Two years ago, consumers typically bought computers and Internet service in separate transactions. But since 1999, PC companies and Internet service providers increasingly have come together to offer customers complete Internet computing bundles.
These alliances have grown into far-reaching relationships. America Online, for instance, invested $800 million in Gateway. The two companies are in the process of co-developing Internet appliances.
Under the Dell deal, consumers who pick up a Dimension desktop or Inspiron laptop get a free year of MSN service, ordinarily priced at $263, offered under the Dell.net brand. The deal was previewed in June.
Dell has offered ISP service under the Dell.net name before, but until now it worked through an alliance with WorldCom's UUNet service.
"It reinforces the importance of bundling as a way of recapturing the industry profits, as profits of standalone hardware start to dwindle," said Vadim Zlotnikov, an analyst with Sanford Bernstein.
The deal, which is more generous than many of the rebates or free service plans other PC makers have offered, also comes amid more desperate times in the PC business.
PC makers have fallen under pressure lately to increase sales following reports of an industrywide decline in sales. Wit SoundView recently cut its rating on Dell to "buy" from "strong buy," also reducing ratings on Gateway and Apple Computer.
"Our recent checks suggest that U.S. consumer PC sales continued to weaken in October and the first part of November," Jason Wells, an analyst at Wit SoundView, wrote in a research note.
On Nov. 10, Dell met lowered earnings expectations of 25 cents a share but reported revenue lower than Dell's historic growth percentage.
Dell's revenue rose to $8.3 billion, an 8 percent increase from the previous quarter's $7.67 billion. Historically, revenue for the PC maker has increased 10 percent to 13 percent from the second to the third quarters.
Dell and Microsoft did not comment on the terms of Wednesday's deal, but sources close to Dell said that aligning with Microsoft will allow the company to off-load billing and customer service functions that until recently were handled by Dell.
Apple and EarthLink forged a similar alliance in January, and MSN has inked a similar deal with RadioShack as well.