Many Free-PC Start-Up Firms Struggling
Months after a series of start-up companies grabbed headlines with offers to give consumers free or nearly free computers, many of those companies are reeling from business missteps, bad planning and a surge of competition.
Among the leading problems: Microsoft, America Online and other well-heeled companies are feeding the free-PC craze with computer rebates linked to Internet access.
“It’s hard to compete with the marketing of Microsoft and America Online,” said Joseph Calamari, whose InterSquid has been shipping “free” Intel- and Windows-based computers bundled with Internet service for which the company charges a $30 monthly fee.
Some of the quasi-free-computer pioneers are already gone.
“The idea turned out to be bigger than they were, and that’s a hard thing,” said Mark Specter, an analyst at Soundview Technology in San Francisco. “I’m not sure that these little guys can get big fast enough.”
One Stop Communications got attention in February when it said it would offer 25,000 free iMac computers to those who committed to spending $100 monthly for three years at retailers represented at a Web site called Shopss.com.
One Stop’s chief executive, Israel Rosenfeld, told reporters he had thousands of takers. Then it was reported that Rosenfeld had admitted doing something similar in Tel Aviv a year earlier, collecting payments and filing for bankruptcy without delivering the goods. Efforts by The Times this week to locate a Web site or telephone number for One Stop were unsuccessful.
Then there’s PC Free of Antrim, N.H. PC Free said in February that it would ship millions of Compaq computers to those who paid $40 a month for Internet access.
Five months later, despite talk by CEO David Booth of plans to sign up millions of customers, the company has shipped no machines.
Mike Sloser, whose independent marketing company was hired recently to handle PC Free’s advertising and public relations, said Booth is still talking to potential partners and has continued to rework the business model.
“The damn thing keeps changing on me all the time,” Sloser said.
Another company, DirectWeb, has been shipping Ingram Micro computers with Internet access in the Philadelphia area for between $20 and $50 a month. But things aren’t running very smoothly: The company withdrew an ad campaign after two weeks because it couldn’t handle the heavy response. It now says it won’t be able to fill all its orders until September.
Calamari’s InterSquid, which has been shipping computers nationally under the $30-a-month Internet plan, has been overwhelmed by costly requests for technical help from its non-computer-savvy new customers.
“We have had more hand-holding to do than I thought,” Calamari said. He added that InterSquid is working up a new business plan tied more to customer spending on the Web.
New York-based Gobi has been selling Internet-connected computers for $25 a month and some one-time fees. It too says it will change the terms of its deal now that the giants have entered the fray, although it professes not to be worried.
“It’s a validation of our business model,” said Gobi President Sudhir Shrotri. “There’s room for more players.”
One pioneer that hasn’t drawn imitators is Free-PC of Pasadena, which last month shipped truly free computers to 10,000 customers willing to use computers whose screens carry a mandatory advertising strip.
Free-PC, which is well-funded by Barry Diller’s USA Networks and others, has been deluged with applicants but is a long way from earning any money.
The company wants to charge advertisers a premium by delivering highly selected groups of viewers. Before that happens, Free-PC must closely track the surfing and spending habits of its first users. And no one can say for sure that there will be enough impact to justify major ad deals.
“The first period is definitely going to be a prove-it period,” Vice President Steve Chadima said.
Among the advantages major companies have over the free-PC start-up firms are familiar brand names and reputations for reliability.
If your grandmother is looking for her first PC, Soundview’s Specter said, “I would certainly advise her to look to a reliable and reputable brand.”
Microsoft and AOL, through different retailers, in the last few weeks tested $400 rebates predicated on consumers’ accepting three-year contracts for Internet service from the Microsoft Network or AOL’s CompuServe, at $20 a month. Circuit City is still offering the CompuServe rebate, and Best Buy is offering $400 off any computer purchases for those who sign up with Prodigy, another online service.
Industry executives say those offers will lead to others aimed at capturing first-time computer buyers. The computer manufacturers Gateway, Dell and Apple Computer are all exploring arrangements with Internet service providers.
The deals so far are not screaming bargains: The three-year lock-up means consumers won’t be able to take advantage of expected declines in access fees, perhaps to below $10 a month, or of the high-speed lines that are likely to become much more prevalent.
Nevertheless, the marketing has connected with customers.
“It’s the shape of things to come,” said J.P. Morgan analyst Daniel Kunstler.
One beneficiary has been fast-growing EMachines, an Irvine-based computer maker that has more than 10% of the retail market for personal computers.
Circuit City promoted its $400 rebate by offering a $399 computer (excluding monitor) from EMachines, which is one of the lowest-priced manufacturers.
“I can tell you that Circuit City sold more computers in the four days following the offer than they have ever sold before,” said EMachines Chief Executive Stephen Dukker. At Staples, the office supply store that ran the limited-time MSN offer, “they broke a lot of records too,” he said.
Dukker said EMachines is prospering in the current bargain-PC wave, since the sort of buyer lured by a no- or reduced-money-down offer is the kind most likely to pick an EMachines product.
“The feedback that we’ve gotten from Best Buy and MicroCenter,” a smaller chain still offering the MSN deal, “is that the $400 rebate does not work very well on more expensive computers,” Dukker said.
Others predict problems ahead for EMachines, which is mostly owned by TriGem and Korea Data Systems, two South Korean PC hardware companies.
“EMachines did a good job riding on the coattails of AOL, which is kind of locked out of the high-speed access market” and is therefore willing to bargain to lock more customers in, said analyst David Stremba of Dataquest. But Stremba said the EMachines deal is “barely break-even” for the manufacturer and that the company will be squeezed even harder when bigger PC firms start offering more stripped-down models for less money.
“This isn’t a good time to be in the hardware business,” Stremba said.
