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Microworkz now ties up with AT&T

The Microworkz drama continues today as the start-up PC maker announces that it has partnered with AT&T to provide customers with free, as well as discounted, Internet service.

The Microworkz drama continued today as the start-up PC maker announced that it has partnered with AT&T to provide customers with free, as well as discounted, Internet service.

And, while these deals may sound good on paper, most observers will likely be watching to see how well the partnership works. Just yesterday, a similar deal between Internet service provider EarthLink and Microworkz turned into an acrimonious lawsuit just a few months after the deal started.

Starting August 15, customers who buy a Microworkz PC will be able to receive 150 hours of Internet service from AT&T for $11.95 a month. In addition, consumers who purchase the upcoming "iToaster" Internet appliance will get free Internet service, according to Rick Latman, chief executive of Microworkz. These service fees are below AT&T's typical fee for monthly Internet access, said an AT&T spokesman.

AT&T will serve as the backbone provider of the service. Customers will not pay AT&T directly, said an AT&T spokeswoman. Instead, customers will pay Microworkz, and Microworkz will pay AT&T.

Eerily enough, this is similar to the EarthLink deal. In that partnership, Microworkz was obligated to pay EarthLink a fee for every customer that signed up for service. Unfortunately, Microworkz never paid, according to EarthLink, although 1,000 customers signed up for and received ISP service. The lawsuit followed. Microworkz for its part claims technical problems at EarthLink's end caused service disruptions. Microworkz said it is planning to countersue.

The AT&T spokeswoman said she knew of the existence of the lawsuit. However, she added: "This is a great contract for AT&T."

Microworkz is emerging as the canary in a coal mine for the free PC movement. The company has drawn the attention of customers, technology executives, analysts, and the press by offering ultra-cheap PCs bundled with up to a year of free Internet service.

But, while the company's prices have garnered attention and prompted observers to rethink the business proposition for PCs, all hasn't been smooth sailing. Customers have complained about delayed orders, refunds that have yet to arrive and shoddy service. Internally, the company has been wracked by defections of key executives and members of the board, according to former executives.

One question that has emerged is how Microworkz can afford to give their customers as much as they promise. The iToaster is expected to retail for $199. Can a company make money off such a device and pay AT&T a service fee?

At these prices, the iToaster package is cheaper than a TV set-top box and year's worth of service WebTV. Analysts have pointed out that Microsoft actually subsidizes the up-front costs of WebTV. Microworkz PCs cost more but are still relatively inexpensive, raising the question whether the costs can be recovered in the monthly service contracts, which are below market to begin with.

Latman would not comment on the underlying terms of his deals but said in an email: "Obviously this is paid for with all revenue streams which includes those of our other partners."