Sunday, February 04, 2007

the 100 dollar un-pc

Rajesh Jain thinks the next billion computer users hold the key to the industry's next big innovation.

By Jason Overdorf

Newsweek International

Feb. 12, 2007 issue - In a humble residential neighborhood in the south Indian city of Chennai, Hema Malini—a quiet 13-year-old girl whose hair was braided with jasmine flowers—switched on the family television and a curious new device called Nova NetTV that was connected to the TV and a keyboard. In a few seconds, the Microsoft Windows logo appeared, and suddenly her TV was transformed into a PC. With her mother looking on proudly, Hema fired up encyclopedia software, checked her e-mail and Googled for a site that offers free versions of Nintendo's Mario Bros. games.

If Rajesh Jain is successful, the NetTV, which hooks up to any television, could be the first in a family of devices that connect the next billion people to the Internet. Jain, 39, is cofounder and chairman of Novatium, the Chennai-based company that makes NetTV and NetPC, a similar product that uses a normal computer monitor. Both are based on cheap cell-phone chips and come without the hard-disk drive, extensive memory and prepackaged software thatadd hundreds of dollars to the cost of regular PCs. Instead, they are little more than a keyboard, a screen and a couple of USB ports—and use a central network server to run software applications and store data. Novatium already sells the NetPC for only $100—just within reach of India's growing middle class—and Jain believes he can soon drive the price down to $70.

Entrepreneurs, philanthropists and established computer firms have for the better part of a decade invested millions of dollars to lower the cost of a desktop PC and develop cheaper alternatives. Intel has made its Eduwise laptop; AMD, a Personal Internet Communicator; Microsoft, the FonePlus. MIT computer guru Nicholas Negroponte's Children's Machine, now called the XO, is the most publicized recent attempt at converting the poor into computer users. But Negroponte's idea is to spread computers to the poor, with the help of heavy subsidies from private and public philanthropy. His price is still about $140, too high for India. Indeed India rejected Negroponte's offer of a million for cost reasons. Jain's motive is different: he wants to make money.

And he knows India. Despite the country's rise as an outsourcing hub, PCs are selling slowly—far more slowly than mobile phones or motorbikes—because they are too expensive, too complicated to use and too difficult to maintain. What people have been waiting for, some experts think, is a new approach to computing that boils the essence of Internet access down to its lowest cost—and lowest risk. Jain plans to offer all this in lease deals that include easy-to-use hardware, Internet connection, application software and service—for $10 a month.

This formula could provide a long-sought bridge over the digital divide—and may just change the way the average person thinks of computing. The solution would open up a huge new market for Internet service providers, starting in India but possibly spreading to other emerging markets, a possibility that is already attracting the attention of the world's biggest computer companies. It would become a target for innovation on a global scale, forged by immense competition for new customers, and that would have a big impact on the PC world in the West. And if the winning formula turns out to be Jain's, or something like it, it could kill the PC altogether.

Google's push into web-hosted software and Web-based data storage is already prompting the world's software makers (including Microsoft) to rethink a business built on selling copies of software for installation on hard drives. As a consequence, the compulsion to upgrade to a more powerful PC every few years is gradually disappearing. As PC sales slow, hardware makers are looking to the developing world as the source of future profits. But if Novatium or a similar competitor succeeds, that market won't ever materialize. Dell, Hewlett-Packard, Compaq and the rest will have to phase out PCs and concentrate on devices that are similar in concept to Novatium's NetPC. The hardware business will be dead. The real money will be in providing the network, applications, data storage and other elements that are even now becoming synonymous with computing. Compaq will have to become more like Comcast.

Jain makes an unusual agent for such sweeping change. He has none of the bombast of Oracle's Larry Ellison. He lives more like a monk than a millionaire—though he sold his first successful venture, IndiaWorld, for more than $100 million in 1999. Jain first got the idea to build a low-cost computer alternative back in 2000, when he realized Western PCs weren't getting cheap enough fast enough to serve India's needs. He considered buying secondhand computers from abroad, or opening cybercaf├ęs. Then he read about Oracle CEO Ellison's plans for the so-called network computer. Maintenance and management costs for the PC were untenable, Ellison proclaimed, and businesses would soon save millions of dollars by putting software and data back onto their network servers. Ellison's idea hadn't taken off, Jain decided, because so many users in Western markets already had PCs and resisted the change. Jain realized that India would be a better target for the idea.

Aiming first at small and medium-size enterprises, Jain started to explore the potential of network-based computing software at Netcore Solutions, a company he started in 1998 (he remains its CEO). But the hardware costs were a problem. After giving a talk in 2003 at a conference in Bangalore, he was approached by Ashok Jhunjhunwala, a professor at the Indian Institute of Technology in Chennai, who runs a research lab and business incubator much like MIT's Media Lab. "The device you're talking about, the network you need?" Jhunjhunwala told him. "We can build it."

A few months later Jhunjhunwala and researchers at IIT came up with a plan that builds on the "thin client" concept that has been popular in the West for years, but only for business applications. It uses a cheap microprocessor (not Intel or AMD's standard PC chips) and removes the hard disk, CD/DVD drive and other costly and problem-prone components, leaving the keyboard, screen and USB port. Easier to maintain than regular PCs, sales of thin-client PCs to businesses are growing at about 20 percent a year in developed nations, even as sales of regular PCs flatten. Instead of working backward from the PC, Jhunjhunwala pioneered a new architecture from the ground up, replacing the expensive microprocessor with the guts of a mobile phone—thus tapping a supercompetitive industry with enormous economies of scale. In 2003, Jain and Jhunjhunwala cofounded Novatium, along with Analog Devices Chairman Ray Stata, with the aim of taking thin-client computers into the home market.

Making the computer affordable was only part of the equation, Jain realized. It also had to be what users want: something that looks and performs like a PC, with all the necessary software and an Internet connection, but which is also easy to maintain and operate. Products like the Simputer, an inexpensive, Indian-made version of the Pocket PC launched in 2004, never took off because it didn't match potential buyers' image of a computer. Meanwhile, people resisted purchasing low-priced or secondhand conventional desktops because they were too threatening—there was software to install, viruses to fight and all manner of mysterious problems.

The device shouldn't be a stripped-down version of a PC, Jain says. It should be entirely new machines, like the NetPC and NetTV, with streamlined technology and a lower price. Already, Novatium can afford to sell computing like the power company sells electricity, providing everything you need, including Internet access, for about $10 a month. And once production volume hits 1 million units, the cost of materials for a NetTV will fall to $35, bringing the sale price down to $70. In July Novatium started a commercial pilot program in Chennai with a cable operator whose feed goes into about 1,500 homes. By the end of December, it had 100 users. By the end of March it's expected to have 500, all of whom would pay around $10 a month. Started with only $2.5 million, Novatium has just 60 employees, but it is attracting attention from many major players.

One reason is that Novatium machines are open to all. Unlike most thin clients, Novatium's devices work with any network server without requiring major modifications, whether it uses proprietary software from Microsoft or Sun, or free software from an open-source company like Linux. Microsoft is participating in the Chennai pilot program because Novatium's subscription-based payment system could generate profit in markets where most users run pirated versions of Microsoft products. Top U.S.-based executives from Microsoft, Yahoo, AOL and other companies have visited Hema's house and other homes wired with the NetPC and the Nova NetTV to see how the utility computing model could work in the home. And network server giant Sun Microsystems—whose slogan has long been "The network is the computer"—has already inked a deal to market the NetPC to enterprises and schools in India beginning this year. "There's a 100 million-unit opportunity in the next five years in India itself," Jain says.

The difference between Jain's approach and Negroponte's is stark. Negroponte is world famous, and teamed up with Rupert Murdoch at Davos to promote One Laptop per Child (OLPC), a program to get computers into the hands of poor, rural users. Negroponte's XO laptop is truly innovative in its own right: it has no moving parts—it uses flash memory instead of a spinning hard disk—because they are prone to failure and overheating, and it uses so little power that it can run for hours on a car battery and can be charged by hand in a pinch. To extend Internet access, it uses "mesh networking" technology that turns each device into a relay that bounces the network onward.

But the XO also needs help. Though Negroponte promises he'll meet the $100 mark by the end of 2008, today each XO costs about $140, even with subsidized parts. AMD, for instance, offer its processors and Chi Lin Technology supplies screens at prices below what they charge for-profit companies. So OLPC is dependent on the kindness of wealthy partners, and does not get great reviews for performance—at least from rivals in the for-profit business. Microsoft's Bill Gates has disparaged the machine as an underpowered and obsolete PC, and Intel executives call it a "100-dollar gadget."

Novatium's approach has been to completely redesign the computer, slashing costs while keeping the form and functions typical of a top-end PC. Once it's set up, it doesn't look all that different from a conventional PC—the basic box plus a keyboard and monitor. It installs and operates as simply as a television—you plug it in and switch it on. And the money doesn't come from government budgets or philanthropic largesse, but from Jain's profit-oriented business model. "We do want to serve people, but we want to be profitable first," says Novatium CEO Alok Singh, who was hired for his experience bringing new products to market at Cummins Auto Services Ltd.

Negroponte is critical of Novatium's approach. For one thing, he argues that reliable networks aren't available in the rural areas where his target users live. He's adamant that the XO's approach, in which software resides on the PC, is better suited to India's needs. "The [Novatium] thin-client approach is not suited for the poor or developing [countries], because it leads to a metering economic model and presumes a stable, omnipresent, broadband network," he said in an e-mail. It's "a bit like buses versus bicycles. I would recommend the bicycle for daily use."

The Novatium team makes no apologies. It is not targeting the deeply poor rural farmers that Negroponte sees as his market. It is looking first to make money on the urban middle class, where many people are too poor to buy PCs but have ready access to cable and telecommunications networks. Taking inspiration from University of Michigan management expert C. K. Prahalad, author of "The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits," Jain says that in India's PC market there are 10 million relatively wealthy Indians at the "top of the pyramid" who buy computers just like consumers in developed countries. There are an additional 30 million urban Indians at the "middle of the pyramid" and 100 million very poor Indians at the "bottom of the pyramid." "What we are saying is how can you dramatically bring down the entry levels for computing in this country and make it accessible to the middle of the pyramid?" he says. "This is the sweet spot."

Novatium, of course, has a long way to go. It needs to build a network along the lines of those run by India's mobile and Internet service providers. For that, the company will need to partner with telecom or cable companies that are pushing broadband Internet access. (It is working to line up a contract with a few small cable companies, which if successful could lead to deals with larger broadband firms like Airtel, Hathway, Sify, Tata Indicom and state-owned BSNL and MTNL.) Success will bring competition from Western firms such as San Jose, Calif. -based Wyse, which already sells some network PCs to India's IT firms. But Wyse and the others aren't yet interested in the home market. And Novatium has licensed its technology to Sun Microsystems for the enterprise and education markets so Novatium can focus on selling to home users. Jain is hoping that that head start plus a rich offering of features—such as streaming video, video-on-demand and voice-over-IP, which other low-cost thin-client PCs don't offer—will give Novatium an edge for at least a few years.

Down the road, Jain envisions his device transforming the computing landscape. "It's taken a quarter century for computer makers worldwide to get to 700 million users," he says. "The utility and network computing model can double that number in the next five years. That means there's a huge opportunity for the likes of Dell, HP, Lenovo, Intel, Microsoft and so on, and the entire existing computer value chain. But they'll have to reinvent their businesses. They have to look at an entirely different model." And they'll have to look to India.

With Jessica Bennett in New York