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Micron takes stake in subscription strategy

The direct seller of personal computers plans to announce that it will invest more than $210 million in building up a "subscription computing" business.

Micron Electronics will shift to a more Internet services-based business model as the company seeks revenue beyond selling PCs.

The move marks the first major effort by a PC manufacturer to sell PCs on a subscription basis, mimicking the services model used by cellular phone providers.

Under the plan, Micron will offer small- and medium-size businesses with less than 2,500 employees and government customers a wide range of products and services--including Web hosting, e-commerce services, and PC hardware--at a monthly rate.

Micron plans to spend $210 million during fiscal 2000 to drive the initiative, which it calls "subscription computing." The Nampa, Idaho-based PC manufacturer will also introduce the MicronPC brand, which it will begin promoting tomorrow in a major ad campaign.

"We've reached an inflection point in the industry where people are viewing the PC as [the] delivery portal for Web content and applications," said Joel Kocher, CEO of MicronPC.com, in an interview with CNET News.com. "The next natural step is to want to treat the PC as a service."

Subscribers will choose from a menu of computing services, e-services, and hardware products, which they can add to as their business expands. Micron will offer products and services on a per computer user basis, so that companies can customize solutions by employee, department, or office.

"If there's anything that signals to me that the customer is now placing services ahead of hardware, it's the advent of the free PC," said Kocher.

Micron shied away from the low-cost PC movement, selling higher-priced consumer and small business systems for more profit but in much lower volumes than competitors. But the strategy didn't pan out, said analysts. Micron placed well outside the Top 10 in 1998 for worldwide consumer PC sales, according to International Data Corporation.

"It's a very smart move for them," said Lindy Lesperance, analyst with Technology Business Research. "Micron has been in a very difficult position in the consumer market, which they've been trying to get out of. They just don't have the volume to compete with Dell and others."

Micron has consistently shifted its business away from consumers to other areas. Consumer revenue dropped 61 percent in Micron's fourth fiscal 1999 quarter, compared to a year earlier. But commercial and government markets rose to 72 percent of Micron's business, up from 56 percent three quarters earlier.

Micron's biggest market is government at 41 percent, up from about 26 percent two year earlier, followed by 31 percent commercial, 24 percent consumer and small and medium-sized business, and 4 percent international.

"Part of the reason to go in this direction is that we are not a big PC guy," explained Kocher. The company has to go in a different direction to succeed, not just survive, Kocher said. And if the company is going to go in a different direction, it might as well be one where companies are commanding a higher valuation.

Micron will leverage several existing partnerships and acquisitions, such as its acquiring of Micron Internet Services from the parent company Micron Technology and the agreement with Covad Communications to provide consumer and small business DSL service.

Micron's first Web access product will be the NetNow, an appliance service-based subscription service offering DSL connectivity to the Internet, Web hosting features, and e-commerce tools.

Web hosting will form the core of the "new" Micron, said Kocher. Subscriber growth in that business, resulting from recent acquisition of HostPro, is reaching 10 percent a month, he claimed. That puts Micron in the top five Web hosting businesses in terms of subscribers, he said, and the company aims to have 150,000 Web-hosted accounts by the end of next year.

To continue on that growth path, Kocher said MicronPC.com would make several more acquisitions related to its new services push.

"There is no other PC vendor who can do this right, make this small business solution available to customers," said Lesperance, because it has the right infrastructure in place to deliver the services.

Micron faces a couple of obstacles in its services push, some of its own making. The company in July jumped on the free PC bandwagon with a free PC that wasn't free. Micron charged up front for Internet services costing $1,087.

That services gaffe could hurt Micron's credibility with new customers, said analysts.

Micron also faces stiff competition from big guns moving into the Web hosting arena, such as Intel, which last month opened an Internet services center.

For now, Intel seems focused on hosting sites for large corporate operations, while Micron is focusing on small to medium-sized businesses and government accounts. The presence of Intel, Kocher said, validates Micron's move.

"When you see somebody like Intel make the move [to services] it seems to be very clear from what customers are saying--the PC is becoming a deliver portal for Web content," said Kocher.