July 2000 - Maximum PC
www.maximumpc.com

Behind the Free PC Fadeout
by Gordon Mah Ung

Sign up with Free-PC.com and get a Celeron-based PC, totally free. Not good enough? Enchilada.com will give you a free PC and upgrade it every two years. Too good to be true? Yes.

In the summer of 1999, companies such as Free-PC and Enchilada were among the first to try the "PC as cell-phone" concept. With cell phones, the hardware is free but you're gouged on the service. Free PC companies attempted to apply the same principle to PCs, betting on either advertising or partnering with ISPs for profits. In the end, giving hardware away for free turned out to be more a fad than a trend. Both Free-PC and Enchilada.com are out of business. Other free PC vendors, such as Microworkz, also went under, and the handful remaining "free" companies - including Freemac.com, Intersquid.com and Gobi - declined Maximum PC's requests for interviews.

What Went Wrong?
One early factor that cut free PC companies off at the knees was advertisers' unwillingness to pony up. That was a severe problem for Enchilada.com. The company hoped to bolster an instant Internet portal by requiring those who received its free PCs to make Enchilada's URL their browser's home page.

"We believed that the e-commerce bottom wouldn't fall out as fast as it did," Rick Latman, CEO of defunct Microworkz, says. "The free-flowing e-tailer dollars have all dried up."

Microworkz crashed with such velocity that it left consumers in the lurch and saw lawsuits from government agencies lock onto it.

Many of the start-up companies also weren't prepared to deal with the immense consumer interest. Microworkz promised to sell PCs with 12 months of free net access at $300. When Microworkz was featured in the Wall Street Journal, the company had buy 10 employees. It ended up with thousands of orders it couldn't fill.

Hyped Out of Control
Fad pioneer Free-PC featured an offer that forced consumers to volunteer detailed demographic information and to view scrolling advertisements while offline and online. As distasteful as it sounds, tens of thousands of people lined up to get a PC. But, though the customers were there, the advertisements didn't show enough interest.

Steve Chadima, a former officer of Free-PC, said advertisers felt that the number of interested customers was too small to make advertising worthwhile (Free-PC ultimately gave out 25,000 PCs, which recipients were able to keep even after the company's demise). In the end, Free-PC was sold off to low-cost PC maker eMachines, which sells PCs in the $400 to $1,000 range.

Chadima, now with eMachines, says he believes Free-PC could have made it, but that the road to profitability would have been long and painful. Chadima says the hard pill to swallow is the cost of the PC. If free service ISPs can barely scrape by giving away net access, Chadima says he believes it's even more unlikely that small-fry companies can survive while amortizing the cost of an entire PC, even with long-term potential for garnering enough consumers to attract advertisers.

Information Appliances
Chadima says new businesses using cheaper "information appliances," such as Netpliance's I-Opener, stand a better chance of making it. The I-Opener features a 200MHz processor, dual-scan flat panel LCD screen, and 56k modem. Designed as only a browser and e-mail client, the I-Opener reduces the cost of an operating system by using its own.

But even the I-Opener isn't "free." The unit costs $99 and the ISP service runs $22 a month. If you fail to keep the service for more than three months, Netpliance can ding your credit card for $500. While the I-Opener looks shi-shi tech, its guts are pure PC. Hacks discovered this year let people convert the devices into fully functioning PCs.

Microworkz's Latman feels that Netpliance and similar start-ups can survive, but that the real problem with the network appliance concept - low-cost, easy-to-use machines designed only for net access - is that pioneering small-fry companies will eventually have to compete with the big dogs: America Online, Microsoft and Sony.

"You can't subsidize PCs as network appliances against PlayStations 2s coming onto the market," Latman says.

Sony's super-game console is expected to eventually come equipped with Internet capabilities, making it a browser for the living room. Many also expect Microsoft to push net access with its upcoming X-Box gaming console, and America Online is expected to begin work on its own stand-alone device that lets users access AOL from anywhere. Latman doesn't see much wiggle room for companies caught between these juggernauts.

He especially takes issue with Microsoft's grip on the PC market. "It is not the per-seat cost [of Windows] that's the problem. It's Bill Gates' obsessive desire to control what America sees on the screen," Latman says. "If we can get some ego out of the way and just build a platform, we can be OK. That's not going to happen from Microsoft."

Free PC Legacy
Despite the failure of several high-profile free PC companies, experts say there will be a long-standing fall-out from the companies' attempted coup d'etas. The average selling price of a PC has dropped dramatically over the last three years. In September of 1997, the average price was $1,355, according to figures from market research firm PC Data. In September 1998, that price fell to $1,087. At the height of the free PC craze last September, prices bottomed out at $790. In the months since the demise of most of the free PC companies, prices have rebounded somewhat - the average selling price of a PC this March increased to $867 - but there's no question that free PCs indeed played a part in reducing costs for all computing consumers.

In an odd way, free PCs also helped stimulate high-end PC sales, says Stephen Baker, director of analysis at PC Data. With the bottom end of computing clearly defined by cheap, no-frills PCs, fast PCs are thriving amid new competition at the high end. Consumers now see value in buying a 1GHz machine with a flat screen display and 8x CD-R, versus a no-frills 433MHz Celeron. A year ago, consumers were faced with the option of buying a high-end 500MHz Pentium III or low-end 400MHz Celeron - not enough of a difference to inspire buyers to shell out the extra cash.

John Latta, president of the research firm, The 4th Wave, says the ultimate failure of free PC companies was their inability to add value to the service. Sure, cell phone companies heavily subsidize the price of the hardware, but they know that every month, customers are making calls and paying more money. Factor in voicemail, PCS paging, and microbrowsers, and the phone companies are raking in the dough. It didn't work that way for free PC companies that offered flat-fee models.

Latta predicts that the future will lie in mobile devices, such as those used to trade stocks. Even the remaining "free" deal - the rebate - may not last much longer. Latta believes that consumers don't want to be locked into one ISP for three years, even if they get a hefty rebate. In the end, free PCs were the exception, not the norm.

"It was just a fad," Latta says.

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