WSJ. PC Makers Decide to Hunt For Gold in Internet Hookups
interactive.wsj.com
August 12, 1998
By EVAN RAMSTAD
Staff Reporter of THE WALL STREET JOURNAL
Faced with sinking prices and slowing demand, the makers of personal
computers are preparing to do something radical: make money from
Internet services.
Compaq Computer Corp., the biggest maker of consumer PCs, has
reached separate agreements with a range of on-line service providers,
including America Online Inc. and GTE Corp., and electronic retailers
including Amazon.com Inc. Hewlett-Packard Co. has cut its own deal with
GTE. In each case, the Internet company has agreed to share with the
hardware maker a slice of the revenue on-line customers generate using
Compaq or Hewlett machines.
In exchange, the PC makers have redesigned
their keyboards to add "quick-access"
Internet features -- and, naturally, give
prominent placement to the Web sites and
services of their partners. Compaq's 1998
consumer desktop PCs, for example, have
four new Internet buttons -- for connecting,
searching, electronic mail and shopping -- with
automatic links to America Online, GTE.net, Amazon.com and Walt
Disney Co.'s on-line store. Every time a customer orders, say, a book
from Amazon.com using his Compaq Presario, Compaq gets a portion of
the sale. The companies won't disclose how much.
The companies' quick-access features could make the Internet easier to
use. They also would shift some of the control over how consumers use
the Internet into the hands of PC makers and their on-line partners. The
PC industry is hoping the new features also could reinvigorate the
economics of making and selling computers.
'Dramatic New World'
"These are the first steps to a dramatic new world for the PC and
companies like us," contends Rod Schrock, chief of Compaq's consumer
division. Three other hardware concerns -- Packard Bell NEC Inc.,
International Business Machines Corp. and Gateway Inc. -- have forged
similar on-line pacts, while also trying to tap Internet revenue by creating
their own services.
If the on-line service business becomes as lucrative as expected, then the
entire economic model of PCs could someday move in the direction of
pagers and cellular phones: Customers would pay a minimal amount for the
hardware but would agree to pay for the service over a fixed period.
Selling PCs that way isn't all that far-fetched. In France, people have
accessed the Minitel on-line service via "free" computer terminals for 15
years. The cost of the hardware is hidden in the monthly fee.
"You could envision something like
the cellular-phone business model
here," says Phil Hester, chief
technology officer for IBM's
personal-systems division. "With
prices coming down and margins
coming down, that day is probably
not too far ahead of us."
It may take more than a simple point
and click to get customers to accept
the new Internet features. Compaq
has already found out how easy it is to annoy users by herding them into
preselected Internet sites. In response to early complaints from testers, the
company had to modify its software to make it easier to reprogram settings
on the Net buttons.
Then there are all the problems and uncertainties of the Internet itself. Even
though they are called "quick-access" buttons, the new Internet features
don't shave any time off the long wait endured while most home PCs get
on the Net. And over the long term, the PC may still be supplanted by the
television set as the way most households go on-line.
Improving Margins
Still, PC makers are salivating at the thought that the Internet could restore
their battered profit margins. If they can cut the right deals, PC executives
think, Internet and related services could provide 15% to 25% of their
consumer revenue in just a few years.
Today, hardware provides about 95% of that revenue. Compaq, with
1997 consumer PC sales of $3.8 billion, is aiming to have consumer PCs
generate $1 billion in Internet-related revenue by 2001. Mr. Schrock says
he believes one million Compaq buyers will have tried either GTE's or
AOL's services by next July.
On-line executives say they hope the new agreements with hardware
makers can help keep customers signed up to Internet services. "There's
skin in the game for both parties," says Alex Coleman, a vice president at
GTE Internetworking Services.
Barry Schuler, president of America
Online's interactive-services unit,
says PC prices are nearing the point
where a monthly Internet service
could conceivably come with a
"free" PC. The critical point, he says,
may be when the price of a PC and
monitor falls below $500 -- down
from a low of about $800 today.
"If we could put the service out for
something like $35 a month and you
got the hardware with it, we think that's a great price," Mr. Schuler says.
AOL, the nation's largest on-line service, currently charges $21.95 a
month for unlimited access.
Compaq's Internet plans emerged last year. Executives were reviewing a
deal with America Online that was about to expire. In it, AOL, like other
on-line service companies, was paying Compaq a fee for installing AOL
access software on consumer PCs. Compaq had just conducted research
showing that on-line services were now consumers' No. 1 reason for
buying PCs. Compaq decided to help encourage Internet use and push for
speedier connections by investing in a cable-TV venture and joining a
consortium of phone companies working on fast phone-line technology.
Mr. Schrock set out to shift Compaq's Internet strategy into even higher
gear. He directed engineers to make it simpler to connect to the Internet
from Compaq PCs. In addition, Compaq decided to offer GTE's Internet
service in addition to AOL and negotiated with both services to share
revenue from customers' monthly fees.
Money Back
It also offered a $100 rebate to customers who signed up for GTE's
service Compaq made signing up for an on-line service one of the steps in
the start-up program that runs the first time users turn on their computers.
Previously, several on-line services appeared as logos on the PC desktop
every time. Now, once users make their initial on-line selections, they are
connected via preset links directly to the services and home pages of
Compaq's partners -- with just one push of a Net button.
Other companies have similar on-line arrangements in the works. AOL
says it is sharing revenue with IBM and Packard Bell NEC as well as with
Compaq. Meanwhile, GTE is working with Compaq and
Hewlett-Packard, which countered Compaq's rebate offer with its own
offer of 50 hours of free Internet access and maintenance of a personal
Web site.
Gateway is taking a different route. Since May, it says, the number of
subscribers to its on-line service, Gateway.net, has surged, following the
start of a financing program called "YourWare." Customers choose a
computer, software and Internet service and pay for all three in 48 monthly
payments starting at $29, for a total of $1,392. The computer alone would
cost about $1,000.
Partly because of the bundling and financing effort, Gateway's gross profit
margin jumped to 20.6% in the second quarter from 19.5% in the first
quarter. Gateway says the number of subscribers is approaching 100,000.
"I'll think you'll see more of this from the industry," says Bart Brown,
Gateway's marketing chief.
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