By Siobhan Kennedy in Orlando

Michael Dell, the chairman and CEO of Dell Corp this week admitted that cheap PCs which come bundled with internet access and services don’t necessarily offer users the best value for money, despite the fact that the company introduced a similar service itself last week.

Speaking at the Gartner Group’s user conference in Orlando this week, he said that users who signed up for deals where they get free or cheap PCs in return for committing to a long term contract with an ISP, would become disgruntled within 18 months. He said that invariably the nature of the contracts would mean that users would end up paying more and at the same time get locked into technology that would become obsolete way before the end of the contract. This kind of deal is not the best thing for the consumer, he said, it’s like high rate financing, but a lot of people seem to be very interested.

Ironically, his comments come just a week after Dell itself introduced a $400 rebate offer for those customers buying a Dell PC who sign up for a three year contract with the company’s ISP service, Dellnet. Answering questions posed to him by Gartner Group analysts, he said that despite his concerns for users, Dell actually made more money out of this type of deal because of the way the financing is arranged.

One difference with Dell’s service, he noted, is that it enables users to upgrade to broadband web access as soon as it becomes available. He said one of his biggest criticisms of other vendors was that they tie users to narrowband access with no options to upgrade to faster technology. He added that Dell would work to ensure that the PCs it offered as part of its service wouldn’t become obsolete within the time frame of the contract, although he wouldn’t give any details as to specification or how the company intends to do that.

Analysts warned that users thinking of signing up for these services should examine the small print. OK, so you get a $400 rebate which means on the really low-end PCs you could end up paying $100 or $200 dollars for a machine, said Gartner’s Kevin Cox. But if you then end up paying $22 a month for internet access, what have you saved? You could end up overpaying. We’re not saying don’t do it, but we are saying shop around first.

At another point during the question and answer session, the analyst quizzed Dell about his company’s position on services. While he admitted that Dell’s services business was not as large as he would want it to be, the CEO said the company wouldn’t look to boost services over its core PC business. The point where we go into services is when we’re very profitable in our core hardware business, he said, but we only have 11% of that market.

Dell said he wants to grow that percentage to somewhere between 25% and 50% of the total market share and added that services would grow alongside that. We have a fairly considerable services business today, we see it as growing and we’re likely to invest in it, but it’s not a substitute for doing our core business correctly, he said.

He was similarly nonplused when pushed about moving into other markets, namely handheld devices and PDAs. There will be brand proliferation of other kinds of devices, but I don’t see them as replacements for the PC necessarily, Dell said. On one of the most talked about devices, 3Com’s Palm pilot, the biggest button is the one that lets you synchronize with a PC. He added: For all the excitement, last year 3Com only made a total of $550m revenues..that’s not really a lot of money. It seems their most redeeming feature is that they can link to PCs. á