Emachines moving to "subsidized" PCs

Bargain PC manufacturer Emachines will begin to market its own brand of Internet service in June, a move which will pave the way for the company to get into the subsidized or "free" PC market. Emachines will likely initially sell its ISP services as an option and charge a monthly fee for the service that is independent of any PC purchase price, sources said. Later, however, the company will offer discounts on PCs if a customer agrees to long-term ISP contracts, similar to the way cell phones are sold.

"We're coming down the home stretch on the logistics of it," stated a source at Emachines. "We will be evolving to a subsidy model."

"We firmly believe in the subsidized PC model and in the bundling of the PC and ISP [service]," said chief executive Stephen Dukker. Dukker would not comment on any future offerings, but added: "We're going to be creative."

Although Emachines won't be the first company to try to amortize the cost of a PC into ISP contracts, the company's shift in this direction shows the strength of the trend. Emachines has emerged as a top 10 retail brand in the past year and would become the largest company to date to offer a subsidized PC.

Even the large PC companies seem to be taking notice and shifting gears. IBM executives recently said "the writing is on the wall" with regard to this trend, while Dell executives earlier this week said that the company is looking at selling PCs via a "subscription" model.

Earlier this week, in fact, Dell registered the URLs Dellwebpc.com and Buywebpc.com. A Dell spokesman said that the URLs were unrelated to any upcoming program, but added, "we're constantly looking at making money and doing business over the Web."

The subsidized PC has become one of the major developments in the consumer computer world this year. Technically, the PC isn't free or necessarily discounted. In these deals, companies hand a PC over to a consumer with little or no money down, and then recover the cost of the box through long-term Internet access contracts with the PC owner, lateral advertising deals, or agreements that obligate the PC recipient to sell products and services via a multi-level marketing program to other customers. These deals are largely possible because computers components have dropped to the point where PC manufacturers can sell a computer for $399 and still eke out a profit.

Although the offers vary, amortizing the cost of the PC through long-term Internet access contracts appears to be emerging as the primary business model.

One of the flash points of this emerging industry seems to be the use of the term "free". Judging by the number of customers that have flocked to companies such as Free PC and Gobi, the word has a certain resonance with consumers.

Dukker and others, however, recoil from it. Although PCs can be built cheaply, certain fixed costs exist which the companies have to recover. By promising a "free" PC, these issues merely get swept under the rug and can lead to problems later.

""We are not a free PC company," he stated. "We are in the traditional space?.Customer satisfaction is an important issue. A lot of these guys are learning it the hard way."

News.com's Jim Davis contributed to this report.