Take My Device, Please - Industry Trend or Event

Industry Standard, The, Sept 4, 2000 by Alexei Oreskovic

Web sites are giving their customers free information appliances. The crazy part is that these giveaways may be paying off.

It's safe to assume Wal-Mart's shareholders probably wouldn't be happy if the retail giant started giving away free Volkswagens so shoppers could more easily reach its stores. Yet as far-fetched as this sounds, it's not that far from the way a growing number of businesses are bringing customers to their Web sites.

Instead of cars, though, businesses are giving away so-cabled information appliances to bring customers to their Web sites. This motley group of devices runs the gamut from wireless two-way pagers to flat-panel Internet terminals. All share the ability to access a site's content and services.

With an information appliance, the thinking goes, customers can interact with Web businesses around the clock, wherever they happen to be. The mobile professional can trade stocks in a taxi; the music fan can order concert tickets the second they go on sale; and the shopaholic can bid on knickknacks whenever the urge strikes.

Half a million such appliances will be shipped by the end of 2000, predicts market research firm Gartner Group. Of the approximately 20 businesses offering the units to their customers, two or three will give them away. The remaining players will partially subsidize the appliances, selling them at significant discounts.

But does giving away these information appliances make any more sense than giving away cars? After all, such devices can cost hundreds of dollars apiece. And the demise of other giveaway programs [see "Land of the Free," Oct. 11, 1999] suggests that handing out free hardware is not a sound business practice.

None of this is scaring big names like eBay, Fidelity and Virgin, however. They are eagerly outfitting thousands of their customers with high-tech Web appliances. And, the companies say, these programs are boosting their bottom line.

"They understand this is a terrific acquisition and retention tool," says Audrey Parma, president and CEO of Internet Appliance Network, a New York-based company that supplies Net devices to businesses. In April, IAN's first customer, Virgin Entertainment Group, distributed 10,000 information appliances to consumers. Dubbed WebPlayers, these sleek terminals give recipients full Web surfing capabilities and e-mail access.

COME BUY WITH ME

Virgin's customers pay nothing for the device or for the first year of Internet service. After the first year, the cost of the service is $50 a year, still a bargain by dialup ISP standards. WebPlayer owners, however, are locked in to Virgin's service for the next three years.

If this sounds eerily similar to the freePC phenomenon that felled so many businesses last year (FreePC, Microworkz and Enchilada), don't tell that to the folks working for Richard Branson. Like most companies distributing information appliances, Virgin is quick to distance itself from anything that smells like free PCs. "It's a different model," says Virgin Megastore Online Senior VP Dave Alders. "This is a much more targeted approach."

In the free PC model, computers ended up in the hands of an undesirable demographic: people who couldn't afford a PC. Virgin has the luxury of handpicking its audience. Each prospective WebPlayer owner has to fill out a 35-question survey about their income, hobbies and shopping habits. "We were able to set the criteria," notes Alders. "So we know that the user base is very high-quality and very high-value, They're more likely to spend and to come back."

While it might seem like Virgin needs to sell a whole lot of CDs and soft drinks to recoup the price of its WebPlayer (which costs roughly $400 to manufacture), the economics are compelling.

According to the McKinsey consultancy, online retailers garnered an average income of $72.95 per new customer in the fourth quarter of 1999. Repeat customers generated an average of $199.28 for online retailers over the same quarter. By these calculations, the WebPlayers would pay for themselves in less than a year, assuming Virgin's customers act like average PC-based online shoppers. The point of the WebPlayer, however, is to encourage more profligate behavior. "We're obviously anticipating higher spending per person," says Alders.

To ensure that WebPlayer recipients shop, Virgin enforces a set of guidelines. Users aren't actually required to spend money, but they do have to spend 10 hours a month on the device or else return it.

Virgin also rakes in commissions from its strategic partners, including Expedia, Gap.com and Tickets.com, which have prominent placement on the service. Whether it's buying CDs, stocks, concert tickets or auction items, the ultimate goal of giving away information appliances is to generate transactions. Each time a WebPlayer user buys a sweater from Gap.com, Virgin takes a cut. The company effectively owns the WebPlayer surfers and profits from their every move.

This is what distinguishes it from the free-PC concept, which relied on advertising for revenue. For Virgin and others, the core business is the commerce site. The free information appliance is merely a marketing expense.