From...

August 16, 1999
Web posted at: 11:51 a.m. EDT (1551 GMT)

ALSO

LA business follows PC model: "free" iMacs    Sign up for the Computer Connection email service    For more computing stories

by Charles Bermant

(IDG) -- Life was tough for Danny Ramos. A 25-year-old New York student without his own PC, he did all his computing at work, in the library, or at his brother's house. He'd stay out until past midnight, and seldom saw his two young kids.

Then he got lucky. Gobi, a company that supplies PCs to subscribers of Internet service, "hired" him as a tester. That is to say, he gets a Gobi PC, Internet connectivity, and tech support in exchange for putting the system through its paces. So now he's up late several nights a week exploring the online world. And he's hooked. But if the deal disappeared and he was forced to actually start paying for the service, he'd ante up in a New York minute. Literally.

MORE COMPUTING INTELLIGENCE
	IDG.net home page
PC World home page
FileWorld find free software fast
Make your PC work harder with these tips
Reviews & in-depth info at IDG.net
		IDG.net's desktop PC page
		IDG.net's portable PC page
IDG.net's Windows software page
IDG.net's personal news page
Year 2000 World
Questions about computers? Let IDG.net's editors help you
Subscribe to IDG.net's free daily newsletter for computer geniuses (& newbies)
Search IDG.net in 12 languages
News Radio
	Fusion audio primers
	Computerworld Minute

Not so long ago, we heard predictions that PCs would hit a "saturation point." Sales would soon level off, and everyone who could afford a PC already had one. Manufacturers would once again consolidate. Faced with such dire consequences, vendors came up with a scheme to sell computers to those previously excluded. By bundling a machine with Internet service -- which customers need to purchase anyway in order to get online -- it then appears that the machines are "free."

So is this marketing trend the wave of the future or a passing fad?

New lows, new lures

"It's the wave of 'now,'" says analyst Cheryl Currid. "With hardware prices so low, vendors are pulling the old razor trick -- give away the razor, but sell the blades. Today's free PCs come with a string attached: usually two to three years of Internet ISP service, but this service will become unnecessary when more homes are equipped with DSL or cable modems."

Clearly, however, the tactic finds takers. "We have removed the barrier of entry for anyone who wants to get on to the Internet," says Steve Dukker, president of eMachines, which in July announced a similar promotion. Buyers get a rebate when they sign a three-year contract with Compuserve. "This is a major turning point in getting America connected."

Adds Gobi CEO Ganesh Ramakrishnan, "this isn't free, it's better to describe it as the 'subsidized' PC model." The subsidized model borrows from the evolution of cellular phone marketing. Not long ago, a cell phone cost $300 to $1000, depending upon features. Now, with computers as well, the low end has become the high end. You can get basic hardware for free as long as you agree to a certain (usually multiyear) service contracts -- in the case of both cell phones and PCs. If you want extra features on your PC, they'll cost a lot less than they used to. The upshot is, the basic PC configuration sufficient for most people can be had for the cost of a monthly Internet service fee, which you would pay anyway.

In this respect, PCs and cell phones have one clear difference. Cellular service requires a monthly service fee and metered calls. Additional services such as voice mail, call transfer, call waiting, all incur extra cost. So anyone who uses the phone several hours a day could face a bill of thousands of dollars. PC prices, however, are fixed. You may sign on for extra services (in most cases, a more powerful machine) but it will never cost more than the agreed amount no matter how much you use the service.

Hidden costs and extras

Options abound. Prices for PC/Net service bundles range from around $20 monthly, the same as "standard" Internet service, to more than double that for a "subsidized" high-end machine. Sometimes you can keep the system after your contract is over for yet another "small fee." Sometimes the subsidy is in the form of a voucher, so you get $400 toward the purchase of a PC. The trouble is, this is never enough. Extra features are always alluring. And none of these offers even acknowledge the need for a printer.

Many of the barriers for new PC users are perceptual. As PCs enter a third decade, we must remember that many people are still scared of computers. But for the reluctant newcomer, it's appealing to get everything for a monthly fee that compares with other utility bills.

Jack Vawter, a retired engineer in Fort Worth, Texas signed on with Flashnet and is proceeding at his own rate. One month he may learn e-mail, the next he will learn how to search for medical information online. And even if he doesn't log in at all for long periods, the most he loses is $21.95 each month.

Vawter points out another similarity between his subsidized PC and cell phones, which he also recently acquired. He pays the cell phone fee on the chance he will need it in an emergency.

"One day I may really need to get something from the Internet, and that's when all of this will pay for itself," Vawter says.

Lower admission to the Net

The subsidized model also dismantles financial barriers. Steve Dukker of eMachines notes that "someone who makes $20,000 a year doesn't have $1000 to put down on a single purchase." PC sellers run a standard credit check for many of their sales. The vendor or retailer will walk new users through set-up and basic use. They're betting that you'll become dependent on the Internet so you will no sooner send back the PC as you would shut off your phone or your cable TV.

Dukker's contention that a monthly fee is a lot easier to handle than a lump sum makes sense. It clearly lowers the admission fee to the Internet. But those who continue to buy "the old-fashioned way" and pay up front also benefit from the trend. Brand name manufactures, including Micron and Dell, are packaging Internet service and a capable PC for one low price, around $1000.

The marketing tactics differ regarding what constitutes a free PC. Dell describes the deal as free Internet service with a PC, while Micron is offers a free PC when you commit to three years of Internet service. In either case, you pay up front.

Unproven companies like Gobi and eMachines promise tech support, but this could turn out to be an empty promise if these firms don't last. "I think customers will put up with a little less consistency and quality in tech support," Currid says. "After all, it's free, and you get what you pay for."

If you can pay up front, you get brand-name components and support -- along with some confidence that the manufacturer will be in business for some time. Dell's tech support has earned praise, which also reassures the cautious PC buyer.

Generally, however, if you can pass a credit check, you can get a PC. Getting out of the contract can have its complications. It's usually not possible to return the PC and walk away. Should you decide to back out, most firms will charge a sliding "termination fee" based on the time left in your contract. So be sure to check out the specific exit strategy before entering into such an agreement.