Gateway feels lure of consumer electronics

The PC maker is in the middle of a transition that it hopes will make it a hip new purveyor of digital electronics--and bring back profits at the same time.

John G. Spooner Staff Writer, CNET News.com
John Spooner
covers the PC market, chips and automotive technology.
John G. Spooner
7 min read
NEW YORK--Gateway believes the key to ending its PC market funk is to become the next big consumer electronics brand in the United States.

The Poway, Calif., company is embarking on a new strategy that it hopes will take it from relying on sales of PCs and PC-related products to overseeing a consumer-electronics lineup with several new sources of income. The changes, though, may well open it to a new set of well-established competitors.

Moving toward a business model it calls "branded integrator," Gateway is preparing to unveil a wide range of consumer-electronics products that work together and share content. It is also designing services to help customers install and operate their new gear.

The effort, which the company began earlier this year, will include the launch of 50 products in 15 new categories by the middle of November. These products, organized under six or seven new product lines, will include a new line of plasma televisions, LCD televisions, DVD players, home theaters built around digital projectors and connectivity products, CEO Ted Waitt said in an interview Tuesday with CNET News.com. Gateway is also working on digital video gear and gaming products, which will take longer to come out.

New products introduced Wednesday, though, were on the PC side: a lightweight notebook and a tablet PC.

"Clearly we want to have everything ready for this holiday season," Waitt said. "But then we'll continue to move through 2004 with a stream of product announcements."

The company believes that it can gain a foothold and win a significant portion of a customer's future business by offering connectivity and ease of use, whether that customer buys a TV, a PC or some other electronics device.

Read more about Gateway
"The TV is the center of the living room in my opinion, rather than the PC," Waitt said. "The question is, what drives the content that goes to the TV? It comes from a variety of sources. You have stored digital content, you have content coming over a wire or satellite and you need some kind of (user interface) to navigate it."

Under the new plan, Gateway products would allow customers to present a slide show of digital photos on a digital television, for example, while playing music in the background, Waitt said. Various types of equipment could be operated by the same remote control--an important consideration for a consumer who opts to buy a TV, DVD player and other gear and expects to use them with digital cable or satellite television service.

Waitt--who rejoined the company as CEO during turbulent times in January 2002--said that by morphing itself, Gateway is setting out to lay claim to both the PC and the TV and many of the devices in between.

Three years, three different strategies
Ultimately, the shift in strategies, which will be coupled with a redesign of all of Gateway's retail stores, is an effort to boost sales and return the company to profitability, all while building a new name for itself as a consumer-electronics seller. The company has also begun an effort to cut costs, in part through layoffs and store closings.

But Gateway, whose consumer-electronics push is its third strategic shift in three years, still has much to prove, analysts said.

Opening the floodgates
By mid-November, Gateway plans to launch 50 products in 15 new categories. An overview of what it's got and what's coming:

Gateway sells a variety of desktops, notebooks, tablets and servers for consumers and businesses. It is particularly proud of its Profile, an all-in-one desktop built around a flat-panel display. This year, it plans to add news desktops, a tablet and at least one new notebook to the mix.

Television sets
Gateway's only current television product is a 42-inch plasma TV. The company plans to add a number of new plasma and LCD panel TVs this year.

In the works are a number of new home theater packages, as well as products such as DVD players. It will also offer digital audio and later digital video products.

To make sure the new products work together and share content, Gateway plans to offer products ranging from cables to home network setups and to provide services to help people set up and connect their new electronic devices.

Based on the success of its plasma TV, Steve Baker, an analyst with NPDTechworld, rates Gateway's chances as a 6 or a 7 on a scale of 1 to 10.

"The good part is that it's looking to access markets that have some life in them. These are categories that have a lot of opportunity. They're growing...and they have a lot of revenue attached as well," Baker said.

"The bad part," he said, is that Gateway is "expanding the number of companies it has to compete with. This is not an uncrowded space...and it puts (Gateway) squarely in the sights of companies like Samsung and Sony as well as Best Buy and Circuit City."

Sony, for one, isn't sitting still. The consumer-electronics giant is looking to revive its PC business and is testing the waters with new high-end products.

Gateway could use the change of scenery from the PC marketplace. Despite aggressive prices, aimed at beating rivals such as Dell Computer, Gateway's PC sales in 2002 did not meet its expectations, delaying a planned return to profitability. That year, the company shipped just over 2.7 million units, for a U.S. market share of 5.7 percent, according to IDC. Its goal had been to ship 1 million units per quarter, a figure it needed to hit to be profitable.

On the other hand, sales of a new product, Gateway's $3,000 plasma TV, exceeded its expectations. The sales success of the 42-inch television convinced the company that it should be doing more with consumer electronics, Waitt said.

"When we compared the success of our plasma television versus the success of our other branded products, it really showed us that the Gateway brand could really scale to a lot of different categories," he said.

With the plasma television, Gateway applied some lessons from the PC marketplace. It sold the device for a price that others found hard to meet--something it plans to do with its new products as well, Waitt said.

The business model, he said, will give the company the flexibility to hit lower prices on some new consumer-electronics products or adjust others to garner higher margins, on the road to market share gains in new areas and improved profitability.

"All of these are higher-margin categories (than PCs). They're all higher-growth than the PC business," Waitt said. "The PC business is going to shrink in terms of dollars between now and 2005, and we've gone from an environment where--way back, we used to sell $2,500 PCs with 20-point margins, so you had $500 worth of gross profit with each transaction. Now with $500 PCs, you're lucky if you get 10 points...(or) $50."

To help it tackle its new strategy, Gateway has hired a number of new executives. Its latest hire, announced Wednesday, was former Mazda executive Kristen Simmons. Simmons, formerly vice president of marketing at Mazda North America, will become Gateway's new senior vice president of consumer marketing. There, she will be responsible for helping Gateway change its marketing plan and alter its brand to fit its new strategy.

Cafe Gateway Gateway's stores will be central to the consumer-electronics pitch. The company plans to make over all 192 of its remaining stores by the holiday season.

The makeovers will increase the amount of selling space from 45 percent of a given store to 75 percent, and couches and chairs at the center of the store will be used to create the open, airy feeling of a living room. Various sections of each store will be dedicated to new product lines, such as audio, while the amount of floor space dedicated to PCs will be reduced. Five stores, located mostly in southern California, will be used to pilot new concepts.

Despite all of the talk about televisions and other consumer-electronics devices, Waitt stressed that Gateway isn't getting out of the PC business. The company is working on a new line of lower-priced desktops for consumers and new versions of its Profile line of all-in-one desktops

On Wednesday, Gateway launched a new lightweight notebook and a new tablet PC. The 4.3-pound notebook, the Gateway 200, incorporates Intel's Pentium-M processor and a 14.1-inch screen. It will start at $1,599. The new tablet also uses the Pentium-M chip, pairing it with a 12-inch screen for a starting price of $2,399, the company said in a statement.

Meanwhile, about half of Gateway's sales come from businesses buying PCs or servers. Many of the new 50 new products planned for this year will be aimed at expanding its offerings for those businesses. Gateway plans to launch new network storage products, for example. It has also said it would deliver servers with the Linux operating system pre-installed.

But Waitt, sitting at a meeting room table at New York's Four Seasons hotel, is visibly much more interested when discussing the new consumer electronics. "I like the digital television business," he said.

Brooks Gray, analyst with Technology Business Research, gives Gateway points for originality. But whether the company can turn consumer-electronics tire kickers into PC buyers remains to be seen.

"I believe Gateway's strategy of leveraging attractive consumer-electronics systems as a lead generator to some extent is a unique strategy versus traditional PC vendors," Gray said. "Gateway may be successful in reaching high-level management and executives with the real buying power and also consumers, but that may not translate to add-on sales of PCs, especially where those executives are really looking at controlling costs."

Gateway is basically turning its old PC-centered business proposition upside down. Because of the rock-bottom prices many consumer PCs sell for and the tiny margins they offer manufacturers, low-end consumer PCs are primarily loss leaders for large PC manufacturers and retailers to sell other products or services, Waitt said.

"So for us, does it become a loss leader? Or...is the PC actually an up-sell? 'Oh by the way, would you like a PC with that?' Waitt said. "We'll see what happens."