Before the Internet arrived, the idea that you could make money by selling products for a fraction of their cost would have seemed ludicrous.
Now it’s merely passe.
A growing number of computer manufacturers are lowering the sticker price or eliminating it altogether if customers agree to use the company’s Internet service and submit their Web surfing habits for inspection by direct marketers.
While it’s unclear whether this business model is any more substantial than a supermodel, the warm reception these companies have received on Wall Street suggests the scheme is at least photogenic.
Netpliance, the latest example of this trend, sold 8 million shares at $18 apiece to raise $144 million in its initial public offering last month. Its hopes rest with an inexpensive Internet device called the i-opener, which is designed to work only with the company’s $21-a-month access service. Between monthly fees and receipts from e-commerce deals, the company believed it wouldn’t be long before the profits started rolling in.
But Netpliance quickly ran up against something that awaits many dot-com businesses a little further down the line: reality. The i-opener is, in fact, a little more open than its makers had hoped.
Infiltration
An enterprising hacker discovered last month that the devices could be modified and used as a cheap PC that works just fine after canceling Netpliance’s Internet service.
Suddenly, a company that thought it was building a captive market of online shoppers was instead selling computers worth $400 or more for $99 apiece.
Oops.
Web pages were posted, wiring diagrams were shared, and hackers around the globe snatched up tens of thousands of i-openers. Netpliance’s stock, meanwhile, plunged perilously close to the company’s actual value.
Company officials originally responded with some gibberish about wanting to take advantage of the creativity of the hacker community. While that sort of talk inspires lots of smiley-faced e-mail among Net geeks, it smells like blood to investors.
So the company settled on a strategy rarely seen in the history of manufacturing: It started sabotaging its own products.
In addition to installing a new bios the chip that gives a computer marching orders immediately after it’s powered up Netpliance workers actually started snipping the metal pins that hackers use to connect hard drives to the motherboard.
Without a new hard drive to boot from, the devices have no choice but to run their own operating system, which requires loyalty to Netpliance’s online service.
Taking countermeasures
These changes only inspired hackers to work harder. A few friends of mine who bought “hack-proof” i-openers said the alterations only slowed them down.
With help from Web sites posted by fellow tinkerers, they figured out how to trick the bios into accepting new instructions. They were then left to choose among several ways to get around the snipped pins, including soldering on a new connector or jamming metal pins into the hard drive’s female connector to allow contact with what was left of the pins.
Mind you, the last thing these guys need is another computer. But the challenge of defeating i-opener’s countermeasures and setting up a free Linux system on a computer meant for commerce was a lure too tempting to resist.
Netpliance has since responded with a legal deterrent that might prove more effective than its physical modifications. The company is telling i-opener buyers that if they cancel the accompanying Internet service within 90 days, their credit card will be charged $499.
The charge raises the effective price of i-openers to more than $200, which might help stem the company’s losses. But it won’t do much to attract new customers when other computers and online services are going for even less than a dime a dozen.
If there’s a moral to this story, it has something to do with how poorly tested most Internet business plans really are. In a market this new, it’s impossible to predict what pitfalls may await the dot-companies that so far have been floating along on high stock valuations and a dream.
Perhaps Netpliance will recover from these problems to turn the healthy profit its investors apparently expect. For now, though, giving away something for next to nothing has earned them more than they bargained for.
To contact Joe Salkowski, e-mail him at [email protected] or write to him c/o Tribune Media Services Inc., 435 N. Michigan Ave., Suite 1400, Chicago, Ill., 60611.
