COVER STORY. Beyond the PC [Nice QCOM reference]
BUSINESSWEEK ONLINE : MARCH 8, 1999 ISSUE
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
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