A Free PC!

Online services lure new subscribers with a tried-and-true promotional technique.

Home PC makers and their retailers have been shaking off the summer doldrums recently, thanks to the latest twist on the "give away the razor to sell the blades" marketing technique: rebate promotions by also-ran online services (read, everyone except for America Online) that subsidize the purchase of a factory-fresh PC. What's the hitch? A one- to three-year contract with CompuServe, Microsoft Network, Prodigy Internet, or one of the smaller online services. (A three-year contract costs $750 on average.) The consumer elec5onics business hasn't seen such a deal since satellite TV titans DirecTV and EchoStar gave away receivers and dish-antennas to lock viewers into long-term service contracts.

DEAL OF THE CENTURY

With PC prices now as low as $399, the heavily advertised rebate offers could theoretically net the consumer a "free" PC. The attention-grabbing deals underscore the cutthroat competition among the online services to aggregate eyeballs for their services. At issue is more than the full subscription fees. The apple in an online service's eye is the downstream revenue from steering subscribers to advertising, online shopping and other services.

PC makers and retailers will also be beneficiaries of the online services recruiting drive. If online services inaugurated the promos to gain eyeballs, PC makers are eyeing them as a way to raise household penetration-- currently stalled at about 40 percent of American homes. Even though PC sales continue to enjoy year-over-year increases, the commonly accepted explanation for the paradox is that sales increases come from repeat customers--either regular upgraders or multiple-PC homes--probably sharing a single online subscription. Thus, the promotions could lead to a new set of online service customers, presumably those curious enough to want to become wired, but downscale enough to alter the elite demographics of the online audience. (Online advertisers, salivating at the incomes of the current online audience, may be less enthused than PC makers and retailers that online subscriptions haven't become as commonplace as cable set-top boxes.)

THE FINE PRINT

A brief tour through just some of the "free"-PC offerings reveals that online services will do just about anything to bring a long-term contract into every home. One startup marketer even ran an old-fashioned dunking contest with Apple's hot iMac desktop as the brass ring, roughly a $1,200 bargain. That particular promotion, by ISP Freemac.com, not only committed the participant to a three-year ISP contract at $20 a month, it also required him or her to accept a Freemac-branded Visa card--thus giving the ISP even further opportunity to participate in residual income from purchases.

The promotions from CompuServe, MSN and Prodigy, which don't require customers to take custom plastic, are more straightforward. To wit: PC buyers can get a rebate up to $400, either instantly or by mail, in return for committing to up to three years of Internet service at the prevailing $20 to $23 monthly rates. The tab can be paid upfront or billed monthly, but in either case a credit card swipe is required as security, lest the buyer opt to exit the contract.

Those that do renege must forfeit all or part of the rebate; their credit cards are charged a prorated fee for the time their subscription was active. For example, someone pulling out within 12 months has to return the entire $400, while another canceling in the final year has to kick back $200. In some cases, a $50 cancellation fee applies. Although most rebate plans are brand- and retailer-agnostic, MSN cut some separate deals with mail- and made-to-order PC makers. These bring the monthly tab as low as $18 for PC rebates that involve MSN.

AND THERE'S MORE!

In some cases, PC manufacturers are making the promotions even more attractive by offering incentives of their own. Although there are no vendor rebates on entry-level PCs, manufacturer discounts tend to escalate with the price and horsepower of the computer. There usually is one catch, though. As the taglines in the ads succinctly put it, "Monitor Sold Separately." Depending on the monitor chosen, consumers can expect to shell out $100 to $200 above the advertised price of the PC.

Perhaps the most intriguing of the rebate deals is Prodigy's--an exclusive pact that links the online service lightweight with retail sumo Best Buy. "We can think of no better or faster way to zero-in on subscriber prospects than to team with a major retailer such as Best Buy. They practically own the PC market," says a Prodigy spokesman. "Our studies show that people do buy PCs for Internet access. Meanwhile, the trend we and Best Buy have seen is that the industry is relying on advertising low-price products, and suffering margin losses as a result." Enabling Best Buy to leverage profitable traffic off the Prodigy rebate while the online service picks up subs from the retailer's market clout was a no-brainer, the spokesman says.

THOUSANDS OF SATISFIED CUSTOMERS

It all sounds so promising. But what have these rebates really meant thus far to the subscriber-hungry online services? Six weeks into the programs, no clear picture has emerged. With the exception of Prodigy, the competition's entrants are playing their cards close to their shirts, despite the fact these are promos they were quite interested in talking about a few short weeks ago.

Prodigy, with the least backing, and thus the most to gain, reports picking up 120,000 new subscribers six weeks into the promotion--a 20-percent gain that brings its U.S. base to 733,000. A spokeswoman for AOL, whose CompuServe 2000 service promotion was one of the most publicized, says the promo has "totally exceeded expectations" and "created our fastest growth quarter since our February 1998 acquisition." The spokeswoman concedes that subscriptions had been "pretty flat" at 2 million since AOL acquired the sibling service. (In contrast, AOL's flagship service has 18 million subscribers.)

As for MSN, as usual, mum's the word. At IQ's deadline early last week, a spokeswoman said the Redmond, Wash.-based OS giant wouldn't be revealing its promo numbers anytime soon. In fact, she wouldn't discuss the online service's installed base at all, except to say that MSN's Instant Messaging service has "slightly more than 3 million users to date." While that establishes a baseline of sorts, online subscription tallies tend to be fluid.

Early on, however, MSN execs were the most voluble regarding the promotion--and the most candid in characterizing the consumers responding to the pitch. MSN's Mike Lucero, group product manager, said the promotion had been "helping create traffic in the stores for our retail partners" as well as "driving a lot of subscribers [to MSN].

"We're getting all sorts of new people onto the Internet that weren't able to get on before, and we're able to do it at a price point that makes very good sense for the customers," he said. Based on early signups, Lucero said the promotion attracted a "substantial" amount of new users, and "a decent amount of people that are either ready to buy a second computer, or ... upgrade."

This jibes with morning-line results on the online service competition gleaned from anecdotal reports from retailers. At the OfficeMax chain, investor-relations vice president Mike Weisbarth says the online service promotions are "skewed a little bit towards the first-time buyers." But sales haven't been limited to entry-level PCs that essentially could be had for free, Weisbarth adds. Customers have also purchased mid-priced and even top-shelf models that require some financial outlay beyond the typical $400 rebates offered.

"It's a program that we feel can drive overall foot traffic into the stores and it's subsidized and supported by the ISP provider," he says. "So, it's not something that is a traffic driver at the expense of our margin." Spokeswomen for nationwide retailers Best Buy and CompUSA concur. "Sales have been better than they were before the deal," Best Buy's rep says. "We've actually had cash register lines just for the Prodigy deal."

FOR A LIMITED TIME ONLY

Despite the effusiveness with which retailers and online services discuss the offers, it's impossible to say how long they will go on. The Prodigy deal with Best Buy is open-ended. "We'll continue as long as we and Best Buy find it mutually beneficial," says a Prodigy spokesman.

Representatives of all three major online services say the game plan is to lock consumers in at current subscription rates--with the implication that these can only go up. However, late last month MSN was already cutting tolls in some quarters, raising the question of just how low discounts may go in order to lure people who haven't yet gone online.

MSN recently advertised a deal through Price Gostco warehouse clubs that gives first-time customers a three-month introductory rate that's effectively $12 monthly, compared with the usual $20 for MSN.

Although the offer isn't tied into any PC purchase, analysts contend that Microsoft's well-financed drive to gobble eyeballs for its many other ventures (such as online gaming, e-commerce and, eventually, interactive TV) will cause Internet access fees to plummet in the future.

Entirely free access already is the business model in Europe--although it came about because consumers incur time-related charges for even local phone calls--and analysts believe that's not out of the question in the U.S. Once telco and cable services begin offering bundled packages for long-distance and local telephony along with Internet and video-on-demand services, Internet access could be a whole different ball game. Indeed, in some provinces of Internet land, free domestic online access is a reality, with the service paid for with ads and e-commerce.

LOG ON NOW!

"Whatever revenue the ISPs are getting for the signups isn't relevant, and it's hard to say if they made any money from new signups alone," says David Ward, analyst for San Diego-based DFC Intelligence. Even after the $400 rebate for acquiring each $750 subscriber is deducted, the ISPs still have marketing costs, like subsidized ads and other compensation for retailers.

"It doesn't matter though. They'll get it all back in the long run from online advertising and residuals from e-commerce," Ward explains.

But leading horses to water is only the first step--then you have to get them to shop online. So the remaining question is: How many of the folks who sign up will actually log on?

"Most people who bit for the deals probably understood they were buying the ISP contract," Ward contends. "Consumers are smart--if they wanted a PC but not an ISP, they probably realize they could have gotten the hardware for just $400 instead of paying $750 to get it with a service they won't use."

Those who do use the online service they signed up for usually remain loyal customers, Ward adds. "Once you have your e-mail address out to friends, and your homepage, passwords and whatnot established, the hook is in pretty deep," he points out. "That's how credit cards work, but there you can eventually square up the balance and shake off the line."

Maybe in this industry, as with so many others, it will all com down to virtual location, virtual location, virtual location.

COPYRIGHT 1999 BPI Communications, Inc.
COPYRIGHT 2000 Gale Group