business

The Information Appliance

The roar of the Information Superhighway is getting a lot louder a lot sooner than anyone expected. When the concept of a huge interactive, digital network first began taking shape in the late 1980s, nobody expected to see much of it before the end of the century. But the frenzy of dealmaking between phone companies, entertainment conglomerates, and cable operators is pushing up the beginning of the highway to the next two to three years.

Only one problem: What will be the gadget we use to harness that flood of digitized traffic--the phone calls, movies, TV shows, data bases, on-line magazines, and shopping services coming into our homes and offices? Before the all-digital lifestyle takes root, we'll need some kind of device--or a series of them--to manage the information flow. Think of it as the information appliance--a device that will be as commonplace in a few years as the washing machine or VCR is now. Information appliances will instantly make the connections to a world of digitized entertainment, communications, and data--on the superhighway or over the airwaves.

So what will the information appliance be? Some technology gurus say it will be a revolutionary new handheld device--a "personal digital assistant," such as Apple Computer Inc.'s Newton MessagePad. Consumer-electronics companies are pushing the idea of a newfangled digital TV or a variation on the video-game player. The cable-TV industry is busy developing a souped-up version of today's converter boxes. 3DO, a San Mateo (Calif.)-based startup backed by American Telephone & Telegraph Co. and Japan's Matsushita, floated one of the hottest initial public offerings of the year on the promise of a hybrid game player that would double as a set-top box.

It all makes the personal computer sound downright prosaic. After all, in the era of 500-channel, interactive digital TV, who will want a PC? Indeed, while phone companies, media moguls, consumer electronics companies, and cable-TV operators are carving up the digital future, many PC makers seem caught in a depressing cycle of price-cutting, downsizing, and quarterly losses.

ON THE JOB. But for all the hype about intelligent TVs, smart cable boxes, and souped-up video-game machines--any or all of which may eventually have their place--there's really only one machine right now that has what it takes to become the gateway to the dawning digital age: It's that old workhorse, the PC. "There is an infinitesimal chance that any of these new products--interactive games, set-top boxes, what have you--will reach even 10% penetration of the home in the next five years," says Mark Stahlman, a consultant who heads New York-based New Media Research. "But the PC will reach 50% penetration sooner than that, and therefore it will become the basis for everything else: networks, videophones, multimedia."

Why the PC? Mainly, because it's there--everywhere, in fact. More than 123 million are in use in offices, homes, and schools around the world. That sheer momentum gives the PC a sizable headstart to become the information appliance of choice. And the accelerated approach of the superhighway only makes the PC a stronger candidate for information appliance. For all its user-unfriendly flaws, the PC has become a familiar tool in virtually every walk of life. People who can't program the clock on their VCRs can go to their desks, turn on their PCs, and type away. In growing numbers, they are welcoming PCs into their homes. Market researcher Link Resources Corp. estimates that 31% of U.S. homes have a PC, up from 26% two years ago--and concurs in Stahlman's prediction that PCs will be in half of all U.S. homes by 1998.

Those PCs will be ready for the information highway. While most of the buzz about the network centers on 500-channel, interactive cable TV, there will also be on-line magazines, archives of historic information, all sorts of directories and data bases, and dozens of services for home banking, investing, and education. "Only a minuscule amount of the information will be video," says John Warnock, chairman of Adobe Systems Inc., a maker of publishing software. And all these services can be handled better on a PC, argues Nathan P. Myhrvold, head of advanced technology for Microsoft Corp. If you want to place a classified ad on interactive TV, for example, you'll need a word processor to write it. Most services on the highway, Myhrvold asserts, "are going to have some evolutionary relationship to existing computing."

PROTEAN PC. The key advantage for the PC in the new digital era--and the hope for PC makers--is its endless adaptability. A video-game player is a video-game player, a cable box is a cable box, and a phone is a phone. Granted, that's what makes them cheap and easy to use. It's also what makes them less than ideal in rapidly changing markets. But feed the PC new software and it can assume a new personality and take on new jobs.

No PC has been more widely adapted than the IBM PC and its clones. While Apple Computer Inc.'s Macintosh and Newton, and perhaps some workstations, have a shot in the information-appliance race, the worldwide industry that has grown up around the PC almost guarantees it faster evolution--and lower prices. There's an infrastructure of thousands of companies to build, sell, and program machines that conform to the IBM PC standards. There are hundreds of companies constantly creating new hardware add-ons to extend the PC's powers and thousands of programmers dreaming up new software applications. This all makes it simpler, at least in theory, to upgrade the PC to handle new forms of data such as voice and video than to reinvent consumer electronics products. "It's easier to add another lane to a freeway than to erase a city and try to start over," says Intel Corp. CEO Andrew S. Grove.

The PC industry, of course, must keep evolving along with the machine. The past few years have brought relentless price wars and massive cost-cutting. That has forced out some marginal players, but survivors are now in the right shape to move into consumer electronics, first with today's home PCs, and soon with new information appliances. IBM, Compaq, Hewlett-Packard, and a handful of others figure the mega-volumes of these new markets are what could restore old levels of profitability. "We're convinced that we can get our cost structure down to a point where not only we can sell these appliances in high volumes, but we will make enough money off them to both satisfy our shareholders and allow us to provide other kinds of [on-line] services that will be even more profitable," says James Cannavino, former head of IBM's Personal Systems Div. and the company's newly named chief strategist.

How will the PC evolve into the information appliance? First, by continuing to incorporate the best features of other computers. Today's PCs, for example, reflect the "look and feel" of the Apple Mac and the graphics and sound of the groundbreaking Commodore Amiga (chart). Steady advances in microprocessors and other components should continue the evolution. The power of Intel's new Pentium chip, for example, is being applied to make PCs "understand" speech. "As these microprocessors continue to get alarmingly fast, our developers have the luxury to use some of that computing power to work on the PC's people skills," says Cannavino.

The new information-appliance PCs will not only be user-friendly, they'll also come in lots of different shapes and sizes. Think of them as the gadgets on Star Trek. On the Enterprise, information appliances were everywhere. Handheld models diagnosed sick aliens and damaged transporters. There were computers that crew members talked to, typed into, and sent messages back and forth over.

So it will be with the information appliance in the home. There will be handheld devices, notebooks, desktop machines, even PCs that hang on the wall. Different forms will be used for different jobs or for tapping into the digital information flow in different locations. "People will own more than one PC--just like they have more than one phone and one TV. It's not that much of a leap of faith," says Robert W. Stearns, vice-president of corporate development for Compaq Computer Corp. Indeed, Channel Marketing Corp. predicts that by the year 2000, every home will have 2.5 PCs.

ON THE FLY. The evolution is already under way. Compaq, Apple, and IBM now sell desktop PCs that act on simple spoken commands. There are also machines that can "read" your handwriting--albeit with difficulty. PCs are shrinking, too, into sizes and shapes that will truly be able to go anywhere. Look at Hewlett-Packard Co.'s latest OmniBook, a 2.9-pound PC with a full-size keyboard and a 486 chip. Compaq and Motorola are both planning new handheld PCs that resemble the PDAs from Apple, EO, Casio, and Tandy and that will have built-in wireless communications. And, if you forget to pack your handheld appliance, don't fret. Soon, you'll be able to keep up with your electronic mail using terminals being installed by airlines in seatbacks.

The most important new direction for the PC, however, is unquestionably multimedia. PCs equipped with CD-ROM drives, souped-up graphics, and sound cards are giving consumers a taste of what the Information Superhighway may bring--a catchy mix of graphics, video, and stereo sound for interactive learning and entertainment, on-line information services, and electronic books and magazines. Sales of multimedia machines are taking off: Market researcher InfoTech Inc. estimates that 3.5 million multimedia computers will be installed in the U.S. by yearend.

And from multimedia PCs, it is only a short trip to the marriage of PCs and TVs. Since January, Packard Bell Electronics Inc., a leading supplier of home computers, has been selling a multimedia PC with a special circuit card that lets customers watch TV programs on their screen. Apple has recently introduced a similar machine, the Mac TV, that looks like a television set with a keyboard attached. The Mac TV can accept CD-ROM computer disks and display captions on the TV programs. IBM is promising a TV receiver built into its notebook-size ThinkPad for next year, so couch potatoes need never miss a program.

Of course, everybody in the consumer electronics, telephone, and cable-TV industry sees where the PC gang is going--and they're eager to head them off. "IBM-compatible PCs, regardless of how they evolve, will not be a match for all the services and applications that become possible," says Takuma Yamamoto, chairman of Fujitsu Ltd., the world's No.2 computer company after IBM. Like many Japanese electronics companies, Fujitsu is betting that video-game machines will be the route into the home.

Why? Because even now, PCs are just too difficult for the average consumer to bother with. Just ask former Apple Chairman John Sculley. Several years ago, he was one of the first to call attention to the coming convergence of computers, communications, and mass media. He began working on offshoots of Apple's Macintosh to catch that wave. But, he says, a decade after he entered the PC business all the changes in technology have not made much of a difference in how the machines are used. Then, 70% of all software applications were spreadsheets, data bases, and word processors--and today, that's still true. "It's why I went into the wireless world," says Sculley, now CEO of Spectrum Information Technologies Inc., a company that is developing wireless data-communications technology. "The phone doesn't require a lot of behavioral changes."

While hybrid computer-phones such as IBM's new wireless Simon are appearing, it's hard to imagine your typical phone sprouting into a full-blown information appliance. But it's not such a stretch for video-game machines. And, unlike most PCs, they are already in the living room, connected to the television. A third of American homes have a game player and two-thirds of the kids between the ages of 6 and 14 are regular players. And games makers bring both a mastery of technology and a flair for marketing to the contest. "We're more concerned about competition from the games makers in Japan than we are about any U.S. competitors," says Robert J. Frankenberg, general manager of Hewlett-Packard's Personal Information Products Group.

CASH BARRIER. But games makers and all the other contenders in the appliance race have their own handicaps. A state-of-the-art interactive game player from 3DO Corp., at about $700, is more money than most parents want to spend on what is still perceived as a toy. And even Sculley acknowledges that the phone must still be "reinvented" before it's smart enough to be the gateway to the information highway.

Makers of cable equipment also face some big obstacles. While they talk of "smart" cable boxes to manage the intricacies of 500-channel, interactive TV networks, they concede that such devices are still only in the prototype stage. Even then, they lack the computing power, storage capacity, and software to manage the kind of information that PCs handle routinely. And they're not likely to gain much intelligence because cable companies figure the cost must be kept to a few hundred dollars. That's fine if the only thing you want off the Information Superhighway is a wide choice of something to watch and the ability to conduct a few simple transactions using your remote control.

PC makers are betting that for a few hundred dollars more, consumers will go for the machine that not only controls the TV and plays games but allows them to work at home. Granted, a PC, at about $1,000, is a pricey home purchase. But if the alternative is to buy a sophisticated set-top controller, and a digital TV, and a game machine, and a smart phone, all costing $200 or more each, an all-purpose device sounds a lot more attractive.

True, the PC makers still have to prove the case to consumers--and prove to themselves and investors that they can cut it in consumer electronics. In addition to slashing costs, companies such as Compaq and IBM's PC division have moved into every possible channel of distribution, from mail order to discount warehouses to traditional department stores. They are in every geographic market, make PCs for every class of user, manufacture them worldwide, and constantly add new models, while slashing prices. "Us PC guys really understand what it's going to take to drive these products into markets where margins are slim and the pace of technology is incredible," says Howard Elias, vice-president of marketing for AST Research Inc. and a veteran consumer-electronics marketer. "I don't know very many companies jumping into this Information Highway business that understand how to do three or four product cycles a year."

Meanwhile, millions of consumers are getting ready for the Information Highway by playing with their multimedia PCs. "How does multimedia differ from the highway?" asks Mal D. Ransom, marketing vice-president at Packard Bell. Very little, he maintains. Those PC owners who are browsing interactive CD-ROM encyclopedias and logging on to on-line services such as Prodigy, CompuServe, and America Online can simply switch over to the Information Highway when it arrives. "The transition for the Prodigy user will be a lot shorter than that, say, of the cable-TV user," says Ransom. "You won't have to sell any new concepts to them."

Certainly, there's a big "if" to the strategy of using the PC as the gateway to the Information Highway, and that's the nature of the highway. The telephone and cable industries are battling, and courting, each other right now to determine which one will build and operate the networks that will pour all the interactive video, games, and voice into the home. Whoever wins that battle will have a big say over what type of hardware device will be at the end of the line. For now, says David Liddle, CEO of Interval Research Corp., a research and development group in Menlo Park, Calif., nobody really knows what the network is. But it's important for PC makers to be involved, he warns: "Getting out there and getting wet is the only way to find out."

Which is why computer makers are getting into the Information Highway frenzy. They are forming partnerships with cable companies and phone companies to develop set-top boxes and smart phones that will work with their own PCs. The theory here is if these other devices do make it into the home, so be it. Just make sure they are all compatible with an omnipotent, controlling PC.

That's the vision of Satish Gupta, director of personal systems for IBM. He sees the desktop PC as the hub, or server, of an "information structure." This structure will include the interactive cable-TV system, wireless phones, and a variety of different size PCs scattered about the house, car, and office, all connected via wireless networks.

While this home computer stores, controls, and processes all the many bits of data floating about the structure, such as household budgets, e-mail, and movies downloaded from the cable system, each family member will be checking in regularly with his or her own, very personal, appliance. "I think in the next two or three years, we can implement a small handheld personal device that uses speech and handwriting recognition and can communicate both voice and data," Gupta says. Such a device will allow its owner to be constantly in touch with every other component of his or her personal network.

Compaq's top strategist has a similar grand vision. Stearns sees a server-type PC built into the house, maybe next to the central heating or air-conditioning unit. It would be linked to what Stearns likes to call "lifestyle devices"--game machines, handheld computers, smart phones. This concept is still sketchy, Stearns admits. But, he says, "we are thinking very hard about this and can move very rapidly when the time comes."

A big question mark hovers over Apple. Sculley once championed an aggressive move into the digital future. But Apple has fallen on hard times this year, a victim of high prices and IBM-compatible PCs that have evolved into machines capable of doing many of the same things as the Mac.

Other PC companies may also find the passage into the age of the information appliance a painful one. Many smaller players lack the research and development skills to evolve their product lines. And they may find it difficult to get shelf space in the consumer-electronics stores that are likely to be key marketing outlets.

And then there are the companies that aren't convinced that the PC will even be the information appliance. Dell Computer Corp., for example, gets 20% of its revenues from consumers, but CEO Michael Dell says he has no plans to build hybrid PC/TVs for the home of the future. "Yes, you could make a PC that also controls the TV, but at those prices why would you want to?" he says.

"PET ROCK PHENOMENON." The information appliance is a concept that not everybody gets, concedes Jef Raskin, who coined the term back in 1978. And even if you get it, it's really hard to translate it into a product. After helping conceive the original Macintosh, Raskin left Apple in 1982 to launch his own company, Information Appliance Inc. Its most notable product was the Canon Cat, a word processor that used written natural language commands like "undo." The processor never sold well, and the company folded in 1989. "What I've been trying to do for a long time is make devices that are easy to use for dealing with information," says Raskin, now a consultant.

Since he's been burned once, Raskin is not willing to bet the farm on what that device will be. "One can never rule out the Pet Rock phenomenon. You never know what new thing will come up," he says. But at least for now, Raskin thinks the PC is the most obvious candidate for an information appliance. Beyond that, perhaps PC makers should stay tuned to Star Trek: The Next Generation to get an inkling.

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