eMachines, FreePC to Merge

Low-priced computer maker eMachines Inc.
announced that it plans to merge with FreePC Inc. late Monday, marking
the demise of the free PC and Internet access give-away program.

The privately held firms plan to complete the deal with a stock swap, but
other financial terms of the deal were not disclosed.

Founded in September 1998, eMachines quickly ascended the ranks to become
the third largest personal computer company selling low-cost machines
through retail outlets such as Circuit City Stores Inc. (CC)
and Best Buy Co. Inc. (BBY).

Established by Idealab! In February
1999, FreePC gives users a free computer and Internet access in exchange
for monitoring their Web browsing habits. Proprietary software determines
the selection of ads seen by each FreePC user.

Neither company has survived success without its headaches. Compaq Computer Corp. (CPQ)
led a complaint against eMachines alleging patent infringements in July and
Apple Computer Inc. (AAPL)
sued eMachines, alleging that the company copied their popular iMac
design in August.

FreePC has come under fire for failing to deliver applicants their free
personal computers in a timely manner. Even with massive funding, FreePC
has only delivered 30,000 personal computers since their inception, while
eMachines delivered more than a half million units during the third quarter
of this year.

FreePC’s advertising delivery technology is designed to ensure that
customers see ads of interest to them, based on their initial demographic
information they provide. eMachines coveted FreePC’s means of targeting
users with highly personalized advertising.

The demise of Free-PC comes as no surprise to many analysts. Joe
Laszlo, Jupiter Communications Inc. (JPTR)
Internet analyst, said free personal computer offers may be a thing of
he past.

“Free-PC was always considered an experiment with no assurance of success,
despite the pedigree of idealab! startup companies which has launched dozens
of firms including eToys and
Goto.Com.” Laszlo said.

Some personal computers are still being given away by regional Internet
service providers in exchange for long-term subscription contracts. But
Laszlo said even those offers may soon dry up. By adding FreePC’s Web-friendly features to its personal computer line-up,
eMachines plans to challenge industry leaders Compaq and Dell Computer Corp.

Stephen Dukker, eMachines chief executive officer, said combining their
distribution ability with FreePC’s targeted advertising deftness would make
an incredible force in personal computer sales and Internet services.

“When you merge our distribution base of retail PC sales with FreePC’s
Internet e-commerce partnerships, you get a killer combination,” Dukker

Dukker said eMachines plans to design their computers with links to
companies selling goods or services over the Internet. The links could
range from special keys on keyboards to icons on the screen, Web browser or
through an Internet access service.

Dukker said some 47 percent of eMachines’ customers were first-time buyers
whose primary goal was to gain access the Internet. The FreePC merger would
make it easier for new computer buyers to get online and buy products
through the Internet.

“Customers purchase these machines to get online, and we have the
opportunity to make introductions between the people looking to get on the
Internet and the providers of e-commerce and services,” Dukker said.

eMachines said the merging companies would not sign up new customers to
FreePC or FreePCNet, a no-cost Internet access service. The deal would also
postpone eMachines’ initial public offering until the first quarter of next

eMachines computers are manufactured in Malaysia, South Korea and China.
The company has reportedly sold 1.6 million units to date.

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