(FORTUNE Magazine) – Of course the PC isn't going away, but we are moving beyond it into the age of digital and intelligent gadgets. Anything that runs on electricity is being computerized, and gizmos will become the true computer for the rest of us, creating opportunities for many companies.

For years the computer industry has been preaching that one day the PC will be as common as the telephone or the TV. But even giving PCs away won't put them in every home, because the real barrier to their penetration isn't cost, it's value. The majority of households don't own PCs because the machines are still too difficult to use and, more important, don't do anything these holdouts want done.

True, when the company Free-PC announced plans in February to give away 10,000 Compaqs that permanently display onscreen ads, more than a million people volunteered to take one. This something-for-nothing marketing tactic is spreading, as more companies offer free Internet access, free electronic mail, and free online personal calendars. And the giveaways are bound to increase household penetration. To achieve ubiquity, however, what's required are computers that are more like CD players or microwave ovens--simple, nonthreatening, one- or two-function appliances--devices whose purpose is immediately apparent and whose workings are invisible.

Don't be misled by the self-serving proclamations of the PC industry, which, not surprisingly, sees its products as the foundation for almost all future developments. As digital devices proliferate, many will be based on the technology of personal computing, but there will be other routes to success, because in consumer products, technology is subordinate to function. We think of CD players as entertainment devices, not as digital-to-analog converters. We regard electronic keyboards as musical instruments, not as digital audio sampling and synthesis systems. We view the latest portable digital imaging devices as cameras. However complex the technology may be, successful mass-market digital devices usually have an obvious purpose and are direct substitutes for familiar analog products.

Following that rule, Diamond Multimedia created its Rio, a next-generation Walkman, which is selling well despite its limitations. The Rio can hold a mere half-hour of CD-quality music. Recording tracks from a CD requires that the music first be copied to the hard drive of a computer. Downloading half an hour of music over a typical Internet connection takes more than two hours. And much of what's available in the MP3 format that the Rio uses is either out of the mainstream or stolen. Nonetheless, it indicates what future portable entertainment systems will be like. Already, many of the organizers and hand-held computers built around Microsoft's Windows CE operating system can play music stored in the MP3 format and could be adapted to other formats once the music industry decides how best to protect its copyrights in online distribution.

Two other young companies taking the right approach are Replay Networks of Palo Alto and TiVo of Sunnyvale, Calif. To most people, better television doesn't involve interactivity, 500 channels, or the ability to play along with quiz shows. Better television is the programming you want, when you want it. It's personalized television--PTV, if you will--television with choice, convenience, and control. And that's what Replay and TiVo intend to provide. Both have developed digital TV recorders for the consumer market and plan to provide services enabling viewers to create on-demand television channels. Beyond the technology, which is leading-edge, a deciding factor in the success of these two rivals will be their ability to forge alliances with distributors of programming and to persuade media buyers to place advertising on PTV. In addition, because product distribution and brand are so important in consumer electronics, I'll be surprised if TiVo and Replay don't generate most of their revenues through sales to widely known, established companies that rebrand the products or build them into television sets or cable television boxes. The market is potentially huge.

Entertainment is also the focus of a powerful new digital appliance in development at Sony, better known as the PlayStation 2 videogame player, which is expected to reach the U.S. market late next year. Using Sony's own processors and memory circuits as well as those developed by LSI Logic, Rambus, SCE, and Toshiba, the PS2 operates with the speed of an advanced graphics workstation. Software developers who have seen demonstrations say the PS2 can create, in real time, moving color images with a detail and clarity approaching those in animated feature films such as A Bug's Life and Antz. Such realism is potentially important for broadening the emotional range of graphics, and thus the market, for videoplayer software, which at present appeals almost exclusively to adolescent males.

Finally, I'm also optimistic about a young digital appliance company in which I am an investor, Audible of Wayne, N.J. The company owns the rights to thousands of hours of spoken material that can be downloaded over the Internet and makes a solid-state device on which to play them. (For a review of the Audible Mobile Player, see Great Gadgets in this section.) The company has just raised $11 million, with Microsoft as the lead investor. Microsoft has nonexclusive rights to Audible's 17,000-hour audio library. That library--combined with MP3 music that's not available on the rival Palm organizers--could provide an important differentiation for Windows CE devices, which have so far been me-too machines with lackluster sales.

Further in the future, the largest potential market may be in cars. If Microsoft could arrange for Audible players to be built into future versions of the AutoPC, I can imagine that with a little programming and a wireless network, my choice of recordings could be downloaded over the Internet automatically when I park my car in the garage for the night. The next morning I'd be ready to hit the morning congestion, listening to such necessary reading as the latest Watch This Space.

RICHARD A. SHAFFER is founder of Technologic Partners, an information company focused on emerging technology. Except as noted, Shaffer has no financial interest in the companies mentioned. For an expanded version of Watch This Space online, visit www.tpsite.com/tp/fortune/. If you have any comments, please send them to shaffer@technologicp.com.