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Editor's Letter
July 2000
Subsidynesia
I’m just not convinced that the subsidy model can launch a successful appliance business.
Maury Wright, Executive Editor
I see my share of Internet-appliance announcements, and some even look compelling. Unfortunately, many of the folks hawking these ideas have a bad case of subsidynesia—a condition that makes them believe that subsidies will help create a new business. While I won't profess to be a doctor of business plans, my instinct tells me that some of these folks had best rethink their strategy.
Let's start with a product that I don't consider particularly compelling—the i-opener email and Web appliance sold online by Netpliance (www.netpliance.com) and by Circuit City for $99. The catch? You have to subscribe to a $21.95/month ISP dedicated to i-opener. In this case, I found the much-publicized hack that turns the i-opener into a weak but cheap PC far more interesting than the product itself. I would buy one if I could figure out how to use the integrated LCD as a monitor for my real PC.
But I don't expect many consumers will want a limited-function device that locks them into one ISP. Consumers who already have an ISP for their PC certainly won't pay $20+ for a second ISP just because of the i-opener's elegant design. And even customers without PCs would be better off taking one of the far-more-capable "free" PCs that comes burdened with an ISP subsidy.
I would make some of the same arguments about the moderately compelling iCEBOX kitchen-oriented appliance announced early this year by CMi Worldwide (www.cmiworldwide.com). The flat-screen, DVD-enabled model is especially neat, combining TV with Web access and a cooking-oriented portal for the kitchen. But even though I may be able to connect it through my cable modem, CMi's business model requires that I pay a monthly fee.
Even highly compelling products come with subsidy burdens. For example, several of us at CommVerge are smitten with the ZapMedia (www.zapmedia.com) ZapStation. Due later this year, the living-room device includes a DVD drive and a hard drive, and can store and play audio and video streams delivered via the Internet. ZapMedia even intends to offer the unit with PVR (personal video recorder) capabilities. However, the company is committed to a subsidy model that results in a relatively low price, but also a monthly fee—in addition to your own ISP.
The ZapMedia portal could very well make the fee worthwhile, given the company's content deal with Gannett. But if so, the content will sell itself. ZapMedia also plans to derive revenue through banner ads. I say the ZapStation could stand on its own at a fair price and sell well, based on the myriad of free Internet content.
I'm just not convinced that the subsidy model can launch a successful appliance business. I know, I know, what about the wildly successful and subsidy driven cell-phone and satellite-dish markets? Well, I paid $1700 for my first cell phone and $1100 for my second one three years later. Subsidies came about much later, as the competing networks moved to expand their already solid businesses by drawing new subscribers. Same argument applies to my DirecTV purchase.
Subsidynesia victims take heed—build a compelling product and customers will pay for it. Let the services stand on their own, and again, consumers will pay for the compelling ones. Once you're wildly successful, a subsidy model might help you become even more successful by penetrating the second or third tier of the market.
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