2HRS2GO: PC makers tread on thin ice in ISP business
America Online probably hopes this doesn't catch on.
Internet service provider Mindspring Enterprises Inc. (Nasdaq: MSPG) confirmed talks about "business combinations", which usually means "buyout", adding fuel to earlier news reports that Gateway 2000 Inc. (NYSE: GTW) wanted to buy Earthlink Network Inc. (Nasdaq: ELNK). Regardless of who the suitor(s) may be, it marks a growing trend for PC makers.
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Compaq unveiled Compaq.net earlier this month. Michael Dell has said his company will introduce its own Internet access service, although no formal announcement has come yet. eMachines plans to roll out its own ISP in the second half of this year. Micron this week announced plans to expand its own Internet service nationwide. And of course, Gateway already offers Internet access as part of Our:)Ware For Which You Overpay In Easy Monthly Installments.
The idea on the surface seems attractive, even logical. Today's computer is supposed to work right out of the box; given that the majority of PCs are purchased with Internet use in mind, it only makes sense for the box maker to try and capture that market right from the outset.
Yup. Sure. Right. No doubt Apple thought the same thing before it shut down eWorld. And I'm sure Microsoft exults in MSN's non-existent subscriber growth.
Every major PC maker believes it can rely on an ISP business for a steady stream of profit. Where they got this idea remains a mystery, since the precedents for reliable net income (as opposed to losses) from a large Internet access business can be counted on one hand. Actually two fingers, Mindspring's and AOL's. And it took 11 years for AOL to reach that point.
Box companies' ISP moves are driven by a cynical assumption about customer ignorance, if eMachines is any guide. eMachines CEO Stephen Dukker has pointed out that ISPs have high customer turnover rates because people realize they can get several months of Net access free by scooping up free 30-day offers; Dukker says his company will avoid that because new PC users won't realize what's available for about 18 months, and by then, their loyalty will be locked in.
Unfortunately, the assumed ease of customer capture is no guarantee. A keyboard button appears to be no more intuitive than a desktop icon, and you can see where the latter has gotten MSN.com: nowhere.
If you're going to stray from your traditional business, at least move into an area where your experience has some meaning. So if you're Intel, you buy Level Three and move from one area of chip manufacturing to another. If you're Yahoo, you buy Broadcast.com to round out your portal offerings. If you're AOL, you buy ICQ and add to your existing messaging business, or Netscape to add a business portal to your network and perhaps integrate the browser into your software package.
But how many PC makers know how to manage sprawling masses of dial-up connections? Companies like Compaq have enough problems running profitable assembly lines, let alone service- and capital-intensive operations like Internet access networks. Can you imagine applying the average PC company's customer service standards to Internet access? You'd end up with another AOL circa 1997: sorry, the line is busy, please try again later...
Come to think of it, AOL probably shouldn't worry much at all. But PC companies' investors should, which probably helps explain some of the retreat in Gateway's share price today. Hopefully the other box makers will get the message.
Other issues:
The overall technology market continued its day-long retreat into the afternoon. With two hours left in regular trading, the Nasdaq Composite Index was down 43.17 to 2554.95, the S&P 500 had fallen 21.33 to 1311.73, and the Dow Jones Industrial Average had slid 163.69 to 10503.17. 22GO>