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Gateway launches full assault in price war

The second-largest direct seller of personal computers fires the latest volley in a price war gripping the PC industry, offering to beat several competitors' prices.

Gateway has fired the latest volley in a price war gripping the PC industry.

Starting Thursday, the San Diego-based PC maker will beat the advertised price of competitors Compaq Computer, Dell Computer, Hewlett-Packard, IBM, Sony or Toshiba.

Gateway does not expect the promotion to affect second-quarter results.

In some ways, the program--or Gateway Guarantee--is not new. Earlier in May, the PC maker tested a similar promotion in 10 Gateway Country stores for two weeks and then extended it nationally last week. But the new program, which Gateway Vice President of Marketing Dave Turner described Wednesday as "a stake in the ground," goes further than the previous one. Rather than just meet competitor prices, Gateway will now beat them.

Gateway is using its Country stores as the frontline for reaching customers and closing the sales. To qualify, consumers must bring a competitor's ad into one of Gateway's 300 retail outlets. That requirement, analysts say, could help Gateway sell software and services, which typically carry much higher margins than hardware.

"Gateway has thrown down the gauntlet in the price department with an initiative to match prices with any competing PC people find out in the marketplace for similar configurations," IDC analyst Roger Kay said. "The company is indicating its willingness to street fight."

Kay noted that Dell, which has been pricing more aggressively than any other PC maker, saw a subsequent decline in its hardware margins. "Driving traffic to the Country stores could have a positive impact on margins instead of the pure hardware play Dell has been doing," he said.

In Gateway's test stores, traffic jumped 15 percent to 30 percent with a comparable increase in sales closures, Turner said.

"A price war is a good thing for consumers in general," he added. "Customers would prefer to buy a Gateway (PC) in general--that's what our research shows. This helps make the decision certain for them."

In some ways, Gateway hopes to take the best of direct sales and retail store operations to beat competitors. Because Gateway does not carry inventory in its stores, the company can match competitor pricing "by the hour," Turner said. The company is, in fact, tracking competitors' prices and passing that onto the stores "throughout the day," he added.

Waitt speaks out
In a memo seen by CNET News.com, Gateway CEO Ted Waitt explained the promotion to company employees.

He referred to a price war ad Gateway ran in a computer trade magazine 10 years ago. "The way the media's covering our industry these days, you'd think that aggressive pricing is something new to the PC business," he wrote.

"We're not going to bother with the tit-for-tat price war that all of our competitors are engaged in," Waitt wrote. "We'll just come in with one blanket statement that guarantees people will shop us, then it's up to you to deliver unbeatable value, service and support."

To support the program, a series of television ads will run with the phrase, "PC Price War...? Cool." In the memo, Waitt said he will be "hitting the road today for a sales rally in one of our Chicago Country stores, as well as rallies in a few of our call centers too."

He added, "I'm really pumped about this and I hope you are too. It's time to get rocking again and show the world we can't be beat."

The Gateway Guarantee should help the company increase its product exposure if the advertising is extensive enough, Technology Business Research analyst Brooks Gray said. "Until now, I haven't heard a marketing pitch like this from any of the major vendors. Typically this type of marketing has come from retail companies selling commodity products."

Rocking again?
Still, Gateway must turn the tide on several quarters of rough sales and on a PC market still slogging below expectations, analysts said. U.S. computer sales, for example, plummeted nearly 10 percent in the first quarter, with little immediate sign of a pickup, Kay said.

"The problem I see is that they have not been effective as Dell using their direct model," ARS analyst Toni Duboise said. "I don't think they're in as strong a position to implement price cuts as low as Dell does. Up until now, I have not seen them going as low as Dell."

Gray also remained cautious, emphasizing the program "should help to rebound unit shipment volume for the company, but the impact on product margins will not be positive."

Dell may be tough to beat, Duboise warned.

"Competitor gimmicks will not deter Dell from providing the best value...the industry has to offer," John Hamlin, vice president of Dell's Consumer group, said in a statement Wednesday.

The Round Rock, Texas-based company, for example, is selling a consumer Dimension 8100 PC with 1.4GHz Pentium 4 processor, 128MB of RAM, 20GB hard drive, 32MB graphics card and 17-inch monitor for $1,199, with a free DVD or CD-RW drive upgrade. Gateway's standard similarly configured system without DVD or CD-RW but with a free MP3 player costs $100 more.

Gateway's only recent price cuts were reductions of up to $50 on three models with Advanced Micro Devices' Athlon processors.

"For all the noise being made, neither Dell or Gateway has really posted any recent significant price changes," Duboise said.

Ultimately, consumers may be the only real winners of "this price war," Gray said. "But I would caution a potential PC buyer to research the service and product quality levels of a particular vendor and avoid purchasing a system solely on price."

As companies cut prices they may need to lay off more employees in an effort to reduce costs and support margins, Gray warned. "Headcount reduction is impacting the size of technical support groups and may be negatively affecting service quality."