The latest noise from Wall Street suggests that even the low-cost PC models now offered by Compaq, Dell and others may not be cheap enough to satisfy the webmania craze. Merrill Lynch & Co believes there will be a major change in the way PCs are sold in which ISPs encourage consumer electornics retailers give away a stripped-down PC free with a commitment to three years of internet access. It says Microsoft Network’s recent deal with regional computer superstore Micro Center is an example it expects could be followed by Best Buy, Circuit City and Radio Shack.
It’s essentially the same model as the way cellular phones are sold. Customers sign 12-month $30 a month deals guaranteeing $360 revenue. Telecom providers, the brokerage explains, pay a $300 commission of the free phone sale, breaking even but making a profit on the monthly minute use and locking users into its service. The retailer paid $150 for the phone and gave it away for free, netting $150.
In the Micro Center deal Microsoft Network provides the subsidy to buy the PC so the retailer still rings up the same sale. Customers sign for a one-to-three year $20 per month access plan worth up to $720 to Microsoft Network and get a voucher worth up to $400 to cash in against a PC. Once the usual deductions are made – including retailers 2% gross margins – that leaves around $250, Merrill estimates. That means Microsoft has to supply internet access at around $7.00 a month over the course of a three-year plan. It will earn more as viewership builds, adding to advertising revenue. If it comes to pass, then the consumer electronics retailers themselves could be acquisition targets, Merrill observes, as the flock of companies which have invested in cable networks to provide future net access compete with ISPs prepared to underwrite PC sales to win customers for three years using low-cost phone services.
