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Netpliance (nasdaq: NPLI) is setting the bar a lot higher, charging $399 for its Internet appliance. And that doesn't include the cost of Internet service. Considering you can get a brand new entry-level PC for about the same price thanks to huge rebates, one has to wonder whether Internet appliances are going to catch fire anytime soon.

The consensus among industry analysts is that consumers won't spend big bucks for a device widely perceived to be a stripped-down PC. True, Internet devices generally start faster than desktop computers and are easier to use. But they have older processors, can't run software applications or games and lack amenities that PC users have become accustomed to, such as hard drives and parallel ports for printers.

"Consumers have shown no interest to date in ponying up a premium just to lose their hard drive," says analyst Seamus McAteer at Jupiter Communications in San Francisco.

For Internet appliance makers to succeed, says McAteer, they must heavily subsidize the cost of their hardware and try to make it up by hooking buyers into service agreements. It's a model that has worked splendidly for the cellular phone industry, and lately for PC makers, who routinely knock $400 off the purchase price of a new computer when buyers agree to a three-year Internet service plan.

Netpliance adopted the subsidy strategy when it began selling its i-Opener appliance late last year. By charging $21.95 monthly for Internet service, it hoped to recoup the cost of the device, which it sold for $199--and more recently for $99 in a promotion.

But subsidized business models only work if you get a truckload of customers, and Netpliance had just 22,000 users by the end of the first quarter. The Austin, Tex., company posted a quarterly loss of $42 million, and investors turned the stock into a Wall Street version of the Ox Bow Incident, dropping it from a post-IPO high of $26.12 in March to its current level of $6 and change.

Netpliance did the logical thing last week, raising the price of the i-Opener--an enhanced version--to an almost profitable $399. Now it faces the back end of the Catch-22, because even though it will make more money on each machine, it will lose some of its ability to attract new customers.

Company officials don't think the new price will be a turnoff. "We've been looking for where the value should settle in this type of category, and what we've found is that there's a price point between $299 and $499 that our market is interested in paying for the i-Opener," says Netpliance founder and President Kent Savage.

He concedes that one reason for raising the price is to appease shareholders. "There's no question that what the capital market is looking for in the past three months is more line-of-sight on profitability, and this definitely moves us in line with that," he says.

The same pricing problem--though not the ire of shareholders--also faces New Internet Computer, the private spinoff created by Larry Ellison, the flamboyant chief executive of Oracle (nasdaq: ORCL). In an effort to reduce sticker shock, the company is advertising its Internet appliance, also called New Internet Computer, at $199.

But that doesn't include a monitor, which brings the cost to $328*--a level that, presumably, would let New Internet Computer turn a profit. The company has targeted the education market but plans to start selling to consumers this month.

Taking a less-risky approach to the market is Intel (nasdaq: INTC), which recently began shipping its Dot.Station. Instead of selling the Internet appliance to consumers, the chipmaker is selling it directly to service providers at an undisclosed price. That way, the service providers--not Intel--get stuck subsidizing the devices when they offer them to their customers.

* A previous version of this story incorrectly reported the price of New Internet Computer's network appliance package.

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