Netbooks offered virtually free with mobile contracts

But questions remain on how PC makers would make money if netbooks were offered for free

Netbook prices in the U.S. are tumbling as retail stores are offering the machines virtually for free, but with caveats attached to them.

Retail store Best Buy is selling Hewlett-Packard's Compaq Mini 110c-1040DX netbook, which has a 10-inch screen, for $0.99, but with a two-year mobile broadband contract from wireless carrier Sprint.

[ Stay ahead of advances in mobile technology with InfoWorld's Mobile Report blog and Mobilize newsletter. ]

The contract limits subscribers to 5GB of Internet data usage per month, with extra fees if the limit is exceeded. Sprint's 3G mobile broadband plans start at around $60 a month. HP's netbook is available without a contract for $389.99.

Consumer electronics store RadioShack is offering an Acer Aspire One with an 8.9-inch screen for free with a two-year AT&T mobile broadband contract, according to the retailer's Web site. AT&T's 3G mobile broadband plans start at $60 a month.

RadioShack's offering goes on "while supplies last." The netbook is priced at $349.99 without the contract.

Both netbooks have basic configurations, making them good for word processing and Web surfing, but weak on graphics capabilities.

The HP laptop is powered by Intel Atom N270 processor with 512KB of cache, and comes with a 10.1-inch screen. According to HP's Web site, the netbook also includes 1GB of memory, a 16GB solid-state drive and runs on Windows XP. The laptop has an embedded 3G mobile broadband module for high-speed Internet connections.

Acer's netbook includes an Intel Atom processor, 1GB of memory, and a 160GB hard drive. The system runs the Windows XP OS.

Telecom providers started offering netbooks with wireless contracts last year in Europe and Asia, which helped spike the shipment numbers of the low-cost devices. The trend reached the U.S. late last year, when RadioShack announced it would offer an Acer netbook for $99 with a two-year mobile contract from AT&T.

Worldwide netbook shipments totaled around 11 million in 2008, with the number expected to double this year, according to research firm IDC.

Netbook distribution through telecom companies has found a sweet spot in Western Europe, where telecom companies have accounted for 25 percent to a third of the netbook shipments, said David Daoud, research manager at IDC.

Though telecom carriers are emerging as major distribution partners, free netbooks could reduce the already razor-thin margins PC makers generate from the devices, Daoud said. PC makers need to work out kinks with wireless telecom carriers on netbook distribution to generate margins.

Carriers may offer netbooks like they do cell phones: by giving away basic handsets to lure in new customers. Similarly, wireless carriers may offer basic configuration netbooks, like the HP Mini 110c, for free, but charge more on higher-end netbooks with added features like larger screens, Daoud said.

Though there is money to be earned in high-end netbooks, questions remain as to whether a PC maker or telecom company would bear the cost of giving away low-end netbooks, he said.

"In essence, the whole story is a work in progress," Daoud said.