US Report: ISPs may offer free PCs

What could make that possible are the quickly falling prices and profit margins of the basic PC. Think cell phones. Providers of wireless phone service give away phones that once cost hundreds of dollars in order to sign up subscribers. "When PCs reach $300 (£177) and $400 (£236) they become like cell phones," said Lou Mazzucchelli, senior PC analyst for investment house Gerard Klauer Mattison & Co. "They will give you the PC and bundle the service with it."

That may be the only way for PC makers -- now competing for ever-thinner margins in the sub-$1,000 PC space -- to actually make a profit as consumers keep demanding ever-lower price points. "Someday you may get a free PC with two years of Internet service -- kind of like the cellular phone model," said Steve Dukkar, president and CEO of cheap PC maker E-machines.

On Thursday, computers continued to get cheaper when IBM unveiled its latest machine, the Aptiva E Series DN1. Price? $599 (£354). It's the first time a machine from one of the five largest PC makers has dipped that low. "The margins on the products are thin," said Andrew Hayden, spokesman for IBM's (NYSE:IBM) consumer division. "You have to be able to not only get the box out fast, but through the channel quickly, in order to make the low-cost business work." The Aptiva has a 300MHz-equivalent MMX processor with 32MB of RAM, a 3.2GB hard drive, 32X CD-ROM and a 56Kbps modem. The monitor is sold separately.

The company joins Packard Bell NEC. in the low, low price arena. In May, Packard Bell unveiled a $699 computer with 233MHz-equivalent MMX processor from Cyrix, 24MB of RAM and a 2.1GB hard drive. To help sell its computers, Packard Bell has inked a deal with Internet service provider EarthLink Networks. (Nasdaq:ELNK) in mid-October to rebate $100 to each Packard Bell customer that signs up for EarthLink during the busy holiday season. In exchange, EarthLink will receive preferred placement on the desktop of Packard Bell computers.

Seeing a chance to get customers on board, other ISPs are clamouring to do deals with PC makers. ICG Communications is testing the market with two different strategies. With refurbished-computer seller Recompute, the company is packaging a year's worth of ICG Netcom Internet service with a Pentium-class computer for $569 and up. "We are going after the late-adopter market of 17 million potential customers," said spokeswoman Laura Crowley. "They want an inexpensive Internet solution." While the computer is no powerhouse, the 90MHz Pentium processor, 24MB of RAM and 1GB hard drive are enough to display Web pages.

And for those users looking for a bit more power, ICG Netcom has another offer. The company has signed a co-marketing agreement with E-machines -- the newest company to enter the low-cost market. In return for helping E-machines market its eTower 266 -- a $499 computer plus monitor package -- ICG will have its service sign-up integrated into eTower's registration process. The deal helps to offset the costs of selling the computers. "For now, the [ICG] Netcom deal helps us get the word out without affecting our bottom line," said Dukkar of E-machines, who affectionately refers to his company as the "pricing antichrist."

E-machines will be shipping more than 200,000 machines during the holiday season, and dealers have snapped them up. The company hopes to sell another 250,000 in the first quarter of next year. Still, price is only half of the equation needed to woo consumers. "Lower cost just gives people the ability to purchase one. You have to make them want one," said Greg Blatnik, vice president and principal analyst with Internet watcher Zona Research. "If they are easy enough to use, they will become appliances -- then they will proliferate."