Emachines outlines the key(board) to its growth

The fast-growing company began shipments of personal computers in November 1998, catering to first-time PC buyers and those looking to use their computers primarily to send email and surf the Web.

As a result, about 47 percent of Emachines customers have never before bought a computer. The vast majority use their computers mainly to access the Internet and to perform simple tasks such as word processing.

But as Emachines matures, so does the computer literacy of its customers. The Irvine, Calif.-based company unveiled a new business strategy this week, which executives say will take it beyond the realm of PC sales and broaden its customer base to include more technologically astute computer users. The company expanded on its new approach at the annual Chase H&Q Technology Conference in San Francisco.

Instead of relying exclusively on hardware sales, Emachines is expanding to provide Internet-based services and to offer e-commerce transactions for its customers. It plans to attract first-time PC buyers to its low-priced hardware and then to keep them coming back for hardware upgrades, travel deals, online shopping sprees and Web searching.

Emachines, which shocked competitors with first-year sales in excess of $800 million and which has annual sales volume of more than $1.2 billion, ranks as one of the top five manufacturers of PCs sold in the United States.

It has built considerable brand identity in a niche that was largely ignored by rivals such as IBM, Dell Computer, Hewlett-Packard and Compaq Computer: PCs that cost less than $600. Within this category, Emachines has a market share of nearly 50 percent.

One of the company's secret weapons in its efforts to retain hardware buyers is new keyboard technology that dramatically simplifies the tedious online search function. New keyboards will feature little green buttons above the letters and function keys that act like broad bookmarks for consumer-friendly subjects such as "shopping" and "travel."

"I cannot teach some of my relatives to use Yahoo over the phone," Emachines chief executive Stephen Dukker said today at the H&Q conference. "But I can teach them to push the shopping button."

The company also will partner with retailers to offer timely promotions based on the keyboard buttons. For example, while a customer is surfing the Web, a small box might pop up in the corner that says, "Press the travel key now to win two free round-trip tickets to Paris, France!"

"This is not a keyboard anymore," Dukker said. "It's a cash register connected to the computer."

Experts agreed that the opportunity for advertising revenue from the newfangled keyboard is significant. Technology-oriented investment bank Chase H&Q predicted that the company will become profitable in fiscal 2001, when revenues are expected to hit $1.3 billion and earnings per share 9 cents. The company is expected to post a per-share loss of 6 cents in fiscal 2000, which ends in December, on revenues of $1 billion.

Emachines' aggressive hardware sales and emerging Internet strategy broaden the company from a relatively pure hardware seller, such as Compaq or Gateway, to a hardware seller that doubles as an entry-level consumer's portal. Dukker described the niche by drawing two overlapping circles: Emachines inhabits the overlap between one circle dominated by hardware providers such as Dell, Gateway and Hewlett-Packard and the other dominated by portals such as Yahoo, America Online and Lycos.

"By using hardware sales as a customer-acquisition tool, we believe Emachines is creating a 'hardware portal' model that can generate substantial Internet revenues through the sale of ISP services, keyboard keys, screen real estate and in-box promotions," said Chase H&Q analyst Walter Winnitzki.

Shares in Emachines closed at $7.56 today, down 81 cents. The shares first sold to the public in March at $9.