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AOL, Microworkz talks signal "ISP-PC" convergence

With AOL in discussions with upstart PC maker Microworkz and Gateway seeking to expand Internet services, the world seems to be headed toward the "ISP-PC."

With AOL in discussions with upstart PC maker Microworkz and Gateway and others seeking to expand Internet services, the world seems to be headed toward the "ISP-PC."

PC makers, desperate to diversify, and Internet service providers, interested in preferential screen space, are on a collision course that just may end up with these two types of companies becoming one and the same thing.

America Online, for instance, is in discussions with "free PC" pioneer Microworkz about marketing AOL on its desktops, according to Microworkz chief executive Rick Latman.

The deals or potential deals are coming fast and furious. Earlier this week, AOL sunk $1.5 billion into Hughes in an effort to develop a high-speed hardware path into homes based on satellites. The No. 1 ISP is also working with Sun Microsystems on Net devices and even owns a part of Linux developer Red Hat Software. AOL has also in the past looked into the possibility of hooking up with inexpensive access devices from ITV.

On the other end of the spectrum, Gateway is in negotiations to acquire ISP Earthlink, said sources at PC Expo in New York. Such an acquisition, if it takes place, would likely boost its successful Gateway.net service. And rival PC maker Dell Computer recently started offering ISP services in Europe under the name DellNet and, within three months, will expand into the U.S., said chief executive Michael Dell. Compaq recently launched a branded ISP service, and upstart Emachines is slated to announce one later this month.

In addition, Intel invested millions this week into Dutch ISP World Online and will unveil an alliance program next week for ISPs. Intel, of course, announced earlier this year that the company will move into data hosting.

"It's like a barn dance with the ISPs on one side and the hardware manufacturers on the other," mused Roger Kay, PC industry analyst for International Data Corporation. "Soon there will be a mad rush to the middle of the floor when they call 'last dance.'''

For PC makers, the rush toward the ISP lifestyle is an example of thinking outside the box, literally. Declining PC prices are forcing manufacturers to diversify their businesses beyond selling increasingly commoditized PCs and servers.

Owning an ISP would introduce an alternative revenue source that is consistent. Signing up consumers also means beefing up the PC maker's marketing database, and thus more channels for selling products to consumers.

"[OEMs] gain a cut of the subscription fee and can market more services and more products to their customers," said Abhi Chaki, an analyst at Jupiter Communications.

Hardware, meanwhile, seems increasingly defined by its communications functions. A number of companies are considering a shift into Internet appliances. By definition, however, many of these products exist only to provide connection to communication services.

"Without service coming in, a set-top box is useless," said Kevin Hause, a consumer device analyst at IDC. Stan Shih, CEO at Acer and other executives have also pointed out recently that the expected low retail prices on these devices likely mean that manufacturers will need a service revenue stream to subsidize hardware costs. The cost of WebTV set-top boxes, Hause noted, is subsidized by monthly access fees.

The movement by these companies into communications services, however, represents a competitive threat to ISPs. Gateway, for instance, gives a free year of ISP services with all computers that cost more than $699, said a Gateway spokeswoman. The next six months cost $15.95 a month. After that, consumers pay $17.95 a month.

Assuming that an ordinary ISP charges about $21 a month, going with Gateway saves consumers about $300 over a two-year period. Put another way, the ISP loses a $504 opportunity and a chance to lock in customers.

The PC companies will not build their own communications infrastructures. Dell, for instance, will likely work with telcos. UUNet serves as Gateway's backbone provider. PC companies take up to half of the revenue, executives and analysts have said. Nonetheless, the PC-sponsored service acts like a funnel. UUNet might benefit when Gateway adds a customer, but everyone else loses.

News.com's Jim Hu contributed to this report.