1999 marks the free PC revolution start
By Brooke Crothers
Staff Writer, CNET News.com
December 22, 1999, 11:50 a.m. PT
year in review In 1999 the "free PC" arrived. The computer will never be
the same.
If 1998 was the year of the low-cost computer, 1999 was the year of the
"free," or subsidized, PC. The vanguard of this movement was a group of
start-ups that gave away PCs to make money on multiyear Internet service
contracts and side e-commerce deals.
These start-ups--armed with no-holds-barred strategies to gain
customers--turned the computer industry, in one sense, on its head. The
focus was no longer the box but the Internet. The PC essentially became an
enticement to sign up for Internet service. And later in the year, several of
these start-ups were also reeling.
The impact has been profound. Major Internet service providers (ISPs) began
to offer $400 rebates, while computer makers themselves cut prices and
offered other incentives such as periods of free Internet access. Companies
are now openly discussing how Internet and advertising partnerships may be
used to offset some of the cost of manufacturing, a change in an industry
that has been centered on making profits from hardware. Computers for $1 or
less--after the rebate kicks in--became a common feature of Sunday
newspaper inserts.
In the wake of these shifts, large PC
makers are laboring to adapt their
sales strategies to those of the nimble
"free-PC" start-ups. The shift has been
huge.
"There will be a time in the future
where we won't be dependent on
hardware for profitability," said Mike
Larson, senior vice president and
general manager of Compaq's
consumer division in an earlier
interview
At the same time, several of these
new PC firms have already gone out
of business. International Data Corp.
expects to see more consolidation by
the end of 2000 in the market, with
possibly a number of companies gone
by the end of the year. Retailers,
meanwhile, are entering into tight
marketing and investment alliances
with AOL and Microsoft's MSN which
will likely lead to further discounting
techniques.
"Circuit City is now giving the $400 rebate on almost anything in the store,"
said Martin Reynolds, an analyst at Gartner Group Dataquest. "What we have
here is a shift in the dynamics of the ISP market, not the PC market."
Though that may be true, the fallout for PC makers has been unmistakable.
The level of competition became so high that superstore stalwart Packard
Bell NEC dropped out of the retail market that it once molded while giant
IBM launched a new marketing plan that will take Big Blue out of most
stores, at least temporarily.
But this wasn't totally unexpected. Back in January, Paul Otellini, general
manager of the Intel Architecture Business Group, said that declining
component costs and a desire to expand the consumer market beyond the 50
percent home penetration level would force PC makers into "a lot of
interesting experimentation."
Some of the options would include giving away the box under extended
Internet service contracts, similar to the "cell phone business model," he said
at that time. Some would survive; many would not, he predicted.
How right he was. A trickle of companies in early spring of this year turned
into a summer flood. The "free" movement officially began on February 8
when Free-PC said it would give away 10,000 PCs to qualifying
customers--and then had its Web site knocked out by inquires. Microworkz,
now defunct, Gobi and DirectWeb then followed.
"We think we can achieve one million [subscribers] over the course of a
year," said Ganesh Ramakrishnan, Gobi's chief executive at the time,
characteristic of the ebullience of those heady months.
On June 30, the dam burst when AOL said it would begin to offer
$400 rebates to new PC buyers who agreed to a three-year service
contract with CompuServe, an AOL sub-brand. AOL also announced
an investment in Emachines.
Customers took to the idea. A report in July from PC Data said free
PC sales contributed to a jump in sales in June. The number of
computers sold climbed 35 percent as hardware makers and Internet
service providers teamed up to offer rebates based on three-year
Internet access contracts, according to PC Data's July report.
The Apple Macintosh camp joined the fray too. FreeMac.com in
August unveiled a plan to give away one million Apple iMac
computers over a two-year period. (FreeMac.com as of December 1,
however, had yet to give any PCs away.)
But trends for manufacturers turned ominous. As sales rose, prices
fell. By mid-year, the average cost of a Windows-Intel architecture
PC fell by 20 percent from year-earlier levels to $890, according to
a PC Data report.
Statements from executives at the legions of free PC start-ups also
began to tell a tale of rickety business models. "If I recovered just
cost on the box, I'm happy," said Rick Latman, founder of
Microworkz before his company collapsed. At that time, he was
planning what would in retrospect be seen as a patently ludicrous
offer: a $199 device that would come with free unlimited Internet
service.
More evidence of trouble came as inexpensive PC maker
Emachines announced plans in November to merge with Free-PC
and phase out the "free" part. The reason for the buy-out, according
to executives at the two companies, was that Free-PC was not
generating the business necessary to sustain a strategy based on
free hardware.
But with the "free" enticement gone, what does Emachines get?
Free-PC was making its money by selling ad space to third parties,
which Free-PC customers had to look at as a condition of getting a
free computer. Emachines will absorb these deals, which in the end
will allow them to reap additional revenue. Either way, the deal
means that Emachines' future is not tied to simply lowering
manufacturing costs, or increasing market share.
Others concur that the future for hardware makers isn't necessarily in
hardware.
Is the PC dead in 2000?
Does this mean death to the PC? The answer to this is a resounding
no, but there will be alternatives.
The most distinctive new twist to the market will be highly
specialized Internet devices. Both IBM and Compaq are planning
strategies that offer a simple appliance centered around a robust set
of Internet services. IBM has been mulling, among other ideas, a
simple countertop Internet appliance that it would supply to
telecommunications companies which, in turn, would sell it with a
host of Internet and phone-like services to their customers. At
Comdex, Compaq showed off the "Clipper" a squarish box with a
built-in screen that connects to a phone line. Microsoft will likely
market the product as part of its MSN Companion push.
"[The PC] is definitely not dead," said Schelley Olhava, an analyst
at IDC. "We see really healthy growth for the PC over the next five
years...People need to get on the Internet and the first thing they
will think of [buying] is the PC."
Instead, the PC will become the hub of the home with ancillary
devices that connect to the PC or compliment the PC in some way.
"Think of the kitchen," Olhava mused. "You have an oven but then
you also have a microwave and toaster."
But Gartner Group's Reynolds warns that the PC industry may begin
to suffer from rebate hangover next year: "Once the base is turned
and people are locked into their ISP contracts, PC sales will suffer. I
don't have a clear view as to when this happens, but next year will
be a transition year."
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