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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 away 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 $550. 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 $50 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 subsidizers (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 $20 a month, with an 18 month lock-in.

By now I'm sure you see where I'm going with this. Now that laptops are becoming mobile broadband enabled, does it make sense for cellular 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.

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