Retailers pave way for net-only boxes

Observers claim rivals have vested interest in free offer.

When retail rivals Time and Tiny launched their free-PCs offer, many wondered if the home PC market would ever be the same again. With profit margins so tight, how could anyone reduce hardware prices further, let alone offer them for free?

The two deals involve the companies' ISP arrangements, although Tiny recoups some of the money by acting as an agent for a telco. It requires people to sign up to its telco and spend at least £25 in call charges for a year. Time requires its consumers to join its ISP and pay £9 a month for three years.

Both offers follow similar experiments in the US where a reseller, Free PCs, gave away internet-ready Compaq machines. The catch with that deal was the consumer had to agree to have 10 hours of irritating advertising pumped at them while they surfed.

Lisa Clark, senior consumer product marketing manager at Compaq, said the US deal was reasonably successful but it had no plans to run a similar scheme in the UK - unless it was approached by one of its suppliers.

Because there is a difference in the way ISPs and telcos work in this country, Clark was uncertain if a similar deal would work here. "In the US, we sold the PC to the supplier for the full cost. They made money back by bundling it with advertising. Our margins were unaffected," she said.

So how does any company hope to make money in the UK? For a start, there is an even lower margin on the kit. Free PCs, which are connected to a television, come without a monitor, boast some obsolete technology and come without software. In other words, the kit is not that good if you are interested in serious power, but great if you want low-cost internet access. A consumer will also have to outlay more cash on expensive software which would be traditionally bundled with an ordinary PC. So with unit costs lower, deals with telcos or advertising sales on the retailers websites more than make up the cost of providing the free PC.

But Martin Brampton, chief analyst at Bloor Research, said retailers had another vested interest in pushing what was, in essence, an internet-only product. He believes that Tiny and Time are testing the water for a much bigger product push in the future.

"I expect they will be following up with internet-only machines, designed for home use, in the near future," he said. He predicted the product will have a basic OS which does not need a Windows licence and will probably be free.

Clark agreed, and indicated that Compaq already had plans on the drawing board for such a product, although she would not say when it was likely to be released.

Laying the groundwork for such a product means that consumers have to be primed to think of the internet without the PC functionality.

Brampton said the free-PC schemes would open the internet-only market in much the same way as Freeserve did for ISPs: "It will not mean the end of home PCs, it will just put more people onto the internet," he said.

Steve Simpson, marketing manager at Time, admitted that the product is designed to provide families that would not otherwise buy a PC, with internet access and a basic starter machine.

But Simpson said the aim of the free PC scheme was to push up registrations on Time's ISP company rather than create more enthusiasm for an internet-only machine: "We have no plans to develop an internet-only machine at this stage."

But, one spin-off that Time sees from offering basic PCs with internet access for free, is that when consumers decide to upgrade, they will automatically stay with Time. "We hope to obtain repeat buys by setting up these arrangements," Simpson said.

David Brabham, home PC product manager at Hewlett-Packard, was not concerned about the recent wave of free PC deals. "We are monitoring the scheme, but when the free PC deals were started in the US, we didn't notice our sales being affected," he said.

Brabham described the UK free-PC deals as an interesting marketing development which was pitched at families that needed internet access alongside their traditional PC use.

"You have one machine for work but, while you are using it, the other members of the family want to play games or read their email. The free PCs are ideal in that sort of environment," he said.

He also pointed out that Tiny and Time were benefiting from the advertising and attention the offer was attracting, and while they may not be selling many free PCs, their sales teams were using the calls to sell other products.

When Brabham approached Tiny's sales desk for details of the scheme, they were reluctant to sell him the free PC and tried to convince him to buy a knocked-down Pentium III instead. "It was like the sales team didn't want to sell me the free PC," he said.

However, not every retailer is looking at giving away its PCs, but are instead looking at ways of cutting the price.

Dixons is using the same mechanism - a deal with a telco, in this case Cable & Wireless, and its own ISP Freeserve - but it is using the cash generated to offer a £300 discount on any PC in its range. Dixons offers discounts on telephone calls and 200 minutes of free internet calls per month.

A spokesman for Dixons said: "We feel this sort of deal is more flexible for customers and gives them an up-to-date computer that they actually want."

Time reported that response from the public about its free PCs was interesting but it would not provide any further details. Tiny was unavailable for comment.