Internet Set-top Boxes - Don't Hold Your Breath

Larry Ellison wants to wipe out the personal computer, and he's about to sell you its replacement - a $500 Internet Set-top Box (ISB). The ISB has received a lot of attention since Ellison, Chairman of Oracle, first described the idea in August, but serious doubts remain about whether a workable product can be built and sold.

To get the price of Oracle's ISB down to $500 or less when it launches, it will use the home's television set as a display. This presents numerous problems - a television is fine for displaying images, but much of the Internet still consists of text, which displays badly on a screen. And how do you arrange the living room furniture? Household televisions are generally watched from across the room, while you need to sit right by your screen to read text. And will the rest of the family be willing to forego their favorite TV program while you surf?

To match the multimedia appeal of games and educational products that work from CD-ROMs, an ISB would need to communicate with the internet at comparable speeds - ten times faster than conventional modems can manage. Broadband communications to the home promise higher speeds, but cable companies cannot provide this to a mass market yet, and modem manufacturers can't produce the necessary adapter cheaply enough.

A simple ISB would cost at least $600 and could not be sold profitably for less than $1,000, according to Rajiv Chaudhri, a technology analyst with Goldman Sachs. Malcolm Bird, chief executive of Online Media, says, "get rid of the hard disk, monitor, some of the memory and the 'Wintel tax' (for conforming to the Microsoft/Intel platform) and prices come down significantly". Certainly this vision is appealing to those who want to shake "Wintel"'s dominance, but Mr Chaudhri disputes the size of the 'tax' - he claims it only amounts to $200 on a $2,000 computer. "The PC is, in fact, a very efficiently-priced platform for the performance it delivers, thanks to extremely high economies of scale of all the participants."

Even if the technical and economic difficulties could be overcome, the potential market for an ISB may be limited. Nearly 40 percent of Americans households with incomes of $45,000 or more own a home computer already, and few computer users are going to be interested in a device that does less than what they already have. For the rest, the ISB could fall uncomfortably between two stools - too expensive for a games machine and not powerful or flexible enough to compare with a PC. Evidence suggests that price does not deter potential purchasers - the average retail price for home PCs has gone up from $1,300 in 1993 to about $1,700 today.

"Vapourware" is how Doug McGregor, Vice President of Dell Computer, recently described the ISB, meaning a product that is announced but never comes to market. Even if it does arrive, it seems that the stock market may be more enthusiastic about this idea than the buying public.