What’s next: Free computers for small businesses?

May 15, 2009 | Mark Goldenson | Comments | |

Small and medium businesses (SMBs) -– companies of less than 50 employees -– are the holy grail of software. They compose 99.7% of all U.S. employers and generate 40-50% of GDP, but are notoriously resistant to technology: Only 39% think IT can help them compared to 80% of large businesses. 70% of SMBs don’t even have a website. Technology vastly enhances productivity but as analyst Steve Hilton writes, “SMBs are stuck in a productivity malaise using technology no more helpful than a bikini in a meat locker.”

SMBs are Luddites for two main reasons: lack of expertise and low confidence in ROI given upfront costs. This creates a huge opportunity. A company that can address these concerns and digitize SMBs could tap a significant portion of the trillion-dollar business IT market. How could that be done? With the best value proposition possible: free.

The idea: offer free computers to small businesses and upsell software and services. King Camp Gillette popularized this model a century ago by giving away razor handles to sell high-margin blades. Cell phone companies now give away or deeply discount phones to lock users into two-year contracts. Giving away PCs wasn’t feasible when they were $2,000, but you can now get Pentium 4s with a monitor and free shipping for under $100. When software is more expensive and higher margin than hardware, giving away the metal makes sense.

Let’s call this hypothetical new company FreeOffice. A small business owner could visit FreeOffice’s site, enter demographic and business details, and choose a computer costing $100 or less. The key is that users must submit a credit card to subscribe to a selectable list of free software trials and web services, which would be pre-installed and could be canceled at any time. A wide variety of programs and services would be relevant, not even considering industry-specific applications:

Accounting: Quicken, Quickbooks, Freshbooks
Productivity suites: Office, Google Apps
Email: Outlook, Zimbra, Blackberry
CRM: ACT, Salesforce, SugarCRM
Project management: Project, Zoho, Basecamp
Payment processing: PayPal, Visa, Verisign
Remote access: WebEx, LogMeIn, GoToMyPC
Taxes: TurboTax, TaxACT
Blogging: TypePad, Automattic
IM: AIM, Messenger, GTalk
VoIP: Skype, Vonage
Security: ESET, Norton, Symantec
Backup and sync: Mozy, Live Sync, Carbonite
Content: NY Times, Wall Street Journal
Graphics: Photoshop, Paint Shop Pro, Picnik
Business networking: LinkedIn, Spoke, Plaxo
Search marketing: Adwords, AdCenter
Internet service: SBC, Comcast, GoDaddy

FreeOffice could auction computer space to these vendors like the hood of a NASCAR racer. It could then earn commissions for every user who becomes a paying member. Because software has nearly zero marginal cost but charges $20-$500+, sometimes with regular subscriptions, commissions can be 10-75% of revenue. Only a few conversions would cover a $100 computer. For example:


To address cash flow risk, FreeOffice could initially require business users to pay for these services upfront. With volume, FreeOffice could negotiate deeper discounts on computers, higher commissions with vendors, and co-marketing with partners, who could offer free computers to their own leads.

To help technophobic business owners, FreeOffice could also offer a marketplace of low-cost tech experts who could teach computer skills, design a website, setup a back office, and manage online marketing. An online community could link FreeOffice users to share best practices, potentially hooking another white whale, a social network for businesses.

There is a similar precedent for this model: OpenTable. The company installs point-of-sale terminals in restaurants for a few hundred dollars, then charges small fees for booking diners. The terminals can capture customer info, track guest preferences, optimize table usage, and run marketing campaigns. OpenTable is only in 8,700 of America’s 935,000 restaurants but already earning $40M in revenue. It will soon earn four letters on the NASDAQ.

To my knowledge, our hypothetical company has no direct competitor. Craigslist and promotions occasionally offer free computers, but that’s hit-and-miss. FreePay offers free PCs but requires you to spam friends and sign up for irrelevant, sometimes scammy offers.

Once FreeOffice launches, competition may come from hardware companies like Dell or TigerDirect, which already have a massive user base and relationships with software vendors. However, creating this end-to-end system would be non-trivial and possibly cannibalize higher-margin sales. Vendors are probably more likely to partner than compete, especially to liquidate older or refurbished inventory.

Executed well, I believe FreeOffice has the potential to bridge the small business digital divide and become a back-office staple. What do you think?

[This is the first in a series of stories on startup ideas that don't yet exist. Tune in next Friday for our next installment.]

Mark Goldenson advises entrepreneurs and is launching an innovative web venture in health care. To submit an idea for the What’s Next series, email Mark at mjgold3@gmail.com. Selected ideas will receive attribution.

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  • This biggest problem with Small Business is that it is a non-market. i.e. most small businesses don't consider other small businesses in different industries to be valid references for their own needs and they don't share new business ideas by and large.

    Instead, you should look at SMB as a very large number of small markets divided along vertical segments. From this perspective your primary problem is cost of acquisition as you must separately break into the thousands of verticals that make up the SMB segment.

    Even free stuff wouldn't solve this problem.
  • Rokhayakebe
    I totally agree with Charles on going vertical here. If you could specialize in one industry and provide them with the necessary hardware, it may be easier to gain traction.

    The idea is great, but the implementation would be such a nightmare. You will soon start to see people creating bogus companies just to get free computers. Yes you could start to verify each business, but that will only add to your cost.

    Before you know it, you will run a business where you customer acquisition cost will be north of, let's say, 300 usd, and most likely only 20% will upgrade their plan from free to paid software. So you really need 1500 usd per paying customer to break even.

    How long will it take you before you can earn that 1500 usd from every 5th customer?

    Again, great idea, but very hard to implement, unless you go after niche markets.

    As a matter of fact I would go where customers are already spending money and tell them hey spend no more on hardware, and spend a lot less on software with this package.
  • there was a company in the UK who (IIRC) tried this a few years ago. I couldn't find any reference to them now so maybe the model wasn't right then (as stated the hardware was expensive so to make money you'd need to shift a lot of software)

    I agree that vertical is the way to go - and it gives more opportunities to differentiate and offer a good fit for software... small medical practices have different needs to an architects office for instance (though there are signifiant areas of overlap which would help FreeOffice scale)

    At the same time bundling with good on and off-site support and web services ( eg http://tr.im/OBMWeebly for easy getting started websites) that encourages an on-goign relationship would help with both long term monetization and reference business
  • elliottdahan
    The 2 biggest fears of us Luddites are: (1) support when we press the wrong button and (2) security, or at a minimum, all those tempting offers to cash in on great investment opportunities from former Ugandan generals.

    If this free computer idea was tied to strong support and security + cloud services - then "yes" this would be a good idea.
  • bizconnect
    Interesting idea. But cost is not the major reason why small businesses don't invest in technology. It is pure and simple -- (1) they don't believe it can help, (2) they are not in the business of trying new stuff.

    BTW, small businesses rarely respond positively to Free stuff. They don't believe in free stuff.

    I think what will bring technology into small business market is macro level trends (e.g. demographics). For example, more new tech savvy small business owners. More new tech savvy franchisors. It's already happening. Technology provider that wants to succeed in small business space should focus on serving those segments. Companies like Freshbooks, Constant Contact, GoDaddy, and OpenTable are good examples of that.
  • Small businesses do advertise in local newspapers, mailers and yellow pages. How about an offer where you spend $1000 in advertising and get a "free" computer?
  • Hardware will continue to be commoditized and the computer resellers will be making no margin in the future allowing less competition in the market, only the big ones will survive while the manufacturers focus on going direct to consumers.

    Companies like Dell and HP may sell computer on a pay-as-you go subscription model where you pay a base fee like $50 and then $20/month for 3 years with all the hardware, keyboard, mouse, screen, maintenance and support.

    As for software, they could take on the "Apple app store" model where users simply buy all the software needed from the 'cloud' (internet) since bandwidth will become more affordable and faster.
  • Charles and Rokhayakebe, it's possible targeting verticals would gain more traction. I'd posit that most small businesses have the generic needs outlined in the article, but focusing on a large niche in need - construction, auto dealerships, small restaurants - is another reasonable strategy.

    Rokhayakebe, I agree that overall operations will increase the necessary break-even per computer but I don't think it would triple it. Once a process is created to install software on the outbound computers, costs should be fairly minimal. As a free provider, FreeOffice would offer minimal support and lean on the community and paid experts to provide high-touch support.

    Bizconnect, I think everyone likes free. :) As long as you can convince folks there are acceptable or no strings attached.

    Eric, there is an interesting First Round Capital company that has a related idea. TechForward (http://www.techforward.com/) lets you lock-in a future tradeback value when you buy a computer. Not a month-to-month subscription but a way for consumers and small businesses to reduce the costs of ownership.

    -Mark
  • pwb
    Small Business doesn't "like" free...it *LOVES* free!!
  • Hi Mark,

    We met briefly at Anybots (a YC meet and greet) a few years ago, before PlayCafe, I believe you were still with PayPal then. I've always been passionate about entrepreneurship and have toyed with the idea of being an entrepreneur for entrepreneurs. Let me know if you are dabbling in something related to what you have just mentioned above - I'd be interested in working together.

    I've been seeking to understand more pain points of these luddite-SMBs, but have trouble seeking out people to talk to, to understand their "day in the life of". The few that I could help, it was very high-touch and not a repeatable solution. I haven't done enough research though, and would love to find out how I can find out more about their pain points that I hope to be able to address and profit from.

    Cheers,

    Jay Liew
    @jaysern
    jayliew.com
  • Selling software applications on free PC's when there is a major shift towards cloud computing and web services.
    No software applications needed: an SMB takes free computer and then uses web services (free or paying)
  • Mark,

    Great article, I hope you keep writing on VentureBeat.

    I see customer support as being a killer cost here. You can try and tell people if they have a problem with a program, call the vendor, however inevitably there will be computer issues and you're selling to the least sophisticated segment of the population. It's a dirty business that nobody wants to do, that's for sure. You're talking about people who don't even have computers yet... I don't see it being an easy transition to go from that to any application without hand holding.

    I agree with you on the market though. In my agency days, if we had developed a compelling package for businesses with lower revenues, rather than charge boutique rates in Western Pennsylvania, we might have done way better. However, as I already mentioned, it seems that the smaller a company is, the more demanding they are of CS resources.

    I'd say you're better off in the software space. :-) A company that might be able to pull this off is Google. Thin clients for all, more eyeballs on their apps, assuming you could make people use them.

    -Jason
  • Jason, thanks!

    I agree SMBs will want more customer support than the typical early adopter. Since the value prop to SMBs is very clear - free - I think FreeOffice could justify hands-off or low-touch CS. It's effectively an a la carte model: the hardware is separated from the cost of support. Most vendors combine the two and charge a higher price.

    A community of tech experts or a partnership with a support company like Geek Squash would help serve that need without getting our hands too dirty with CS work.
  • weeramuni
    i waould like to starts computer bussiness in Sri Lanka, Specially can sell machines for the North & Nort central provinces coz, TERRORIST WAR FINISHED in Sri Lanka