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Microworkz shake-up underscores free PC troubles

Companies offering "free" PCs have insisted that giving away costly computers with paid Net service can be a successful business. But moves such as Rick Latman's departure from Microworkz may indicate otherwise.

Companies offering "free" PCs have insisted that giving away costly computers with paid Internet service can be a successful business. But moves such as president Rick Latman's departure today from start-up Microworkz may indicate otherwise.

Latman, who had been one of the most vocal proponents of the free-PC concept, today announced his resignation. His tenure at Microworkz was tumultuous, including soaring demand for the company's cheap PCs, a lawsuit from partner EarthLink, and numerous customer complaints. Microworkz has not named a successor. Latman is staying on as chairman of the board.

This past spring, Microworkz joined a bevy of similar start-ups including Free-PC, Gobi, Enchilada, and DirectWeb. Many in this group have since been hit with similar problems.

Analysts say the issues affecting these ventures are more than growing pains and reflect a fundamentally flawed business plan.

"Free PCs are always going to be a tough row to hoe," said Forrester Research analyst Carl Howe. "Someone has to pay the bill. The question is who?"

Microworkz and companies like it have not articulated a clear plan for surviving, let alone profiting, Howe says. By giving away Internet service and charging prices as low as $299 for its computers, Microworkz is much more a marketing firm than a PC company, he said.

"They have to have a really clear concept of how its going to work in the long term. They haven't been doing that kind of due diligence." Howe said. "How are they going to keep both the customer and the supplier of service satisfied, because that's where the money comes from."

Microworkz in particular has had a hard time keeping these two groups happy. Soon after launching the Webzter Jr., a $299 scaled-down computer, Microworkz was facing angry customers who had never received their order, despite being charged on their credit card.

After dealing with that problem, the company was soon publicly battling with Internet service provider EarthLink, which had been supplying Internet service to Microworkz customers. EarthLink subsequently filed suit against the company.

"This could happen to anyone in the industry when you grow this fast," a Microworkz spokesman said. "I can't think of another company in this sector that's grown this fast."

Microworkz is far from alone in its troubles, to be sure. Enchilada, which had been giving away computers with paid Net service subscriptions, stopped accepting orders in July. Since that time, the company's Web site has said that Enchilada is experiencing "technical difficulties."

These problems do not surprise either skeptical analysts or more established PC makers. "I am unimpressed with the current crop of companies," Howe said. "Established PC makers are smart to stay out of it."

While PC companies such as Dell Computer, Gateway, and Compaq Computer do offer various deals to customers--including some subsidies of hardware costs for customers who sign up for Net access--the major players have largely stayed away from giving away computers completely for free.

Executives at a Dell conference in Austin, Texas, expressed skepticism about the long-term success of these companies.

"There are not business models. They are merchandising," said Paul Bell, senior vice president at Dell's home and small business products group. In other words, these companies are not developing new ways to do business but engaging in clever packaging. One company, he noted, is offering free ISP service if a checking account with a certain bank is opened.