B: Companies Providing Cheap Computers Fail to Capture Market
Feb. 21 (Austin American-Statesman/KRTBN)--When Free-PC Inc. announced
last February that it would give PCs to users who were willing to
constantly have ads on the screen and their Web-browsing habits
monitored, there was excited speculation about the radical new business
model.
The following month, Microworkz Computers announced its Webzter Jr.
for $299 -- including $240 of Internet access in the first year.
Chief Executive Rick Latman predicted the company would sell 500,000
of the PCs by Christmas and make money at it. Another revolutionary
business plan, went the industry buzz. In theory, upstarts such as
these would exploit the lure of the Internet to radically change the
way consumers acquire PCs.
In fact, skeptics who said there is no such thing as a free PC were
right. Sort of.
EMachines, the Irvine, Calif., pioneer of cheap PCs, acquired Free-PC
in January. One of the first things it did was end the money-losing
experiment.
The 25,000 people who received new Compaq Presarios last year got to
keep the computers, no strings attached.
Who can blame eMachines? Free-PC lost nearly $106 million in 1999,
according to stock-registration documents eMachines filed with the
Securities and Exchange Commission.
"That whole free-PC thing, the online model and rebate model is really
beginning to fade, especially where you agree to be online and look at
all these ads," said Steve Koenig, senior hardware analyst for PC Data
Corp.
There are a number of reasons why it didn't catch on, including
frequent complaints about being locked into poorly performing Internet
services and slow computers.
"They were practically out of date before they left the warehouse,"
Koenig said.
While eMachines didn't think much of that business model, it bought
Free-PC for its expertise at blending other companies' ads and Internet
access with eMachines' hardware.
The company recently announced a sale of fully equipped PCs with a
466-megahertz Intel Celeron chip for about $550. A newer model with a
500-megahertz Celeron and more memory goes for about $750.
Those prices don't include available rebates of up to $400 for signing
up for Internet service.
Free-PC's obituary was barely finished before a new low-cost company
emerged to exploit the market that Free-PC and eMachines helped create.
This month, PeoplePC Inc., a tiny San Francisco startup, signed deals
with Ford Motor Co. and Delta Air Lines to provide brand-name computers
to their employees worldwide. The corporations, with more than 400,000
workers, will subsidize the PCs, which will come with Internet service
and direct links to the companies.
The U.S. employees will pay an estimated $5 to $12 a month for
Internet service.
"They didn't dream this whole idea up out of nothing," said Roger Kay
of International Data Corp. "They learned from some other people's
mistakes."
PeoplePC becomes, in effect, a re-seller for the consumer market. In
the huge corporate market, resellers help big companies design their
computer systems and then install the brands that offer the best
prices, such as IBM, Hewlett-Packard Co. or Compaq Computer Corp.
PeoplePC will provide the full suite of services for Ford and Delta
employees, from shipping computers to their houses to getting their
Internet access set up to follow-up technical support. PCs will be
supplied by H-P and Toshiba Corp., and the services will be delivered
by established Internet service providers and service vendors.
It's that low-cost, high-volume model that helped PeoplePC attract
deep-pocket investors, including Softbank Corp.'s venture fund.
Free-PC was launched with about $50 million in funding by Idealabs,
the respected California venture fund and incubator. But it had trouble
rounding up more money as time went on.
There really isn't any money in it," said Koenig.
EMachines lost money in 1999 too, but nothing like Free-PC.
According to the documents filed with the SEC, eMachines lost $5.7
million on revenue of $814 million.
The filing also underscores how little breathing room the low-cost
model affords the company. EMachines said gross profit margin, which is
the difference between sales and the cost of producing those sales, was
only 4.1 percent for the year ended Dec. 31.
Dell Computer Corp., by contrast, had a gross margin of 20.7 percent
in its recently completed fiscal year.
But eMachines' role in forcing the PC industry to lower prices is
indisputable. It was the first company to introduce a branded PC for
less than $400, after the rebate, and consumers responded. Six months
after shipping its first product in November 1998, it was among the top
five makers of consumer PCs. Supported by three-year Internet access
agreements for customers, eMachines sold nearly 2 million PCs through
retail stores by the end of 1999. By summer of 1999, Best Buy and
CompUSA were selling their own brands, coupled with Internet access,
for about $22 a month. After signing up for the Internet service,
customers were mailed a rebate checks.
The programs often were criticized, as was the Free-PC plan, for
saddling naive consumers with mediocre PCs and locking them into three
years with an ISP that was owned by someone else.
Initially critical of those deals, Dell last year began offering
rebates of $400 for selected PCs with a three-year Internet-access plan
through DellNet. That offer ended late in January, but may be started
again.
"It was directly through Dell vs. a third party," said Lory Pilchik,
director of consumer brand marketing at Dell.
Moreover, Dell allows customers to upgrade their PCs. All those
competing offers slowed eMachines, whose shipments declined in the
third and fourth quarters.
Still, eMachines remains popular with novices. In Austin, for example,
eMachines sells nearly as many of the PCs as Compaq at Sears Roebuck &
Co.'s store in the Hancock Center, said sales associate Terry Parker.
"They're pretty useful for first-time buyers who are not sure what
they want to do with a PC yet," Parker said.
Free-PC, operating under the principle that you get what you pay for,
left its customers with little leverage to complain about computers
made with outdated technology.
David Brown of South Bend, Ind., was one of the 25,000 people who was
willing to put up with the hassles of ads and monitoring to get a free
Compaq from Free-PC.
He said it looked cheap, the hard drive was noisy and he had to add 64
megabytes of memory so it would run basic applications fast enough for
them to be useful.
"Even taking in the hardware problems, the computer was free," Brown
said after reading eMachines' e-mail canceling the agreement and
telling him to keep the PC. "So I cannot complain that much."
By Jerry Mahoney
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