Do the dynamics of free laptops work‾

Last weekend, a friend was showing off his shining new laptop - an HP machine with Intel processor, 1GB of memory, DVD burner and a large 39cm/15.4" display. Not amazing specs, but it had an amazing price - it was free! After checking to see if the serial number had been filed off, I learnt the laptop was free from AOL UK, which is now owned by the Carphone Warehouse.

The broadband provider has a promotion which bundles 8Mbps broadband with unlimited local and international calls for £25 (€31)  a month - plus a free HP laptop. What's the catch‾ Well, there isn't really much of one. The deal locks the customer into a two-year contact: a prison sentence for someone like me, but manageable for a typical consumer, particularly one that doesn't already own a PC or is looking to upgrade their old one, as was the case with my friend.

Giving away a free laptop allows a broadband service provider to achieve three key objectives in a developed market like the UK, which is highly competitive and where household internet penetration is flat-lining. Firstly, it provides a differentiated service offering, distracting consumer attention from the price versus speed comparison. Secondly, it opens up a new constituency of consumers who have a desire for internet access but for whom the affordability of a PC is beyond their means. Finally, a free laptop sweetens the two-year contact, making consumers more willing to lock themselves into an operator for such a long period of time.

Wholesale, I estimate the laptop probably costs AOL about US$550 (€347 or £278). The operator will amortise that over the two-year period, but is unlikely to be making any margins from the laptop itself, especially when the associated distribution and logistics costs are taken into consideration. As a bundled offering, margins will come from the plain vanilla broadband and VoIP telephone services. However, as the terminal provider, unlike its competitors, AOL is in a position to pack the laptop full of content, features and services which has the potential to take their customers' monthly ARPU well over the £25 mark.

If these economics sound vaguely familiar, they certainly should. The terminal-subsidy-content-and-services-premium model is an established aspect of the mobile phone industry. As newer, more powerful and feature-rich handsets have come to market, operators proved willing subsidisers (often down to zero dollars) in order to proliferate these devices across their subscribers base in the hope of reaping bigger rewards from the take-up of premium services.

From last year, laptops started shipping with embedded mobile broadband modules -initially for EV-DO networks and subsequently for HSPA. Now, all the big laptop vendors have mobile broadband devices on their roadmaps and many will be shipping products in 2008. Apart from this, the industry has seen a jump in the take-up of 3G data cards (primarily used with laptops) on the back of aggressive promotional activity over the last 12 months from mobile operators - particularly those in Europe. It is now possible to get a USB data-card and 3G broadband for less than £10 a month, with an 18 month lock-in.

Now that laptops are becoming mobile broadband enabled, does it make sense for mobile operators to start subsidising the cost of the laptops as they are already doing with handsets, and as some fixed broadband operators, like AOL, have started doing‾

On one hand, the raw economics make sense.

 

For example, the wholesale cost of a Nokia N-series devices or a high-end Samsung phone is higher than most basic laptop models. There is also more opportunity to pass on support costs to the laptop vendor, something not possible with handsets.

From the end-user's perspective, a laptop destined for home use will have its value spread across all family members (unlike a phone which is only used by one person), augmenting the perceived value and increasing the potential for lock-in periods of longer than 18 months. The opportunity for service bundling which includes laptop, handset, broadband and voice is also compelling.

However, while all this is a powerful service differentiator for a mobile operator trying to grab consumer mind-share in a market where all operators have identical network capabilities, the ability to boost ARPU through a subsidised laptop offering is more challenging and will only be achievable by certain mobile providers.

Going back to the Nokia N-series phone; an operator will be inclined to subsidise generously such a device since the multimedia (music, video, camera etc) and navigation features mean a user is more likely to consume data and premium content. The same cannot be said for a notebook unless the operator, like AOL, has a portfolio of online collateral which it can channel the laptop user towards.

A few mobile operators do have such collateral - Orange is perhaps the best example and has resulted from the France Telecom ownership of the pan-European Wanadoo ISP which has now been completely re-branded as Orange.

It will be interesting to see how the operator laptop subsidy plays out. T-Mobile toyed with such an offering last year in Germany and discussions with two other mobile carriers show they're not averse to such a concept. One scenario is that mobile operators which also have an ISP business in a local market (such as Deutsche Telekom/T-Mobile in Germany, Orange in France and the UK, Telefonica in Spain and TIM in Italy) adopt the laptop-subsidy model primarily to keep their ISP business competitive. However, as a result, competing mobile operators may feel compelled to offer a similar laptop-subsidy package to remain competitive.

Such an eventuality would speed the day when consumers no longer pay - or expect to pay - for any of their terminal devices, be it a set-top box, WiMAX router, laptop, mobile phone or gaming console.

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