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PC Vendors Explore Packaging Free Internet Service

In a countermeasure to the free and low-cost PCs sold via the Internet, some vendors are preparing to bundle a year’s free unlimited Internet service with certain PCs, giving away the “blades” instead of the “razor.”

Compaq is reportedly planning to offer NetZero free nationwide Internet service as well as other low-price service packages in the near future, according to several retailers briefed by the company. NetZero is a free Internet service provider (ISP) that requires users to watch ads in exchange for service.

Both Compaq and NetZero would not comment on future products or deals.

ISPs, including MSN, EarthLink and AOL (under CompuServe), are also working on deals with PC and peripheral vendors to offer year-long free service bundles in what has become a frenetic race to capture the 70% of households not yet online.

Explained an EarthLink spokeswoman: “Only 30% of the households are online in the U.S., and the growth is going to be in the next couple of years, so we have to get big quickly, which means we have do to some of these deals. There’s really no clear number-two player in the ISP market. There’s AOL, and a bunch of us. There’s a Coke but no Pepsi, so there’s a land grab for new subscribers.”

MSN group product manager Mike Lucero told TWICE his service will announce “a dozen deals within the next 90 days” offering extended free MSN service. In addition, MSN said that it will provide a year’s free unlimited service to a major PC manufacturer that is launching a new “e-commerce enabled device called e-pcdirect” to be unveiled in the next several weeks. e-pcdirect will be a “very competitively priced, fully configured PC,” Lucero added.

Several PC vendors also told TWICE they are working on year-long free Internet service bundles. Xtreme PC executive VP Randy Scott said, “We’re working on something. We’re looking at NetZero and possibly MSN.” Pionex is also reportedly planning to give away a year of free CompuServe service on certain models beginning in June.

AOL has allegedly offered a deal to certain computer vendors, allowing them to pay a fraction of a year’s service charge. The promotion would effectively knock off $240 of the cost of owning a PC, so that a $599 PC could be said to effectively cost consumers $369, providing they use the Internet, vendors said.

Modem vendor KDS is also firming up plans to join in the ISP giveaway binge, said Tony Ferraro, KDS’s sales director. The company is now finalizing a deal with an as yet unnamed ISP to supply free Internet service to customers purchasing one of KDS’s new modems. Ferraro could not say when the free service would be offered but said it was a harbinger: “As they [ISPs] become advertising-based they can afford to offer the service at a low cost. So within two years I think ISP service will be free for everyone.”

Both Micron and Microworkz began offering a year of free EarthLink service in April. Prior to that time, service promotions were typically offered in up to 50-hour increments or through complicated coupon rebates. Free ISP service is considered a win-win situation for vendors and ISPs as it enhances the value of the PC while helping ISPs to attract new customers. EarthLink said it is continuing to look for new OEM deals where both the OEM and ISP share in paying for the year’s free service to the consumer.

“Your average member acquisition cost is from $80 and $150, which is within what we are getting for the one-year free service deals,” said an EarthLink spokesperson. The OEM deals are lucrative for ISPs, she said. “When you give away a year free the churn is really low, it’s only 1% or 1.5% at the end of the year because people integrate the service with what they do, and there’s no reason to change as long as you provide good service.”

MSN’s Lucero called the new crop of year-long free unlimited ISP service promotions “a very important movement in the industry” and said “it’s really a great way to drive customer acquisition. Now is the time people want to get on the Internet, and a lot of these people are first-time users.” Lucero said he is not concerned that one year of free service will devalue ISP service to the point where consumers expect it to be free all the time, as is the case in Europe: “I don’t see the market going to free. First of all, the telco structure in Europe is much different, and it allows free to happen. But it’s different here. Particularly with AOL, there’s a perception among consumers that it’s not something that has to be given away for free… People are going to pay more for better quality service. Free services can’t support the same capacity of customers with the same quality of service.”

But several free ISPs are making an attempt to win a share of the burgeoning Internet service market. The leader thus far is NetZero, which requires new subscribers to fill out a demographic questionnaire. NetZero then targets advertisements to the user’s profile. The ads appear in a small moveable window on the subscriber’s screen. Netzero claims it has won 1.8 million subscribers since its launch last October. Another free ISP is Y-Pay, a national service that is expected to launch in July. Y-Pay, according to its web site, also requires users to watch ads targeted to their demographic profile.

However, not everyone is racing to give away free service. Monorail president Andrew Watson said, “When you look at the way Wall Street is valuing Internet customers, which is the concept of valuing Internet subscribers pretty highly, it’s a reverse of what I’d expect to see, which is giving away anything to get an Internet subscription. We don’t have any near-term plans to do anything like that.”

This article was written with assistance from Doug Olenick.

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