November 29, 1999 2:30 PM PST

Emachines, Free-PC to merge

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The "free PC," one of the hot consumer items of 1999, appears to be going away fast.

Inexpensive PC maker Emachines will merge with Free-PC, the company that kicked off the free PC craze earlier this year by giving away computers with complementary Internet service. The acquisition will delay Emachines' initial public offering until the first quarter, said Steve Dukker, CEO of Emachines and the executive who will oversee the combined companies.

With the merger, See special report: PC free-for-all Free-PC's computer offers will end. Free-PC had been giving away Compaq PCs and subsidizing the cost through advertising and e-commerce deals.

Those offers are no more, Dukker said. Instead, Emachines will take Free-PC's advertising and e-commerce deals and incorporate them into the Emachines platform. This could easily lead to lower prices on Emachines PCs, but they won't be free.

The two companies have been at the forefront of the price war that has revolutionized the consumer PC market. Relatively small a year ago, Emachines' aggressive pricing has landed the company a spot among the top five consumer PC makers in the United States. Combined with rebates, some Emachines systems sell for $1 or less. Earlier this year, AOL placed an investment with the company.

CNET TV: Free computers
CNET TV: Free computers

Despite the popularity of "free" PCs, customers have lodged complaints about orders that never get filled or delayed refunds. Analysts also remain skeptical whether advertising or services can subsidize the entire cost of a PC. Overall, however, Free-PC seems to draw fewer complaints than other companies.

The linchpin to the new Emachines strategy will be an enhanced browser called a "bi-directional" client. The client will clear a path between the user and participating electronic merchants. Emachines will collect revenue from companies that want a preferential spot on the client, and possibly a "bounty" for any e-commerce transactions completed through the client.

"What we are doing is changing the essence of the business from one-shot sales to long-term relationships with customers," Dukker said. "We will derive substantial revenue streams that none of our customers register."

Bill Gross, founder of Free-PC, claimed these deals will enhance customer enjoyment.

"Don't think of it as spam advertising. Think of it as a new experience for the consumer," he said.

Tune in to CNET TV's IPO Forecast The change comes because of two reasons. One, Free-PC was not generating the advertising and e-commerce traffic necessary to sustain a strategy based on giving away hardware, Dukker said.

Second, the Free-PC experience was relatively intrusive. A substantial portion of the user interface, and around 40 percent of the hard drive, on Free-PC systems was dedicated to promotions. The bi-directional client, Dukker said, will be less intrusive.

Under terms of the deal, Free-PC shareholders will exchange their stock for shares of Emachines, and Gross will join the board of Emachines.


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