Mani and Thread - Article: FTC may not like "Free PC's" when tied to long term service contracts.
mercurycenter.com
Free' computer offers draw interest of the FTC
Agency is scrutinizing the ISP long-term lock-ins
BY MARK HARRINGTON
Newsday
As ''free'' computers tied to three-year Internet service contracts fly off retail shelves, they're also drawing scrutiny from state and federal authorities who question the wisdom of such long-term lock-ins. The Federal Trade Commission said Monday that it is scrutinizing the offers.
''It's definitely on our radar screen,'' said Toby Levin, team leader of the FTC's Internet Advertising Group. ''It's a question of whether there's adequate information being provided to consumers so they can evaluate the offers.''
Internet service providers who sponsor the deals say consumers have never had a better chance to enter the PC revolution so cheaply, but they also say the $400 rebates lower their traditionally high marketing costs and promise them stability in an industry notorious for high customer ''churn,'' or turnover, rates. Swarms of new customers also allow the Internet companies to charge higher rates for advertising or linking to their sites.
In addition to the FTC, at least two state attorneys general are questioning whether the benefits extend to consumers. The New York State Attorney General's Internet Bureau, which has been monitoring the offers, said customers should be cautious about locking into the long-term contracts in a fast-changing market.
Service may suffer
Of particular concern, said Eric A. Wenger, assistant state attorney general, is that an Internet service that appears fast and cheap now may seem slow and overpriced in three years, hobbling those who locked in.
''It's quite possible that modem-based communications might become obsolete'' over the three years, as broadband technologies such as cable modems take hold, he said. Others point to free Internet service from companies such as NetZero, Microworkz, AltaVista and rumblings from such lock-in proponents as Microsoft's MSN service and America Online, which owns CompuServe, as a sign Internet pricing is certain to decline.
The stakes could be high: Up to 70 percent of retail computer sales this summer are tied to Internet service rebates, said Stephen Dukker, president and chief executive of PC maker e-machines, based in Irvine. Micro Center, the Columbus, Ohio-based national retail chain that launched the first such promotion with Microsoft's MSN service this summer, is reported to have sold in excess of 100,000 systems in just the first month.
It's easy to see why: In some cases, the $400 rebates are enough to cover the entire cost of the cheapest PCs. Most customers will have to pay an average of $20 a month for Internet service whether they opt for the PC rebate or not, the companies argue.
Practice is defended
''They're going to need (Internet service) from someone,'' said Audrey Weil, senior vice president and general manager of CompuServe, which offers a $400 rebate through retailers such as Circuit City. ''This is quite a value proposition. We are seeing lines in stores for people to get the computer.''
While the cost for Internet service is effectively cut in half with the rebate figured in, the discounted or ''free'' PC can require an investment of $1,000 or more.
Wenger urged customers to be aware of the out-of-pocket expense many of the deals require, particularly since the rebate check may not arrive for months, and he urged consumers who do sign on to keep photocopies of all receipts, and to watch the calendar to make certain the rebate check arrives when companies say it will. If it doesn't, and the company won't respond, notify the attorney general's office. Others urged consumers to read the fine print.
Service companies say the deals offer an unprecedented value. Some suggest that even if market prices for standard Internet service were to decrease, they would consider sweetening the offers for locked-in customers.
''That's obviously something we can look at as time goes on,'' said Rob Bennett, director of marketing at Microsoft's Internet service, MSN. ''We could treat (those subscribers) like they are part of a subscription club. They may get special subscription benefits there could be a service offering.''
First-timers targeted
Companies said their offerings are targeted at the largest segment of the available market, the first-time computer buyer.
For Internet service providers, the offers represent vast improvements over past marketing schemes such as free trial offers and direct-mail CDs. Dukker of e-machines said ISPs can spend between $100 and $300 in marketing dollars to acquire a single subscriber who is very apt to switch service quickly; so-called churn rates for ISPs can range from 30 percent to 60 percent a year, he said. In that light, the $400 rebate to lock in a customer base for three years isn't much at all.
Weil agreed. ''We'll see our marketing expenses go down,'' she said. ''This is a more efficient way of marketing than other ways.''
At the same time, observers note the Internet service market is in a state of great flux, with prices falling, broad-band Internet services promising significantly faster ''always-on'' service, while others test the free Internet model.
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