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Below is a take on AOL's recent deals.Enjoy the read,I did.
Ed Forrest
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***RAGAS SPEAKS FOR THE WEEK***
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The free PCs are coming
Wake up America. It's time to get your Aunt Edna and Uncle Ernie a "free PC,"
and send them on to the Internet this Independence Day weekend. The excuse
that personal computers are "just too damn expensive" is finished. The
expensive PC is dead. If Paul Revere was alive today, I could easily imagine
him riding on horseback through the streets yelling, "the free PCs are coming,
the free PCs are coming."
They are indeed coming and America Online (AOL) chief Steve Case is leading the
charge.
How would you like to be paid $1 for buying a new PC? That's right, under
AOL's new plan you'll actually get a new computer and make an extra buck as
well. I'm not joking. As part of a marketing alliance AOL forged with
Korean-backed low-price computer maker eMachines, the term "free PC" is much
closer to becoming a mass-market reality.
As part of the alliance, consumers will receive a $400 rebate on the purchase
of eMachines' $399 eTower PC if they agree to sign up for three years of AOL's
CompuServe Internet service. Of course, consumers will still have to cough up
$100 for a 14-inch eView monitor to go along with their eTower PC. So for the
moment, this offer still isn't entirely "free." After reviewing the recent
spate of "free PC" deals, though, I'm sure such an offer will soon arrive.
Is it a bargain?
Let's look at the math of this deal from AOL's point of view. CompuServe
subscribers must fork more than $21.95 a month for their Internet service.
Over a three-year period, AOL will actually pull in more than $790 in
subscriber fees from a consumer who jumps on the eMachines $400-rebate deal.
In other words, AOL could potentially turn a profit from this initial loss
leader by subscription fees alone. And that doesn't take into account the
incremental e-commerce and advertising revenue that AOL gains for each
additional pair of eyeballs it brings aboard its service.
For the consumer, however, this isn't such a screaming bargain. Why?
EMachines' eTower (with a 2.1-gigabyte hard drive, 32 megabytes of RAM and a
Cyrix M II 333 processor) will likely seem outdated, compared with most
comparable PCs priced at $400 just six months from now. It's no secret that PC
prices continue to plummet. Even if a subscriber decides to discard the eTower
for a new PC within the next three years, he or she will still be stuck paying
$21.95 a month for the next 36 months for the Internet service. It's not the
type of deal I would jump at, but the prospect of a free computer will probably
appeal to many others.
The eMachines deal allows Case to acquire new subscribers and corral them in a
three-year “lock-up period.” AOL realizes that three years is an eternity on
the Web, and that this deal will help decrease its subscriber churn rate down
the line. For a company that is evidently worried about losing subscribers to
broadband offerings from RoadRunner and ExciteAtHome (ATHM), this deal helps it
buy subscriber loyalty. You can rest assured that AOL will slap a large
penalty on eMachines subscribers who jump to a competing Internet service
before the three-year period has ended. In effect, lock-up agreements help AOL
buy more time to negotiate with the cable companies and put other broadband
operations like satellite in place before a potential mass exodus of AOL
dial-up account subscribers could occur.
Adding subscribers
Here's the real kicker. The eMachines deal should help AOL indirectly increase
its market cap. Based on AOL's market capitalization of $123 billion and
worldwide subscriber base of 19 million, Wall Street values each subscriber at
a whopping $6,473. If you were Case, wouldn't you be happy to spend $400 up
front for a new subscriber when each subscriber could potentially add almost
$6,500 to your market cap? The entire $400 rebate expense will be wiped out
over a three-year period by the $790 in revenue generated from subscription
fees. At these prices, I believe AOL will do these types of rebate deals with
PC makers all day.
Catching on
EMachines wasn't the only "free PC" deal that AOL announced this week. The
company unveiled a similar agreement with computer retailer CompUSA (CPU) on
Thursday. CompUSA customers who sign up July 3-5 for three years of CompuServe
Internet access will receive a $400 in-store discount on a large selection of
CompUSA's desktop and laptop computers. CompUSA executives apparently view the
CompuServe rebate deal as a big positive, because it will help drive traffic
into the stores. After July 5, the program will continue as a mail-in rebate.
AOL also announced a free and subsidized agreement with national electronics
retailer Circuit City (CC) last week. It is similar to the CompUSA agreement.
Circuit City customers who sign up for three years of CompuServe will get a
$400 rebate on any computers bought at Circuit City's build-to-order kiosks.
Circuit City customers can also apply the discount to in-store purchases of
eMachines' $399 eTower model. Like CompUSA, Circuit City executives were
thrilled at the prospect of additional traffic during the busy holiday
weekend.
Internet service provider Prodigy Communications (PRGY) also hopped into the
free PC game earlier this week. The company announced the nationwide roll-out
of a program that will offer a $400 mail-in rebate to all Best Buy customers
who sign up for three years of Prodigy Internet access. The rebate can be
applied to a variety of brand-name PCs sold at Best Buy. AOL nemesis Microsoft
(MSFT) is already experimenting with a similar $400 discount off PCs purchased
in Staples (SPLS) office supply stores for customers who sign up for MSN
Internet access.
A leap of faith
With big names like AOL, Microsoft and Prodigy embracing the "free PC"
movement, I believe it will be only a month or so (definitely before the end of
the summer) before some of the big PC makers like Dell (DELL), Gateway (GTW),
Compaq (CPQ), Hewlett-Packard (HWP) and International Business Machines (IBM)
make similar announcements. Gateway and Dell are already creeping in that
direction; Dell by the launch of its own ISP in Europe and a planned U.S. ISP
in the works; and Gateway through its existing gateway.net Internet service
provided by MCI Worldcom's (WCOM) UUNet.
Even Compaq jumped into the co-branded ISP game a week ago by announcing the
launch of compaq.net. According to published reports, Gateway seems the most
determined to take the co-branded PC maker-ISP game a step further by possibly
acquiring a national ISP like EarthLink (ELNK). I'm still waiting to see if
any portal site steps forward and launches its own free ISP to combat the
ferocious battle for eyeballs and subscribers that I believe this free PC
evolution will bring in the next year.
In the meantime, I'm sure Steve Case & Co. at AOL are happy to once again act
as trailblazers of the Net, while competing ISPs and portals sit on the
sidelines. After all, it's much easier to be a trailblazer when Wall Street
rewards the company for growing its subscriber base at any cost. Why should
Case waste mail by bombing American homes with floppy disks when he can scoop
up those three-year lock-up agreements at $400 a pop and turn them into almost
$6,500 of perceived value?
I'm sure if it was up to Case, we would rename Independence Day as “Free PC
Day.” Either way, there's going to be one hell of a lot of fireworks and
explosions going off when AOL gets done making its mark on the free-PC space.
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