PCS TURN FROM CHEAP, CHEAPER TO FREE; TECHNOLOGY: INTERNET PORTALS, ISPS WOO COMPUTER MARKETERS

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It's been a tough year for personal computer marketers, unless of course you're a direct-to-customer powerhouse like Dell Computer Corp. or Gateway, or have the marketing finesse of an Apple Computer.

Most of the non-direct players like IBM Corp., Compaq Computer Corp., Hewlett-Packard Co., and others, are struggling to mount direct operations and cut costs, improve sourcing deals and streamline fulfillment and manufacturing processes. And when they're not touting their e-business capabilities to businesses large and small, they're trying to put customer care and technical support operations online.

INTERNET DRIVES PC VENTURES

And lest anyone forgets -- the Internet rules. It will continue to do so as e-commerce heats up and PC vendors dangle a bevy of rebates that render a machine nearly free when consumers sign up for long-term Internet Service Provider deals.

It remains unclear when the Federal Trade Commission might move from a "look" to a formal investigation of the multitude of $400 rebate deals (AA, Sept. 6). The FTC has questioned the way in which the terms and conditions (often in fine-print in newspaper ads) are advertised. These deals are typically tied to three-year agreements with ISPs.

It's not easy being a hardware manufacturer. It's hard to make money in the consumer business, which is why PC makers have partnered with ISPs and Internet portals to help boost their margins. The three-year ISP bundles help PC marketers retain customers for the long-term.

The already commoditized category sunk even further this year with the sub-$1,000 PC category giving way, incredibly, to a sub-$500 segment.

FREE PC DEALS

Just when it couldn't get any better for first-time, or even repeat purchasers, the Free PC movement burst onto the scene. For a free PC, consumers agree to receive targeted ads that scrawl across their PC screens and to answer questions from companies seeking demographic information. Free-PC, the company that spawned the concept, puts candidates through an elaborate application process. Despite the extensive screening, there is a backlog of applicants.

The sub-$1,000 PC, which first hit consumer radar screens in time to rev Christmas '97 sales, is now well-entrenched with nearly every vendor offering one. "The sub-$1,000 PC is a very dangerous category, it makes up well over 50% of all PCs sold," says Matt Sargent, senior industry analyst for InfoBeads, a computer research company that tracks PC sales.

Mr. Sargent puts the bulk of consumer product sales volume for "direct" players Dell and Gateway roughly from $800 to $1,200; at $500 to $800 for Compaq and Hewlett-Packard; and $400 to $600 for newcomers like EMachines. He says direct sales will comprise more than one-third of the consumer market this year, but are unlikely to hit the 50% mark.

While searching for ways to mirror Dell's "direct" sales model, PC marketers also delved into e-commerce ventures vis-a-vis online stores and other vehicles, dabbled with Web portals and struck alliances with ISPs.

COMPAQ-ALTAVISTA PACT

Compaq last year touted its seriousness about the Web via AltaVista, acquired when it merged with Digital Equipment Corp. But this summer it offloaded the search engine to CMGI, a holding company of Internet companies that currently controls a majority stake in the Web portal and search engine site. CMGI has positioned AltaVista.com as a "mega portal."

The Web deal made Compaq CMGI's biggest outside shareholder and as such, made AltaVista the exclusive search engine on Compaq Presario PCs. Compaq and CMGI also will partner to develop new Internet technologies that are expected to build AltaVista and Compaq-related e-commerce.

AltaVista recently mounted a splashy new brand campaign, another sign that not only are nimble dot.coms awash in freshly-minted venture capital, but are poised to partner with older, offline PC brands struggling to transition from hardware into e-commerce and a host of other services.

So where does brand enter into a volatile, commoditized category? The top PC marketers spent a bundle in media and elsewhere: Dell touted its enviable "direct" sales model; Gateway urged consumers to "Call, Click or Come In;" IBM owned e-business with a savvy, smart campaign; and Compaq is expected to paint itself as a fast-moving Internet computing firm.

Hewlett-Packard, always the bridesmaid but never the bride, tried to stir some action via an e-services campaign. Trumping IBM on e-business is difficult, if not impossible. But don't count H-P out just yet. Carly Fiorina, its fiesty new CEO, is a self-styled brand evangelist who's bound to refashion the stodgy

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