With $99 netbooks, wireless carriers see growing market in subsidized devices

AT&T calls netbook offer a 'terrific opportunity'

Look out for a deluge of wireless devices, including netbooks, sold at heavily discounted rates by the wireless carriers, as the operators battle to win customers during the economic downturn.

AT&T Wireless confirmed today it has been selling two netbooks from Dell Inc. and Acer Inc. for $99 apiece after rebates, but customers must commit to a two-year data service contract for $60 a month.

An AT&T spokesman said the carrier eventually wants to sell all kinds of embedded wireless devices that will work over its networks, including e-book readers, wireless cameras and in-car navigation devices.

"We're talking about just about anything going wireless. We're even talking about machine-to-machine devices like devices that do power readings, sending data wirelessly," said spokesman Mark Siegel in a telephone interview. "The netbook is certainly a terrific opportunity, but just a start."

Siegel hedged when asked if the netbooks on sale are heavily subsidized by AT&T, arguing that the device makers eventually set the prices AT&T customers pay. But most netbooks are selling today for $350 to $600.

Radio Shack Corp. began offering the Acer Aspire One netbook in mid-December for $100, with a requirement to purchase a two-year AT&T data plan for $60 a month. At that time, the Aspire One was selling elsewhere for $500. But at $60 a month for data service, a user will pay $1,440 over two years in addition to the $100 for the netbook.

"We're learning like everyone else about pricing and have to see what pricing models make sense," Siegel said. "It will be a situation-by-situation [decision]."

However, one AT&T executive told Investor's Business Daily that the company is glad to lure consumers with low-cost devices that it subsidizes, because that strategy helps it build a customer base for its services.

"The economics for us are terrific. We're willing to invest to get a customer," Glenn Lurie, AT&T's president of emerging devices, told IBD. "We're very comfortable with the margins we're going to receive on these netbooks, in the deals we're talking about." Siegel confirmed Lurie's comments.

Verizon Wireless said it offers a $200 rebate on a Sony Vaio netbook to customers who purchase two-year service contracts; the rebate comes in the form of a debit card. The device, called a P-series notebook computer on the Sony Web site, normally sells for $900.

Analysts noted that carriers that subsidize devices must pay up in the short term but will gain in the long run. And as the economy sours, carriers will be scurrying to get customers signed up, said Kevin Burden, an analyst at ABI Research Inc. in New York.

"We're going to see a lot more subsidies from all the carriers who are going to look for a lot more and different devices," Burden said. "And they have to be subsidized heavily, since the carriers always make more money on the back end with the cost of wireless services. All the carriers are trying to do is use the device to get service customers."

The popularity of AT&T's iPhone 3G subsidy shows that people are willing to pay for a service contract over time for a popular new piece of hardware, Burden said. "That psychology works," he said. AT&T subsidized the iPhone 3G, bringing the retail cost down to $199, but it signed up many customers to two-year contracts. The iPhone data service charge is $30 a month, while voice service can be as high as $100 per month.

Jack Gold, an analyst at J.Gold Associates LLC in Northboro, Mass., said all the carriers will continue to offer subsidies "because they want to fill their networks" as close as possible to capacity.

But Gold said consumers should be careful. If a user starts downloading movies to a netbook and exceeds a monthly data limit, the overage fees could be onerous, he said. Moreover, carriers may not want their networks flooded by that kind of traffic, he said.

Gold also said that netbooks are not a proven commodity, and it isn't clear if they are going to be used as replacements for laptops or fall into the category of toys.

And even "if it's more a toy and is not used as a laptop would be, then you are still bound to that two-year contract," he noted.

Copyright © 2009 IDG Communications, Inc.

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