999, some pure PC players will have moved "beyond the PC"
   themselves. Startup eMachines, for example, plans to unveil a DVD
   player/PC hybrid called the eMedia, that's designed to be used in the
   living room for E-mail, Web browsing, and game playing on the
   Internet. Packard Bell NEC Inc. expects to have an entertainment-based
   product by yearend as well. And Compaq Computer Corp. plans to be
   selling wireless communications devices and set-top boxes in a year's
   time.
   Why break out of the "Wintel" fold now? Because when it comes to
   generating profits, the tried and true Microsoft Windows-Intel
   processor model seems to be running out of gas -- at least for
   companies relying heavily on the sub-$1,000 market that now represents
   half of U.S. consumer PC sales, according to ZD Market Intelligence.
   It's not just that margins are negligible on today's low-end models,
   where a $500 machine might return only $40 or so in profit. Given
   Intel's and Microsoft's near-total control of the technical standards,
   there's little PC makers can do to make their products stand out -- or
   to make easier-to-use machines that would appeal to a broader
   audience. "We're on the eve of a revolution in pervasive computing --
   and the ease of use of the current PC will never get to where it needs
   to be," says Packard Bell NEC Chief Executive Alain Couder. Indeed, he
   recently asked his engineers to find a way to remove Windows from the
   PC and replace it with a simpler operating system. The response: Not
   economically feasible.
   DRASTIC CUTS. The result of this profit squeeze has become dangerously
   apparent in recent days. On Feb. 19, Packard Bell NEC announced a
   15,000-person layoff, along with news that its Packard Bell home-PC
   unit had lost more than $1 billion over the past two years. On. Feb
   23, Acer America Inc., after years of losses, said it would get out of
   unprofitable retail-store channel and sell only via the Interent.
   These moves followed Hitachi's Feb. 4 announcement that it would shut
   down its U.S. notebook subsidiary, Hitachi PC Corp.
   Rather than downsize or surrender, some PC makers are taking a
   different tack. To break the cycle of falling prices and shrinking
   profits, they're adding services, which may draw new buyers -- and
   also produce revenue annuities for the PC companies. On Feb. 24, for
   instance, Gateway 2000 announced it would provide free Internet
   service to customers who buy a PC costing more than $1,000. Other
   companies are expected to make similar moves. Compaq, for one, is
   trying all kinds of schemes to find a profit formula that adds up. On
   the one hand, it's experimenting with the so-called free PC model: It
   will sell 10,000 Presario home PCs to startup Free-PC Inc., which will
   "give" them to customers who agree to have online ads appear on the
   units 24-hours a day. But Compaq is also buying up software and
   E-commerce companies such as Shopping.com, with the goal of creating
   services and content that set it apart from the PC crowd.
   One PC maker that appears unlikely to stray from the pure Wintel model
   is Dell Computer Corp. The Texas company has mastered the direct-order
   business and continues to squeeze great profits from conventional PCs.
   But even Dell may be feeling the heat from plunging PC prices: Revenue
   growth in its most recent quarter fell from historic 50%-plus levels
   to just 38%, prompting a shellacking on Wall Street on concerns over a
   slowdown.
   In the end, high-volume PC producers, including even Dell, will have
   to follow the market-segmentation strategy of their patron saint (and
   master) Intel, which is trying to compensate for cheaper chips by
   selling more high-powered models used in corporate servers and
   engineering workstations. So far, that balancing act has helped keep
   Intel growing, even as PC prices plunge. For PC makers contemplating a
   plunge into ultracheap, low-margin information appliances, having a
   high-end server and workstation business could prove to be a crucial
   determinant of their continued success.
   By Peter Burrows, in San Mateo, Calif.


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