Free PC's in the future. The following appears in the weekend edition of the WSJ Interactive. I think it gives a clue as to why a box builder has to be positioning for the future through divesification.
Is a Free PC in Your Future?
Analysts No Longer Say No
By GENE KOPROWSKI
Special to THE WALL STREET JOURNAL INTERACTIVE EDITION
PRICE WARS over personal computers are almost as old as the
industry itself -- and the price points keep plummeting. A few years ago,
insiders wondered if PC makers and associated high-tech companies
could remain profitable selling $2,000 PCs. Now, the competition is to
snatch computers in the sub-$1,000 market.
But brace yourself. The fiercest round of cost-conscious competition is yet
to come. Later this year, consumers may see the first wave of personal
computers available at the lowest price point possible: Free.
The move to free PCs won't come because some electronics retailer --
like the now-defunct Crazy Eddie -- wants to draw traffic into stores with
an outlandish loss leader. Instead, it's coming because Internet-service
providers are desperate to increase the number of customers they have in
a world where on-line access has become a commodity that costs around
$20 a month.
After all, what better way is there to lock in a would-be Web surfer than
offering them the use of a Pentium or 486 PC for free -- or close to it --
just for signing a three-year contract for Internet access? Cash-hungry
service providers and their partners think this may be the best strategy yet
for their industry, a way to expand the reach of the Internet beyond the
technophile elite.
Such plans aren't years away, either -- they're being negotiated right now.
Ira Victor, president and founder of the San Francisco Internet-marketing
shop 452 Degrees, says he is working with "several major computer
companies" to bring the concept to reality within the year. And Tom
Howard, chief operating officer of Recompute, an Austin, Texas,
computer refurbisher, says the company is in talks with several major
service providers -- including one of China's top providers -- and hopes to
make an announcement in the coming weeks or months. Recompute's idea
is to provide service providers' customers with a refurbished Pentium or
486 for Web surfing, in exchange for a subscription deal, and a small
monthly fee, to cover the cost of shipping and refurbishing the computer.
"It won't cost more than a cable-TV subscription," he says.
While those potential deals are driven by computer companies or their
agents, other likely "free PC" pacts are being put together by Internet
companies themselves. For example, WowGlobal, a U.K.-based
consortium of service providers and hardware and software concerns,
says it is putting the finishing touches on its own version of this concept.
"We can't really tell you much at the moment, because the deal we are
looking at is very sensitive," says Gregory Adams-Tait, who is co-manager
of the WowGlobal consortium. "But I can confirm that we are examining
the cost-benefit of giving away between one million and four million
low-end computers and bundled software."
Not wanting to be left out, noncomputer companies are studying their
options. For example, Bow Rodgers, chief operating officer of PowerTV
Inc., a Cupertino, Calif., maker of operating systems for cable-TV set-top
boxes, envisions a scenario in which Internet-capable converter boxes are
given away or leased for a low cost to cable-TV subscribers. Meanwhile,
cellular-phone companies are already working with service providers, and
might someday give away Web-enabled cell phones to subscribers.
"It's happening because this kind of thing always happens," says Neal M.
Goldsmith, managing partner of Tribeca Research Inc., a New York
technology consulting firm. "It's the end point on the commoditization
road."
Going Cellular
Think about it this way, suggests Mr. Howard: Back in the early 1980s,
when cellular phones debuted, critics scoffed that the only likely customers
for them were doctors, lawyers, and repairmen -- people who, in short,
always had to remain reachable.
But cellular-phone companies discovered some interesting economics as
they built out their networks. The cost of providing cellular service for
1,000 customers was pretty much the same as furnishing phone service for
just a few customers. So starting small didn't make sense. They found it
better to increase the traffic on the network to the most it could handle and
collect more cash.
The best way to do that, the cellular-phone industry found, was to give
away low-end cellular phones for new customers who signed a multiyear
subscription package. That is why today one sees all manner of
professionals -- and even teenagers -- toting cell phones around.
Service providers want to make PCs as ubiquitous. The thinking behind
the emerging strategy -- heretofore discussed by pundits as a purely
speculative, futuristic scenario -- is to make the PC just another part of the
Internet's infrastructure, along with routers, switches and servers. For
Internet entrepreneurs, PCs are the way to unlock consumers' wallets and
make money on Internet access, content and transactions -- the PCs are
the means, not the end in itself.
Those committed to the idea think that the PC giveaway could bring a rush
of not only surfers, but also shoppers into cyberspace. "As soon as the
wholesale price for a PC gets down to a reasonable level, it would make
sense for us to give them away to be used, primarily, as the shop in your
home," says WowGlobal's Mr. Adams-Tait.
In his view, cyber-savvy merchants should be eager to see that come
about. "Compare the cost of giving homes their own direct retailing
system, compared with the cost of opening stores in malls across the
country," he says. "This makes sense."
Already, the wholesale cost Mr. Adams-Tait speaks of is lower than one
might think. According to Mr. Howard, procuring a used PC costs
computer remanufacturers around $100, with rebuilding them and
polishing them up costing another $100 or $150. That means that any
amount over, say, $250 charged by the remanufacturer is pure profit. The
remanufacturer can make a profit by selling the refurbished PC to an
service provider for $300. The service provider then gives the PC to a
subscriber, amortizing the cost of the giveaway over the course of a
three-year contract. The model also works for new but older-model PCs,
which sell for a similarly low price.
Casualties on the Road?
The era of the free PC could create casualties, of course. Take the
network computer, envisioned by Oracle Corp.'s Larry Ellison and others
as a low-cost, easy-to-maintain computer -- and already pitched in Oracle
ads as a way for those left behind by the information revolution to catch
up. But the NC could lose a lot of its appeal to home users if the
competing product is a familiar, traditional PC that's offered for nothing or
next to nothing.
But of course, the free-PC era isn't here yet. Richard Watson, a vice
president at Boston consulting firm Fitch Inc. says he thinks it is premature
to start tallying up the winners and losers in this next round of the computer
price wars -- among other things, no one really knows how consumers will
take to the concept. But what is clear is that the idea of giving away a PC
is no longer an "if" for analysts to ponder in their idle hours. Now, the
question is "when." |
