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December 3, 1999
Web posted at: 3:20 p.m. EST (2020 GMT)

By Mark Gimein

(SALON) -- Earlier this year, when a slew of companies started talking about giving away PCs, hard-nosed editorial writers recoiled in horror. "There's no free lunch," they said in near unison; "you lose money on every computer, and you sure can't make it up on volume." PC World said most of the free PCs were too slow. BusinessWeek dissected an eMachines computer -- a system that was not free, but very cheap -- and "proved" that the company couldn't make a profit.

Now most of the PC makers are in trouble or worse -- Microworkz and its iToaster are kaput, Enchilada is no longer whole and free-PC pioneer Free-PC is rushing to merge with cheap-PC pioneer eMachines.

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So does this mean that the makers of free and super-cheap PCs just didn't do their math? Did their executives wake up one day and think, "Boy, this was a bad idea! Why didn't we just sell computers for $600 like everybody else?"

I'll bet they didn't.

Free-PC makers aren't in trouble because they were wrong -- they're in trouble because they were largely right. Most of the free-PC makers hoped to "give away" computers, but make up the cost by charging for several years of Net access (Free-PC, which was to have been entirely supported by advertising, was the one exception). The idea that computer makers would bundle Internet access with their machines and give the machines away scared Net access providers enough that they effectively co-opted the business model. Prodigy and America Online's Compuserve unit quickly rushed to offer $400 rebates to computer buyers who agreed to commit to three years of Net access.

This hasn't made computers absolutely free -- but they're getting awfully close. A quick check at the CompUSA store down the block showed that the cheapest new CompUSA-brand computer, with a monitor, ran $650. Subtract the Compuserve rebate, and it's a $250 computer. And that's with no special promotions.

Even the totally-free-PC chapter is by no means closed. Gobi is alive and kicking and PeoplePC is just getting into the market -- both think that by charging about $25 a month for computers with Net access, they can make the "no money down" equation work.

The critics of the free-PC idea, however, had it partly right, too. There just isn't that much money to be made from selling low-end beige boxes. Actually, there might be no money to be made from it. How else to explain that Packard Bell, once the consumer PC market leader, and IBM have gotten out of the consumer market? Dell, by many measures the most successful PC maker, has grown so quickly by strenuously avoiding the consumer market and catering to business users. (Dell does have a new consumer-oriented "Web PC," but it is a rounded, two-tone machine -- not a competitor in the cheap beige-box market.)

The consumer PC market is likely to only get worse: Gateway 2000 still sells plenty of low-end computers in its Hereford-cow spotted boxes, and has very healthy profit margins. But even Gateway, which in its corporate financial statements brags about its price discipline, has seen average unit prices drop by 14 percent since last year. In the meantime, its inventories have risen as computers take longer to sell.

What free-PC makers and cheap-PC makers such as eMachines have done is dramatically speeded up the collapse of prices for low-end home computers. Will eMachines ever make a profit? Who knows? The more interesting question, however, might be whether anyone will make a profit selling home computers in the conditions that eMachines and Free-PC and even complaint-plagued Microworkz have created. The cheap computing pioneers are like discount airlines: People's Express went out of business, but the fare wars it helped set in motion dragged down most of the U.S. airline industry.

So who gets the last laugh? The free and super-cheap makers who had the imagination to see that computer prices could get very close to zero but couldn't take advantage of that discovery? Or the PC makers and Internet providers who are at this very moment in the path of a tsunami of near-zero prices?

Most likely, neither. The last laugh will go to the buyers of the newly cheap machines. Go out and get them while they're hot -- their might be even fewer PC makers left standing in the near future.

Mark Gimein is a staff writer for Salon Technology.

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