AOL deal signals sea change for PCs

AOL said today that it will make a minority investment in Emachines and begin offering a $400 rebate on Internet access through its CompuServe brand with the purchase of an Emachines PC.

The deal underscores some fundamental changes that have been reshaping the PC industry in recent months. Internet service providers are seeing a variety of computer makers, including Gateway in the United States and Dell Computer in Europe, add Internet service to their offerings in hopes of raising revenues to offset razor-thin profit margins in the hardware-manufacturing business.

"AOL has the strongest brand in the Internet access space and is clearly looking to use its brand to move into the consumer products area," said Joe Laszlo, an analyst at Jupiter Communications. "This is a first step."

But Laszlo noted that the move surprised many industry analysts who were expecting AOL to take an even deeper plunge into the PC market.

"There were rumors that AOL was going to make a deal with Microworkz and actually produce an AOL-branded PC," Laszlo said. "That would have put them in direct competition against the Dells and the Gateways, which are trying to leverage their brands into [Internet service provider] space." Gateway offers a year of free Gateway-branded Internet service with new computers.

AOL plays down the idea that the online service is responding to trends in the PC industry or that AOL, by virtue of its investment, in essence becomes a competitor against the companies that it also partners with.

"This [rebate program is] an opportunity to help a hardware manufacturer move more machines," said Audrey Weil, senior vice president and general manager of CompuServe, who notes that the rebate program is the first of several partnerships with PC makers and retailers.

"We look at all of the computer manufacturers and think about how they are [offering] services. We really want them all to be successful. We look to partner will all of the OEMs."

AOL's desire to grow its audience extends beyond the PC. The company is partnering with a number of hardware manufacturers to provide interactive TV service and is looking for ways to offer content to myriad other computing appliances.

"We're trying to benefit from all the different types of hardware out there. No matter what type of device, we want to give [consumers] access to the services we provide," Weil said. Recent examples include offering some AOL services and AOL email on 3Com's Palm line of handheld digital organizers.

Analyst Bruce Kasrel, senior analyst with Forrester Research, believes that AOL will be cautious not to anger the PC companies it works with too much. "AOL doesn't want to get too in bed with Emachines and start favoring them, then they start looking like Microsoft," he said, in reference to Microsoft's business practices.

Still, the deal may be of far more benefit to Emachines than the likes of Compaq Computer and Hewlett-Packard, which are the leaders in sales at retail and online or catalog resellers. Emachines has a $399 computer that is essentially free with the rebate program, while the other companies aren't at the $400 mark yet.

Emachines chief executive Stephen Dukker said the rebate program works best when the net price of the PC is $99 or less. "Up from there, you're courting a more sophisticated customer that doesn't want multiyear commitments," he noted. And PC companies aren't terribly interested in selling $400 PCs, he claims, so the market may be supplied largely by Emachines, he hopes.

PCs go cellular
Whether or not AOL can now be seen as a competitor of sorts to the big PC players, the PC market is changing, according to Dukker.

"I think that what has been interesting is that what this amounts to is the beginning of the era of free PC on wide-scale distribution. It's the 'cellularization' of the PC industry," Dukker said. Subsidized PCs that come with Internet service have been available but only on a limited basis. The Emachines program will be offered on a nationwide basis in volume, Dukker said.

"It is the cellularization of the PC industry, but not the popularization," Kasrel said, meaning that consumers without PCs may still not leap in to the market just because the PC is free.

"It's another option for consumers, but is it the only option? Probably not," he said. "I don't think this will be the mainstream way to get Internet service and PCs together," he thinks, because many people will be hesitant to sign a long term contract.

Dukker said that the company will also launch its own branded Internet service later this year with similar promotions, but they will be structured differently so as to not compete with the CompuServe deal.