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COMPUTING

From...
PC World

Free PCs, but not a free lunch

graphic
  

Users pay with personal data and by reading online ads.

February 10, 1999
Web posted at: 4:55 p.m. EST (2155 GMT)

by Tom Spring

(IDG) -- Remember when $800 for a PC seemed ridiculously cheap? How does free sound?

Free-PC.com of Pasadena, California, plans to give away 10,000 Compaq PCs with free Internet access to customers willing to forfeit detailed private information about themselves and how they'll use the computer. The FreePCs.com site was overwhelmed today by a stampede of potential customers eager to sign up.

Free-PC.com plans to ship 333-MHz Compaq Presarios with special software to monitor how the PC is used. It will also deliver continual advertising in borders that runs around the computer's 15-inch screen -- whether the system is online or not.

Free-PC.com's founder, Bill Gross, says the company will spend about $600 on each PC, and expects to make a profit on the targeted advertising.

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"Merchants will pay to reach you, so they essentially will subsidize the cost of the PC, indirectly," says Gross in a written statement.

The company will store ads on a computer's hard drive before it ships, and update them periodically when users go online. Free-PC.com expects to begin shipping the free PCs by the second quarter and will refine the business model after early tests.

Free-PC.com is an offshoot of Idealab, an incubator for technology start-up companies operated by Gross. Idealab unveiled its latest venture Monday at the Demo 99 conference in Palm Springs, California.

"I think it's going to be challenge," says Paul Huges, a Yankee Group analyst, who is among those skeptical of the startup's success.

The model

Industry prognosticators have said for years that PC prices would eventually drop so low that vendors would give away computers, much like cellular service providers hand out telephones. In fact, Free-PC.com might be better suited following this model and not one based on advertising revenues, suggests Tom Rhinelander, analyst at Forrester Research.

"It's not like they are giving you the razor and asking you to pay for the blades," Rhinelander says. "It's like NBC giving you a television set and making you promise you'll watch NBC for a certain numbers of hours a week."

Instead, FreePC will test the limits of personal privacy as it monitors, records, and reports to advertisers its users' habits and interests. Advertisers can then better market products and services to users.

Idealab says marketing information collected from users will be kept separate from their actual identities. Gross believes free PCs can be profitable because the potential revenue from selling advertising and transaction fees for several years is worth more than the computer's hardware. For many, this emphasizes the Web's impact on the computer industry.

But Free-PC.com is grossly underestimating the public's distaste for advertising and invasion of privacy, suggests Vernon Keenan, Internet analyst with the research firm Keenan Vision.

"This isn't like they are giving you a free cell phone and selling you a service contract," Keenan says. Free-PC.com is going to know more about you than your neighbor, he says. "I don't know how many people are going to jump at that opportunity."

One online merchant was enthusiastic.

"It sounds like a dream come true for people like me," says Scott Schoenherr, general manager of Crucial Technology. Schoenherr is in charge of sales, marketing, and e-commerce for his firm.

"Accurate information about how people use a PC is hard to find and always expensive," Schoenherr says.

Dwindling opportunities

A glut of Internet ads on the Web translates into a slow decline in ad prices, says Barry Parr, analyst with International Data Corporation. If this trend continues it could cut into Free-PC.com's projected revenues, Parr says.

Jupiter Communications projects that online advertisers will spend $3 billion in 1999 and $7.7 billion by 2002.

"Ad-supported ISPs and software have never been popular with consumers," says Marissa Gluck, a Jupiter analyst. However, an ad-supported $1000 PC might have a chance, she adds. "The value proposition is much greater with a computer. Who knows? It might just work," Gluck says.

Don't look for free PCs on street corners anytime soon. But more companies may offer free PCs before the end of 1999, analysts say.

Budget PC maker Emachines is talking with several companies about offering free PCs by the end of the year, the company confirmed.

"We are in discussions with several companies -- not just Internet service providers -- about integrating low-cost PCs into a free PC business model," says an Emachine representative.

Free-PC.com says it has received $10 million in backing from USA Networks, parent of Ticketmaster Online-CitySearch, Internet Shopping Network/First Auction, and Home Shopping Network.

Free-PC.com's computers will come with a 333-MHz processor, a 4GB hard drive, 32MB of memory, a 56.6-kbps modem, and a 15-inch monitor, loaded with Windows 98. Net access will be provided by NetZero, another Idealab venture.

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