he Internet has changed the world, but much of the world is still not using the Internet. That is the fundamental assumption behind the original concept for the Internet appliance: create a stripped-down PC, a less-expensive tool that allows more people access to the global communications network.

Tim Bajarin, president of market research firm Creative Strategies Inc. (Campbell, Calif.), said the original idea for an Internet appliance was proposed several years ago by Oracle Corp. software magnate Larry Ellison, who suggested that a dumb terminal might be a simple way to access information stored elsewhere on a network. In both appearance and function it would resemble a PC; but by moving much of the processing power to a machine at the other end of the connection, it would be possible to make the appliances much less expensive. That, in turn, would democratize the Internet, making it accessible to many times more people.

A year ago, this was still what most people thought of when they heard the phrase "Internet appliance," but today they may have a different idea. Not only has this original concept failed to take off, but it has been replaced with several entirely new ones that seem much more exciting.

"I have broadened my definition of 'Internet appliance,' " said Bajarin. "Now I would say that it is any device that connects to the Internet but is not a PC."

Bajarin described three major shifts that have prompted this evolution in the concept of the Internet appliance. First of all, the Internet has changed. While before it was mainly used for e-mail and gathering information from Web sites, now it is ubiquitous. The Internet is everywhere, and can be used for grocery shopping, reading the daily newspapers, making travel plans and so much more.

In addition, the growth of wireless technology has allowed for an untethered approach to accessing the network. Couple that with some creative engineers and some innovative system designs, and the Internet-appliance market takes on a whole new look.

Part of the sector's changed appearance has been prompted by evolution in the marketplace. But another element was the lack of enthusiastic response for Internet appliances that looked like cheap computers. Most of those systems-which were aimed at people who didn't own PCs-were sold in computer stores, a serious marketing mismatch. While there may yet be a demand for such systems, there isn't much buzz surrounding the idea now.

So what idea does have buzz today? Think wireless.

Sean Burke, vice president for iPaq products and connected devices at Compaq Computer Corp., said that handheld devices rank among the most exciting applications today for the Internet-appliance market. The products include pocket-sized versions of the PC, two-way paging systems and Web pads. The Web pads look like a thick clipboard with a screen and can link up to the Internet.

Compaq has an extensive line of iPaq products that could be considered Internet appliances. Burke said the company is targeting people who already have a computer, and could use a second device, either around the home or on the job, to make their life easier. Most of the products are less than a year old and have not yet begun shipping in huge volumes. "We think the iPaq line is taking off, and we're pretty excited about the third and fourth quarters of this year," he said. "We're hoping to grow this business pretty substantially."

But the big question is when the market will take off. Mike Polacek, vice president of National Semiconductor Corp.'s information-appliances division, has been watching this segment from the beginning. National was one of the first chip companies to jump on the information-appliance bandwagon, and its chief executive officer Brian Halla, has been one of the driving forces in the field. Over the past several years, he has systematically built up National's technology portfolio, adding all the key building blocks for such systems and putting them together into a line of chips known as the Geode.

Today, Geode devices are found in systems from more than 130 different companies. However, Polacek candidly said that some of those companies are quite likely to fail. The past year has not been easy for this end of the market. Some companies had thought they could make a business out of providing free Internet access and low-end PCs or information appliance-style boxes to access the World Wide Web, but they found out the hard way that advertising dollars could not support a business. "In the long view, I still believe it's a very viable business model," said Polacek. "But right now, the volumes just aren't there."

Home gateways
While he said that one of National's main target markets for the Geode family is now Internet terminals, it is also well-established in advanced set-top boxes. This is another category that is seeing healthy growth, as broadband access through cable lines turns basic cable boxes into powerful home gateways that link computers and peripherals and also deliver entertainment offerings.

Polacek estimates that the company will ship some 4 million Geode chips this year. That's twice the number National sold in 2000-and last year's figures were double the 1 million devices sold in 1999. Continuing the trend, he hopes to double sales again next year, to 8 million chips. "This is steady, solid growth, but these are not breakthrough numbers yet," he said. "We do expect to see the market take off, to see the sales chart hit the hockey stick. We expect a breakthrough-not in 2001, but one of these years."

But some companies are not willing to wait that long. For example, 3Com Corp. last year introduced the Audrey, an attractive Internet appliance e-mail terminal that could sit at home on the kitchen counter or on a desk. A national ad campaign and significant media attention helped create a positive buzz for the Audrey, but that didn't translate into sales. Last month, as the company announced a $223 million pro forma loss for its fiscal quarter that ended in early March, 3Com killed the Audrey project.

"The abruptness and severity of the current technology slowdown have clearly impacted 3Com," said Bruce Claflin, president and chief executive officer of the company. "While 3Com has maintained or increased market share in its key segments, these gains were not sufficient to offset the decline in the industry." Production has already stopped, and 3Com will completely shut down its consumer Internet-appliance operations by June.

"There will be some Internet appliances that really become useful, and some that are just great ideas that don't take off," observed Arnold Estep, senior marketing manager for NEC Electronics (Santa Clara, Calif.). "A lot of people in the market are still waiting for the killer application."

NEC produces several chips aimed at various Internet appliances, built around a MIPS processing core. Estep said that one problem for the chip companies in this space is the diversity of target products. If they deliver a design with every functional block to power a Web pad, it may not be right for a PDA or a terminal. But if they strip out functions so the chip will fit everywhere, it may lack some critical elements that will deter key design wins.

"I think this market is getting closer," Estep said. "There is still a lot of potential business, but there are also a lot of questions that have not been answered."

Egil Juliussen, president of eTForecasts (Buffalo Grove, Ill.), said that there will also be some critical regional differences as the Internet-appliance market evolves.

In the United States, where the telecommunications infrastructure is well developed and Internet access is common, the market may focus on consumer electronics that boost personal productivity. But outside the developed world, there could still be a strong demand for the terminal-type applications that resemble PCs but offer inexpensive network access.

"Outside the United States, where PC penetration is low, this type of design could do well," Juliussen said. "But here, where people are looking for a second system in the home, I think a Web-pad design will be the most successful."

Analyst Bajarin agreed, noting that the PC, ubiquitous in the United States, remains a novelty in many parts of the world. "I don't think the PC will be the heart of Internet access in much of the developing world," he said. "So there is some potential for other devices to emerge."