The price of your next PC: Free!

Here's another soon-to-be new twist on the Freemium model, where companies make money by giving things away. This time it's set to hit the high tech hardware world. Talk of the Apple (AAPL) Tablet continues to build with rumors that the iBook (or whatever) will be subsidized. At the same time, wireless carriers like Verizon (VZ) and AT&T (T) are rolling out more and more plans that offer subsidized netbooks to customers willing to sign up for two and three-year data plans on top of their existing cell phone coverage. The carriers are willing to part with these netbooks for $199 and up, a subsidy in many cases of $200 or so.

That still sounds expensive to me because the true value of a customer is in the data subscription, not the hardware charge. According to a DisplaySearch analysis, the lifetime value of a two-year AT&T or Verizon subsidized netbook (w/ HP Mini or Acer Aspire One netbook) ) and service plan (assuming you don't blow through monthly data limits) is $1,159 before sales tax and all of the monthly telecom taxes are added. That's about $900 more than the upfront price paid by the customer. So how about a free netbook for anyone willing to sign up? Yep, that's where we're rapidly heading. The entire PC sector will probably soon follow.

The reason why is very simple. Hardware costs continue to spiral downward at a rapid clip. This is part of what has allowed Acer and other PC makers to offer netbooks that basically are very stripped down laptops at prices below $400, in many cases. The cascading affect reaches all the way up into the PC ecosystem as laptops are cannibalized by netbooks and laptop makers are forced to lower prices further. We've already seen what's happened to the shrinking desktop market, where components have gotten so cheap that it's easy to buy a respectable PC for under $300.

As the acceptance of applications delivered over the Internet continues to grow (Microsoft OfficeLive, Google Apps) the true value in a customers engagement will move towards this software and away from hardware. That will force PC companies like Dell (DELL) and HP (HPQ) to consider new ways to boost revenue because, let's face it, they don't want to be in the business of selling sub $500 computers, which is where the market is heading.

The logical step for them is some sort of service offering that includes backup, maintenance of a package of approved desktop installations, remote trouble shootings and security offerings. Anti-virus company Symantec (SYMC) has already successful proven the model. The rise of netbooks and accompanying subsidies by carriers to encourage plan purchases will condition consumers to at first expect heavy subsidies and then to expect free or nearly free hardware. That will swim upstream to the PC market and within a decade its possible that millions will get their PCs free or rented at a low monthly cost as part of a package sold by a PC maker, a cable company, or a wireless broadband company.

The obvious exception, of course, is Apple. The company has been able to keep its product prices high and has resisted the sort of cell phone discounting that has hammered much of the rest of the smart phone market. And there will certainly be exceptions to the Free PC development. Another note. This was tried before when people were given PCs in exchange for ISP services and longer-term contracts. It didn't work then.

But now customers would be willing to pay more for a real package of services that they need. And broadband has made it more possible to view a PC as a device that is both flexible and integral to the daily life (viewing videos, IMs, emails, Web research) -- far more than in the days of dial up. The upshot? The new price for some PCs might well be $0.00.

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