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Will PCs be free?

If the trend in the U.S. retail market for low-price personal computers moves to the corporate world, we should see a fundamental dislocation in the PC industry.

We are at the cusp of a new era for personal computers.

The PC has evolved from a scientific curiosity in the 1970s to a mainstream business application in the 1980s. Through the early 1990s, however, even with increasing demand for PCs, the number of households in the United States with a computer has remained around 40 percent. Although higher income households have been shown to buy multiple PCs, a large fraction of households with an annual income of under $40,000 has remained largely underrepresented.

The next era of PC growth in the United States must come from this market. The buying habits for this group suggest that price is a key concern, while special features are secondary. The important question for buyers is whether a computer can perform, regardless of whether the processor is the latest Intel upgrade or not. What is more important, however, is the existance of a killer app.

The Internet has provided the industry with that killer app. Dedicated information appliances that aren't PC-centric but still can provide gateways to the Net are now all the rage. This is the market of WebTV and the elusive Network Computer. The low-end market can be energized by a low-cost, powerful PC solution that provides easy Internet access on a standard platform. In other words, the Internet, not the Network, is the Computer.

The PC has multiple advantages as the conduit to offer consumers low-cost Internet access. A personal computer has a standard platform, thousands of cheap software applications, a industry infrastructure built with cheap motherboard and component support, and is familiar to most everyone.

With the advent of the sub-$1,000 computer in 1997, we also now have sub-$100 microprocessors, HDDs, and cheap peripheral support. It was just a matter of time before sub-$700 and sub-$500 PCs debuted, taking advantage of processors from Cyrix that are available now at sub-$50 levels.

However, the business model in this low-price market needs to be markedly different than the traditional PC model. Service will be the key. The opportunity lies in selling the PC as a conduit to sell Internet access, and later leverage the subscriber base to gain a portion of content and e-commerce based revenue. This is similar to the cellular phone model, where mid-level phones are given away for free in return for service. I wouldn't be surprised, assuming a large conversion rate of customers to ISP subscribers, that in return for some premium service and support plans vendors start offering PCs for free.

There already are multiple vendors trying to capitalize on this trend. The U.S. retail market is the one that debuted the sub-$1000, and now the sub-$500 PC--and it is also the market that has been the most receptive to low-price PCs. EMachines, perhaps the most successful firm in the low-price PC market, got a late start in November but has since moved to a strong position in the U.S. retail market. Companies like Gobi and DirectWeb are offering a PC with different ISP access fees under two to three-year timeframes, with a PC thrown in for "free." There will be other vendors that will announce product offerings in this segment.

If the trend in the U.S. retail market moves to the corporate world, we should see a fundamental dislocation in the PC industry. Traditional resellers and the indirect channel will have to evolve their business models as margin dollars fall lower and lower. All PC system vendors will be affected, as will component vendors. It will be interesting to watch the evolution of the PC industry, as 1999 will be a key year in its development.