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By Robin Lloyd
CNN Interactive Senior Writer

In this story: Sell the service, not the steak Differentiation drives the free PC world RELATED STORIES, SITES

August 2, 1999
Web posted at: 8:35 p.m. EDT (0035 GMT)

(CNN) -- It's Apples and oranges in the world of "free" personal computers now that a Los Angeles e-commerce specialist has launched an offer for free iMacs in exchange for an Internet service contract, credit card sign-up and advertising.

FreeMac.com plans to give away a total of 1 million of Apple's popular Internet-oriented home computers in the next two years, starting with 10,000 this fall designated for those whose demographic profile matches the marketing plans of FreeMac's advertising and business partners.

In exchange, users must sign up for three years of Earthlink Internet service at $20 a month - a total of $720. Users also have to get a FreeMac First USA credit card -- which carries no annual fee -- and understand that their iMac will be barraged with advertisements tailored to their consumer profile.

"I think that we'll have a tremendous number of takers," FreeMac.com founder Jonathan Strum said Monday.

Word of the offer leaked late Friday, Strum said. By Saturday afternoon, more than 10,000 interested people had left their e-mail addresses at the Web site freemac.com. The Web site promises to give a heads up the night before the September online registration opportunity.

Strum sees a possible scenario where FreeMac.com selects 1 million people from a pool of 2 million applicants for the free iMacs. Different offers, perhaps for discounted iMacs, will be made to those not selected, he said.

A later phase of the FreeMac offer will go out to college students, he said. Another phase will offer a different Macintosh computer, customized with business applications, to users with home offices, Strum said.

The free iMacs will come with 32 megabytes of internal memory and a six gigabyte hard drive. Basic hardware upgrades can be purchased at the time of ordering.

Strum plans to buy the iMacs in bulk from Apple, which has no association with the free offer. The first shipments will go out in late October, he said.

Apple did not return calls for comment Monday.

Sell the service, not the steak

The deal follows similar offers in the past year made by a number of PC manufacturers who give away machines if buyers agree to monthly Internet connection payments and/or a stream of advertising and e-commerce offers on the computer's desktop.

Like the PC deals that preceded it, FreeMac.com's offer follows trends set in the telephone and photography industries, where businesses have moved away from selling hardware -- telephones and cameras -- to virtually giving away the hardware to sell services or other products -- local and long distance calls or film and film developing.

Strum agrees with that model. "I hope that a year after somebody receives a free iMac from us, the people will say the free computer was cool but it wasn't even the best part of the deal," he said.

At least six companies entered the "free" PC market in recent months, but at least two of them are in trouble due to user complaints and inability to deliver units.

Strum says his approach will endure because he is relying on more than one income stream (ISP service, credit card and advertisements) and has chosen "first tier" business partners in EarthLink and First USA. FreeMac also has a partnership with Cybercash, an e-commerce transaction processor.

"When you predicate something completely on ad revenues, you are going to be disappointed," Strum said.

Differentiation drives the free PC world

The free PC market generally is driven by a need for generic PC manufacturers to differentiate their product from the sea of others with what boils down to a payment plan in place of a lump-sum price tag, according to Joe Laszlo, an analyst at Jupiter Communications, an Internet business watcher.

That trend fails to explain FreeMac, however, as Apple's products are the most differentiated personal computers on the market, Laszlo said.

Jupiter would have advised against a free Macintosh offer for that reason, he said.

If FreeMac comes up with an alternative business model, it has a chance, he said.

"They'll probably have trouble attracting people beyond a certain segment of population," he said.

In general with free computer offers, however, with most consumers changing ISPs every two years, locking customers in beyond that means companies extract more value from them, Laszlo said.

Smaller free PC start-ups have been challenged with the entry of larger firms, like Microsoft and AOL/CompuServe, which has a partnership with retailers Circuit City, Best Buy and CompUSA.

It is unclear who is leading the pack in the free PC market, Laszlo said. However, FreePC has put up some impressive numbers with a million people signed up for its machines.

"Clearly, there is some segment of population that is motivated for something for free even it means giving up some of personal information and putting up with advertising," he said.

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