Netpliance Laces Up the Gloves

Dear Kelly:

Well, it should not surprise you that I disagree with many of the
statements and most of the assumptions that you make in your article about
the company. I think your reference to the company as a “cockroach” clearly
states how you feel, and hints to your objectivity.

However, my primary concern is of a more general nature. You evaluate an IA
[Internet appliance] based on PC criteria. To compare the two is, I think,
confusing for consumers and therefore does them a disservice. To be more
specific, if an IA were judged on speeds and feeds, price and bytes then
Netpliance would not have almost 50,000 loyal
customers (remember, we do not tie customers to any kind of contract). In
addition, customers have a full month to decide on whether or not they wish
to use the product. Just something to consider.

The fact is, if price for IAs was as much of an issue as you position it to
be, how do you explain why free computers did not fly off the shelves. If
the answer is simply because of too much banner advertising, then wouldn’t
someone of figured out a way around that little problem? There is a huge
consumer demand for simplicity and convenience to become a part of the
consumer experience for those less technologically adept than you. In fact,
the same benefits the computing industry enjoyed when windows replaced DOS
may spur a wider acceptance of computing and the Internet. But this is the
frontier of computing, and where PC makers are tweaking products we are
constantly innovating and improving. It is a learning process, but I hope
you will agree it is a worthy one.

You appear not to like Netpliance, and I have little hope of persuading you
otherwise. However, if you are interested in developing a better
understanding of the company, or just information appliances in general, I
welcome the opportunity to opening a dialogue between us. (In response to:
Netpliance Unveils a Real i-opener“)


Jon Osmundsen

Corporate Communications Director

Dear Jon,

While I can appreciate your position as chief pom-pon shaker, I
respectfully disagree with your fundamental arguments. Rather than speak in
generalities, I’ll take issue with the meat and potatoes of Netpliance’s
current outlook, which I’ve consistently believed to be dim, long before
the Internet appliance maker even hit the new issues market earlier this
year with its bloated $150 million offering.

For the quarter ended June 30, 2000, Netpliance burned through $22 million
in marketing expenses primarily attributable to an increase in advertising
costs. During that same period, Netpliance doubled its user base from
22,000 to 44,000. That boils down to a customer acquisition cost of about
$1000 a head. That’s not an impressive box score if you’re selling stripped
down Net appliances at $99 a pop.

Bottom line – with a marketing budget of $22 million, I’m certain I could
sell a subsidized punch bowl full of Sea Monkeys to curiosity seekers.
Despite spendthrift customer acquisition costs and a deeply discounted i-opener, the very idea that
Netpliance only managed to add a paltry 22,000 customers during that period
should be more than enough handwriting on the wall for skeptics. But, it
gets much worse.

Netpliance was already facing an uphill struggle, even as it offered its
i-opener appliance at blowout prices as an incentive for new customers and
unsuspecting investors alike to drink the special Kool-Aid. Then in early
July, the company bumped the price on its marginally popular i-opener from
$99 to nearly $400. Netpliance’s top banana

Kent Savage opined that his
company research showed consumers would be willing to pony up between $299
and $499 for a Web appliance.

Savage must have commissioned his research from the same Robby Stevens
yes-man who recommended this dog with a mandatory “buy” rating back in
April; because just yesterday, Netpliance made headlines after it announced
it would re-price the i-opener at $299 instead of $399. The back-peddling
went so far as to offer $100 rebates to customers who purchased a unit at
the higher price. It’s clear that Netpliance found itself sitting on top of
a warehouse full of unsold inventory following the dramatic price hike.

You stated that Netpliance has over 50,000 loyal customers and that it does
not tie customers to any kind of contract; but, that argument should be put
curbside for garbage pick-up. Customers are not allowed to use an alternate
service provider, so if they choose not to subscribe to Netpliance’s
branded ISP, they’re left with little more than an expensive doorstop.
Further, Netpliance’s entire strategy revolves around its ability to
convince consumers to buy the i-opener and “pay subscriber fees for a
significant period of time.” Barring prolonged access fees – each and every
unit is sold at a significant loss.

It’s also worth pointing out that in the early goings, savvy members of the
open source community were able to configure the i-opener to use alternate
service providers. Netpliance’s response was to change its hardware to help
prevent such reconfigurations in the future. There was clearly an initial
demand for a cheaper Web appliance with the option to choose a rival ISP.
Now, at i-opener’s current price and new configuration, a fully functional
discount PC has filled that demand. Another missed opportunity, and further
evidence of a fundamentally flawed business model.

Netpliance bled $45 million in its latest quarter on $3 million in sales
with an accelerating cash burn rate. The start-up has enough cash in the
bank for two, maybe three, quarters before it will need to saddle retail
investors with a secondary offering or explore “strategic alternatives.”
That’s plenty of time for insiders to unload their shares, before heading
for the hills. You mentioned that my reference to Netpliance as a cockroach
hints at my objectivity. That would imply that I’m presenting facts
distorted by personal feelings or prejudice. But I simply shoot from the
hip. If you find my answers frightening, you should cease asking scary



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