Dell to supply PCs for American Airlines

Dell Computer has landed a contract to provide computers to 100,000 employees of American Airlines in a deal that could signal trouble for another PC start-up.

American said it will launch an "affiliate" buying program under which employees will be able to purchase a Dell computer along with Internet access at a discount. The company will spend at least $15 million a year in the next three years to offer low-cost computers and subsidized Internet access to workers.

Dell's coup underscores the growing importance PC providers are attaching to "affiliate buying" programs, in which a single PC company provides bundled computer services for another company's work force.

The deal, however, is also likely bad news for PeoplePC, a San Francisco start-up that pioneered affiliate buying last year. The company recently announced deals to provide PCs to employees of Ford and Delta Airlines. Yesterday, it filed plans with the Securities and Exchange Commission for an initial public offering of up to $100 million.

The potential danger to PeoplePC is that Dell could easily prove to be a more efficient provider of computers to large customers. PeoplePC is essentially a middleman. The company gets its computers from IBM, Hewlett-Packard or other brand-name manufacturers and sells them to the employer under large-scale contracts.

Dell, meanwhile, is widely regarded as one of the most efficient computer manufacturers in the business. The company has been known to undercut other manufacturers as well as dealers because of its operational efficiencies. As a result, Dell theoretically is in a position to reduce the amount the employer must subsidize, because its computers could cost less.

PeoplePC also hopes to make a substantial portion of its revenue and profits from e-commerce deals. Merchants will provide the company a portion of revenue generated from sales that PeoplePC somehow participated in. A number of companies have tried this so far, including Free-PC, and failed.

PeoplePC reported revenue of $4.9 million and losses of $64.3 million last year.

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A matchup between the two companies won't be unprecedented. A number of start-ups last year, such as Microworkz and Free-PC, began to market low-cost or free computers. In consideration, consumers had to accept advertising or long-term ISP contracts. Many big companies, including AOL, Gateway and Microsoft, adopted some of these tactics, and most of the start-ups have closed their doors.

Affiliate programs, under which employees can obtain PCs and Internet access at a discount as part of their benefits package, will become an increasingly important channel for home computer sales. PC makers are loath to abandon the brand identity that accompanies the package deals.

"PCs are getting into people's hands in a whole host of new ways," International Data Corp. analyst Roger Kay said in a recent interview.

Kay said people who buy PCs from their employer, bank, trade union or school identify primarily with the company that brokered the sale and secondarily with the PC manufacturer.

For employees, the benefit of affiliate buying programs is obvious: they can get a top-of-the-line PC with Internet access for less through their employer than through a store.

PC companies also benefit. Rather than slugging it out for market share and retailer shelf space, providers land large, multi-year contracts with huge institutions with strong credit ratings. In a sense, the consumer market becomes more like the corporate market, where marketing efforts can be directed straight at the potential purchaser rather than the public at large.

Like other companies with large and dispersed work forces, Fort Worth, Texas-based American Airlines hopes to cultivate a computer-savvy work force so that employees can receive scheduling updates and other critical information at home, saving time and boosting efficiency.