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How much do rebates save in long run?

Hewlett-Packard and Compaq announce PC rebate programs that drop the prices to $300 for the first time. But these offers and others may prove confusing.

Hewlett-Packard and Compaq Computer today announced new rebate programs that drop the prices of select PCs down to around $300 for the first time. But following similar initiatives from retailers and online services, the discounts may prove confusing to some customers.

Like other programs, Compaq Computer and Hewlett-Packard are offering rebates that can result in computers with a retail price under $300 when customers sign up for three years of Internet service with America Online subsidiary CompuServe.

Starting July 25, Compaq will offer up to $200 in rebates to customers who purchase a three-piece package that includes a desktop, printer, and monitor. Those customers who sign up for the CompuServe Internet service will receive an additional $400 in discounts, according to Compaq.

HP will offer a $400 mail-in rebate to any Pavilion PC customer who signs up for three years with CompuServe.

Such deals are the products of a metamorphosis in the computer industry as hardware makers scramble to make up for profits lost to declining PC prices with Internet service revenues. But these deals foist tricky purchasing issues onto consumers and the companies providing them.

For the customer, the contracts can easily end up being no bargain at all. For example, those who terminate the service agreement early must pay a penalty fee, as well as the remainder of the contract.

In addition, the overall cost of the service contract is often more than the value of the rebate. Three years of CompuServe comes close to $800. And what happens if, in the meantime, Internet service through cable or DSL becomes more widespread than today's dial-up model? Upgrading to a faster form of service is not universally contemplated under these contracts.

The value of these deals is equally unclear to the PC manufacturers. Because many Compaq and HP computers are sold through retailers, many of which have begun their own rebate programs, it is questionable how aggressively these stores will promote the offers from the PC makers.

For example, CompUSA also offers a $400 rebate in conjunction with CompuServe, from which it ostensibly recoups a portion of the service fees. The retailer would be unlikely to promote Compaq's CompuServe rebate over its own, observers say.

For its part, CompuServe states no preference between a consumer signing up with its service through retailers or manufacturers, AOL spokesperson Wendy Goldberg said. "We're totally agnostic," she said.

It also remains to be seen whether the cut of the monthly ISP revenues that PC makers get will offset the costs of selling PCs for under $300.

"Believe it or not, Compaq can make money on it," said Patrick Griffin, a product manager for the consumer group at the Houston-based company, conceding that it is still unknown how many consumers will be drawn to this type of arrangement.

The laziness factor
All companies offering rebates expect that some customers will not follow through and actually redeem the coupon, which, of course, boosts profits. Griffin acknowledges that Compaq has made similar assumptions.

"It's kind of early in the market, and people are still wondering what the take rate will be," he said. "We've taken the position that you don't know how something's going to do until you actually do it."

Under the terms of Compaq's rebate, customers must complete the three years of the contract or risk a $50 cancellation fee plus the remainder of the service agreement, a company spokesperson said.

But most of the retailers that distribute Compaq PCs, including CompUSA, Best Buy, and Circuit City, offer their own discounts to customers who sign Internet service contracts. As a result, Griffin concedes that deals coming directly from manufacturers like Compaq and HP may confuse some customers.

"It could be somewhat confusing," he said. "We can't tell anyone what to do, as a retail channel partner. They're free to cut their own deals and promote whatever they choose, although obviously we prefer that they promote Compaq."