From...

October 29, 1999
Web posted at: 11:10 a.m. EDT (1510 GMT)

by Tom Mainelli

(IDG) -- It sounds too good to be true. Enter any superstore, buy a PC, and you get $400 back if you apply for three years of Internet service. Pick the right PC and it's basically free.

But beware, because "free" is relative -- and you may find yourself regretting that long-term Internet service deal.

When you commit to a $400 rebate deal, an Internet service provider such as CompuServe or Prodigy Internet puts up that money, says Schelley Olhava, a research analyst at International Data Corporation. If it's a retail arrangement, like the one Best Buy has with Prodigy, the ISP pays the retailer so you get the discount at purchase, she says. The retailer probably earns a finder's fee as well (though executives aren't keen on disclosing such details). If it's a mail-in rebate, you pay for the system and your check comes from the ISP (or a hired rebate firm).

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ISPs front the money today to make more money later, she says. If you agree to a three-year deal with a provider that charges $20 a month, for example, by the end of that term the provider has reclaimed its money plus another $320, and it has the opportunity to make more by selling you additional services.

Free isn't frequent

Contrary to rumor, "free" PCs are not plentiful. Only a handful of vendors sell such low-end systems because profiting on them is nearly impossible. For instance, eMachines offers $400 PCs (sans monitor), but it loses money on them and must make up the difference with more expensive systems and other revenues, Olhava says.

Most consumers use the $400 to buy a more expensive PC, taking advantage of deals such as that offered by Hewlett-Packard and CompuServe on Pavilion home computers. The lowest-priced unit, including monitor, costs about $300 after the assorted rebates.

People are willing to spend money on top of the rebate to get a name-brand PC, says HP spokesperson Ray Aldrich. With rebates, he says, everybody wins because the consumer gets a good PC, and HP reaches another customer.

Executives at Best Buy say the Prodigy Internet deal also benefits everyone. "It's one-stop shopping," says Best Buy spokesperson Joy Harris. You get the PC and Internet access you want for less up front, and Best Buy gets to sell you a system as well as extras like printers and software, she says.

Meanwhile, Prodigy sees the deal as a good way to get people online. "It makes computers and Internet service available to more people," says Dan Levine, a Prodigy spokesperson. And it helps the company "zero in on the right subscribers."

Regrets down the road?

IDC's Olhava says she doesn't think these deals are bad for consumers. You are still paying for the PC, however, and you're agreeing to an extended commitment that could prove costly.

"Three years is a long time," Olhava says. While you're locked into one price for Net access your neighbor's price might drop to $5 a month. Or maybe broadband comes to your neighborhood for $15 a month, but you're stuck with 56 kilobits per second. "Think about the long-term implications," she says.