It's a question of when, not if. When Internet appliances become the next hot product market, I mean. Why am I so confident that the time for Internet appliances is just now upon us? Three reasons: One, history is repeating itself. Two, Internet appliances actually solve real-world problems for consumers. Three, world-class product manufacturers smell a chance to make real money in this space, and they're already moving to establish leadership positions in this market.

Figure 1: Connected appliances deliver new applications.

What I don't mean by the term "Internet appliance" is how your dishwasher is going to talk to your refrigerator. My definition of Internet appliances describes low-cost, purpose-built products that execute one or more applications that access the Internet reliably.

So how is history repeating itself, and what does that have to do with Internet appliances?

In the early 1980s, cable TV changed how and what we view on TV. An interesting fact that most people aren't aware of was that 93 percent of cable purchasers said they did not need cable. By that, I mean that they could receive broadcast TV signals without any problem in their home. They did not need cable to watch TV.

However, they wanted CNN, ESPN, HBO and other cable-only services, and the only way they could get what they wanted was to install cable. American consumers (and the manufacturers of television sets) decided that they couldn't live without the fastest growing new source of entertainment and information content.

Dé ja vu. The Internet is today what the cable infrastructure was in the 1980s—the fastest-growing source of new information and entertainment on the planet. Just as television manufacturers found out in 1980, people making consumer devices today must have a plan for how their product can connect to the Internet, or their product will suffer the same fate that a television without a cable TV tuner would today.

This has already happened to personal computers. I can't buy a consumer PC on the Internet that doesn't have at least a modem for Internet communication. The coming wave of Internet appliances all have connectivity as well. Otherwise, they wouldn't be very good Internet appliances, would they?

So what applications do people want Internet appliances for? Sharing Internet access, listening to music/news/TV, and low-cost IP telephony are the three killer applications for Internet appliances. Although not an exhaustive list of all applications that are possible, these three applications encompass the tasks that tens of millions of people do every day. Consumers have consistently demonstrated that when there is a better way to perform these tasks, they adopt it.

Figure 2: Which Internet appliances make sense?

The now-hot debate is centered around the form factor of the consumer electronics device that will deliver Internet voice, video or data as the network of networks continues to take reign as the fastest growing source of entertainment content on the planet. Which Internet appliances make sense?

The answer is far from obvious. It is perhaps wiser instead to focus on individual consumer applications and the voice, video or data content they require. There is no shortage of device developers already rushing the doors with connected non-PC devices. But, will these devices solve real-world problems, like shared Internet access off a single broadband pipe; streaming audio or video; or cutting the cost of long distance telephony by 80 percent? The short answer is yes; and they are becoming more commonplace as smart, talkative microprocessors populate everything from your car, television, cordless phone and digital picture frame.

Pair the growing presence of these smart digital devices with the fact that analysts like eTForecasts believes 205 million Internet users are expected in 2005 (when a lot more Internet-connected devices will be coming home). Already, digital picture frames from companies like Cevia allow users to plug into an existing telephone jack and download pictures from family members across town or halfway across the world. Dell Computers and S3/Diamond Multimedia now sell networked audio devices using that same existing household phone line as a digital link to a home computer for serving up music.

The third reason why Internet appliances will sell is that the big boys want it to happen. Companies offering Internet-based services are already putting Internet appliances into their subscribers' hands. Examples of this include Virgin Entertainment and Fidelity Investment.

Virgin distributed more than 10,000 Internet appliances called WebPlayers to consumers earlier this year for full-fledged Web surfing and e-mailing. Fidelity chose a two-way wireless approach for account access, alerts and trading. Both services take a subscriber approach to Internet appliance usage. Other connected devices from mainstays Dell and Compaq Computer, with its new iPaq, are straight-out purchases.

Another approach to the market comes from Sega and Sony and their popular gaming machines. Connecting these machines to Internet content vastly increases the number of games users can access, not to mention the number of players capable of playing online. PlayStation2 and Dreamcast, along with upcoming next-generation consoles from Nintendo and Microsoft, are vying for a share of an expected boom in sales of devices and appliances capable of accessing the Internet for limited purposes, like games or e-mail.

Two of these heavy hitters have also doubled down their bet. Sony has publicly stated it expects to have the majority of its products talking to the Internet for increasingly interesting content and constant connectivity. Not to be left behind, Microsoft now includes home networking support in every new operating system, including the connected gaming market, with its X-Box console.

Market researcher International Data Corp. predicts that this market will grow rapidly. Internet appliances, including TV set-top boxes, handheld computers and gaming consoles, are expected to increase from 11 million units shipped in 1999 to 89 million units in 2004. Revenue will grow from $2.4 billion last year to $17.8 billion in 2004, IDC predicts.

Three is not a crowd; it's a network

The Internet appliance market is not simply about connecting one device to the Internet. It's all about sharing access to the Internet from multiple points in the household at the same time. With the surge of broadband Internet service coming to tens of millions of U.S. households in the next three years, there will be a large number of multi-device homes coming online.

Today, more than 25 million U.S. homes already have two or more PCs. Will these computer-laden households and their new Internet appliance brethren pay for two or more monthly Internet services? That's unlikely. Instead, the vast majority of these Internet-thirsty households will install a home network to share Internet access among the PCs and new Internet appliances.

Figure 3: Internet appliances feed off a home network.

Already, there are millions of homeowners who have purchased high-speed home phoneline-based networks. Industry estimates point to nearly 20 million miles of pre-installed phone wiring, compared to less than 5 million miles of business-class networking wiring for Ethernet. This same wiring everyone uses for simple telephone calls today is actually a high-speed network in disguise. Devices featuring a standard developed by the Home Phoneline Network Alliance (HomePNA) boast 10 Megabits per second capabilities (just like business-class Ethernet without any new wiring) that are now available in numerous forms from leading PC suppliers, network equipment purveyors, broadband modem providers and communication semiconductor companies.

Self-service is essential

Retailers and equipment providers alike have an important requirement for both Internet appliances and their home networking counterparts. Both must be consumer-installable, require no new wiring and have enough speed to support any number of household audio, video or even telephone users. Also, home networks will need to offer concurrent support for both wired and wireless application traffic.

Fortunately, manufacturers have already spotted the fact that history is repeating itself, as home phoneline networks are poised to offer wireless extensions mirroring today's cordless phone base stations. This solves the mobility problem, while leveraging the home phoneline network already installed.

Connecting new Internet appliances needs to take five minutes or less. Any additional complexity or time requirement and the customer will promptly box up the device and return it to their retailer.

The other dilemma here involves a low enough cost to allow any consumer to use a home networking scheme. To stimulate rapid market acceptance, HomePNA members are pricing stand-alone, home networking add-on adapters at well under $50. Vendors including 3Com, Intel, NetGear and S3/Diamond Multimedia are among the early leaders in this market space.

Aftermarket products are only one branch of the Internet appliance tree. Building network connectivity into the device for the consumer at the time of purchase builds value right out of the box. The new home networking marketplace gives retailers and OEM product developers a huge opportunity for new sales because multiple Internet appliances are more likely to be sold at one time. The more Internet appliances that get sold, the more a high-speed home networking solution for consumers will become essential.

The crux of this argument is that we can see the applications that consumers want supported by Internet appliances clearly, but what those appliances look like is less clear. Each one incorporates some form of home networking, just as all TVs today include a cable TV tuner. Consumers can be expected to continue to demand applications that are already being used that become more interesting and more useful with Internet appliances and a home network. By focusing on those applications that are already being used, the consumer skips the steps of learning new behavior and deriving minimal value from the Internet device. The biggest remaining question is what other Internet appliances will come to market to solve the users' information needs today and tomorrow. Only time will tell.