shirky.com Clay Shirky's Writings About the Internet
Economics and Culture, Media and Community, Open Source
Free PC Business Models
3/5/1999

"Get a free PC if you fit our demographic profile!" "Get a free PC if you subscribe 
to our ISP for 3 years!" "Get a free PC if you spend $100 a month in our online store!" 

Suddenly free PCs are everywhere -- three offers for free PCs in the last month alone, 
and more on the way. Is this a gimmick or a con game? Has the hardware industry finally 
decided to emulate online businesses by having negative revenues? More importantly, is 
this the step that will lead to universal network access? When PCs and network access 
are free, what's to stop everyone from participating in the digital revolution? Could it 
be that the long-lamented gap between the info-haves and the info-have-nots is soon to be 
eliminated by these ambitious free PC schemes? 

The three offers rolled out last month -- from the start-up free-pc.com, the ISP 
empire.net, and the online mall shopss.com respectively -- are actually the opening salvo 
of the biggest change in the computer industry since the introduction of the PC in the 
late 70's. The free PC marks the end of the transition from PCs as standalone boxes to PCs 
as network-connected computers, and from PC as product to PC as service. But however 
revolutionary the underlying business model may be, it is unlikely to change the internet 
from a limited to a mass medium, at least for the coming years. To understand why, 
though, you need to understand the underlying economics of the free PC. 

We've gotten used to cheaper and cheaper computers over the years, but this is different. 
Free isn't even the same kind of thing as cheap - a $399 computer is cheaper than a $999 
computer, but a free computer isn't just cheaper still, it's a different kind of computer 
altogether. $999 computers and $399 computers are both products; a free computer is a 
service. 

To see why this transition from computer as product to computer as service is a necessary 
condition for a free PC, consider the forces making the free PC possible in the first 
place. The first is cost, of course: PC prices have been falling for years, and the 
recent fall over the last three years from $999 to $399 has been especially precipitous. 

A $399 PC is still not free however, and no matter how far prices fall, they will never 
fall to zero, so the second part of the equation is cost savings. A $399 PC is cheap 
enough that companies can give them away and write off the cost, if they can make back 
the money elsewhere. A free PC is really a loan on expected future revenues, revenues 
derived from customer attention of one sort or another. 

ABC's TV slogan, "Hello? It's free" isn't quite right. You may not be paying ABC money 
when you watch "Nightline," but you're still paying attention, and they sell that 
attention to their advertisers. TV, radio and a variety of other media have figured out 
a way to distribute free programming and profit from consumers' attention. The low price 
of computers and their growing use as media outlets and not just as fancy typewriters now 
brings them into this realm as well. Companies can absorb the cost of giving away hardware 
if they can profit from getting you to pay attention. 

To see how a company might do this, consider these three bits of marketing jargon - 
"Customer Acquisition Cost," "Customer Retention," and "Lifetime Value of a Customer." 
Each of these is a possible source for making back that $399, and in fact, each of the 
current free PC uses one or more of these sources to underwrite their offering. 

Customer Acquisition Cost is simply the marketing budget divided by the number of new 
customers. If I spend a million dollars in advertising and get 2000 new customers, then 
my Customer Acquisition Cost is $500 per customer. If, by giving away a $399 PC I can 
cut my other customer acquisition costs to $100, I come out a dollar ahead per customer, 
even though I've given away hardware to get there. This is the model free-pc.com is 
following, where they are acquiring an audience cheaply as a first step towards selling 
that audience's attention to their advertisers. 

Customer Retention is a way of expressing the difficulty of keeping a customer once you 
get them. Telephone companies, for example, are especially vulnerable to this -- customers 
switch long distance services all the time. If I can give away a $399 PC and keep a 
customer longer, I make the money back by increasing customer retention. (This is the 
rationale behind the "free cell phone" as well.) The New England ISP empire.net is 
following this model -- in return for your computer, they have you as a customer for 3 
years -- guaranteed retention. 

Lifetime Value of a Customer is a way of thinking about repeat business -- if the average 
customer at a grocery store spends a hundred dollars a month and lives in the 
neighborhood for 5 years, then the lifetime value of the average customer is $6000. If a 
company can give away a $399 PC in order to raise the recipient's lifetime value, they 
can absorb the initial cost and make it back over time. This is the model shopss.com is 
following, where you get a free iMac in return for agreeing to spend $100 a month at 
their online store for three years. 

It's worth pointing out that all three models depend on one critical element, without 
which none of them would work: the Internet. Every one of these plans starts with the 
assumption that an Internet connection for these PCs is a basic feature, not merely an 
option. This is is the final step, the thing that turns the computer from product to 
service. Without the Internet, there is no way to stay connected to your users. Every 
business model for the free PC treats it as an up-front loan that the user will pay back 
over time. This requires that a computer be a connected media outlet, not an isolated box, 
and the Internet is the thing that connects computers together. 

A few years ago, engineers at Sun and Oracle began talking about creating an NC -- a 
"network computer" -- but while they've been talking, the Internet has been quietly 
turning all PCs into NCs, without needing any change to the hardware at all. Everyone 
giving away free PCs (and there will be more, many more, following this model over the 
next few months) has recognized that the real PC revolution is not in hardware but use. 
PCs' main function has slowly but decisively passed from standalone computing to network 
connectivity over the 20 years of its life. We've already seen that transformation alter 
the business models of the software world -- the free PC movement gives us our first 
glimpse of how it might transform hardware as well. 

If personal computers are now primarily devices of connection rather than computation, 
this raises the larger question of access. There is a technotopian dream of universal 
access floating around, where the Internet connects every man, woman and child together 
in what John Perry Barlow memorably called "the re-wiring of human conciousness." For 
years now, old-style progressives have been arguing that we need public-sector investment 
to make the digital revolution more democratic, while free-market devotees have contended 
that Moore's law alone would take care of widening the wired world. Is the free PC the 
development that will finally lead us into this promised land of universal connectivity? 

No. 

There's no such thing as a free lunch. The free PC is not a free product, but a short-term 
loan in return for your use of a service. The free PC, in all its incarnations, is really 
a "marketing supported PC" (a more accurate albeit less catchy description). Its cost is 
supported by your value as a consumer of marketing, or of products bought online. The 
inverse is also true: people who do not have enough value as consumers won't get free 
PCs. (Imagine answering one of those ads for a free cell phone, and telling the phone 
company that you wanted them to send you the phone itself, but you didn't want to 
subscribe to their service.) 

For the whole short history of the commercial Internet (1991-present), it has been an 
inverted medium, with more representation among higher income brackets. This means that 
for a marketing supported medium, the most valuable clients for a free PC are, 
paradoxically, people who already own a PC. Indeed, free-pc.com makes this assumption 
when they ask the prospective recipient of a free PC how many computers they already own. 
Access to the Internet is still growing rapidly, but it is growing in stages -- first it 
was populated by computer scientists, then academics, then "early adopters," and so on. 
The free PC doesn't change the Internet's tendency to expand in phases, it's just the 
next phase. The free PC will extend the reach of the Internet, but it will start by 
reaching the people who are the closest to getting there already, and only expand beyond 
that audience over time. 

The free PC isn't charity, but it also isn't a temporary marketing gimmick. It is simply 
the meeting of two long-term trends -- falling hardware costs and the rising value of 
connecting a customer to the Internet. In retrospect, it was inevitable that at some 
point those two figures would cross -- that the Internet would become valuable enough, 
and PCs cheap enough, that the the PC could become like a cell phone, a dangle to get 
people to subscribe to a service. The number of people who can afford to connect to the 
Internet will continue to rise, not instantly but inexorably, as the value of the 
Internet itself rises, and the cost of hardware continues to fall. 1999 will be 
remembered as the year in which this shift from computer as product to computer as 
service began. 


Write clay@shirky.com with questions or comments.

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shirky.com Clay Shirky's Writings About the Internet
Economics and Culture, Media and Community, Open Source