Putting the sparkle back into Gateway

Can Wayne Inouye succeed where Ted Waitt could not?

That's the question making the rounds on both Wall Street and Main Street these days, as Inouye attempts to revive the momentum at this former high-flying computer maker.

Inouye became Gateway's CEO in March, after Gateway's acquisition of eMachines. It was an interesting match, bringing together two corporate cultures from two vastly separate geographies: Gateway hails from the plains of South Dakota, while eMachines got its start in Southern California. The company will make its new headquarters in Irvine, Calif.

Inouye's first order of business was to cut excess costs and refocus the combined company's businesses. He has since ordered the closing of Gateway's 188 retail stores, a perennial money-losing operation that failed to meet the original lofty expectations. Gateway has since inked an agreement with Best Buy to carry Gateway's PCs, one of a series of retail partnerships Inouye intends to pursue as he seeks to extend the company's nationwide and worldwide coverage.

Inouye also plans to temper Gateway's push into consumer electronics. The company garnered lots of headlines when it began selling consumer products such as plasma TVs in 2002. But the incremental revenue gain has failed to translate into big profit, according to Inouye. While he's not opposed to delivering what he calls "convergence" consumer electronics devices that either work with or resemble a PC, he says he wants to stick with what Gateway knows best: PCs.

CNET News.com recently sat down with Inouye in one of his first interviews since becoming chief executive.

Q: How are you going to compete against Dell, which has lower costs, and HP, which spends more on research and development? A: I plan to create a cost structure that is lower. That's going to take some time--it doesn't happen overnight. But it will happen fairly quickly.

I plan to create a cost structure that is lower.

I think it is very important to understand the competency of your competitors and what they're good at. What we are really trying to focus on is what's going to get our customers--or potential customers--to buy from us. So if that requires R&D, then we will spend money on R&D. But in the short and moderate terms, research and development are best left with our key component suppliers.

What is your vision for Gateway? I would like Gateway to be recognized as a global brand and certainly as a provider of very high-quality, affordable products. The near-term is centered around PC products--desktops, notebooks, servers and, in the intermediate term, convergence products.

Do you want Gateway thought of as only a PC company? We want to break out of that and take our brand beyond PCs. That becomes trickier. I think it requires different approaches.

I think there is a distinction here. Brand personality is typically the characteristic of the company itself. You could consider us a witty, friendly offering--technology without being technical. There are certain aspects of our brand personality that I think would resonate in all channels. In terms of a PC company, that is where we came from. We built our brand and our brand recognition because we sold PCs.

How does that tie in with the vision for Gateway? You have to have a well-defined brand that everybody fundamentally agrees on and understands. Then you build on that for the long-term vision. Will it work in different product segments? The answer right now is: I don't know. I believe it works for convergence very well. I think people who look at convergence products--products that are PC-enabled or act like a PC--would think Gateway would be a natural brand.

What will this involve, in terms of people or new investments?
All we are really doing is leveraging what has already been done. A lot of it is back to basics. When you go to a period of discovery or rediscovery, you kind of go back to what you are really good at.

As a company that has been struggling, we need to really focus on things that we are naturally good at first--get a bunch of wins under our belt and energize not only our employees but also people who buy from us.

How do you handle your dual-brand retail strategy, and how do you avoid losing market share? That requires a lot of discipline. It's all about first defining your space in the marketplace, your relevance. eMachines was built on the value that it provides. We provide highly configured, very inexpensive products that provide an exceptional after-purchase service. I really look at eMachines as being like Toyota, and I look at Gateway as Lexus.

I really look at eMachines as being like Toyota, and I look at Gateway as Lexus.

In terms of how we will make the brand work, we have clearly positioned eMachines in the desktop area from $700 on down and Gateway from $700 on up. In the direct channels, it's a little bit different. The Gateway brand is going to have to span all the relative price points. In the direct channel, in order to compete with Dell, we have to have offers that are fairly aggressive and that fall below that $700 price point.

But can you also adopt eMachines' tactics to reduce Gateway's costs? Well, there are two things that we can do. We are certainly leveraging our combined scale--the numbers of units we buy are greater than just one company alone--that helps us with our costs. The other thing we are doing is figuring out ways to do things less expensively with fewer people or using third parties.

How did the Gateway-eMachines merger come about? I don't think it's all that relevant. I don't mean to skirt the issue. But the most important thing that we can do today is look forward. If you start talking about the past, everyone wants to focus on "why this happened." The fact is it has happened. It's done.

Can you elaborate on what you mean by convergence products? I look at convergence products as products that are either PC-enabled or act like a PC--so they have some PC function with them. I wouldn't consider a DVD player a convergence product. Why? Because it doesn't require a PC to operate. An iPod, on the other hand, or a music player that requires a computer to download music or data onto a hard drive--or flash memory is a convergence product.

Let me describe a product that, simplistically, could fall into the convergence space. What if we took a satellite receiver box and put a hard drive in it? You wouldn't consider it a convergence product, because it doesn't require a PC to operate. But what would happen if you put a broadband connection on it and added an 8-in-1 media card reader? It becomes a convergence product, because it's connected to the Internet, and it acts more like a PC.

Aren't a lot of Gateway's CE products still in limbo? Also, you have said Gateway wasn't making much money selling consumer electronics. The model that we've introduced as a company is: We build products that our customers will buy. We do not build products on speculation. When Gateway had a captive retail store, we could build products and put them in the stores and sell them. We no longer have that luxury.

Our focus to the consumer electronics area is convergence products. You could call them consumer electronics products, but they have to fall into my definition of convergence for us to focus on them. I don't want to go out and compete with Sony. I don't want to compete head-on with Matsushita and the Panasonic brand.

What about direct sales? What changes might you have in mind for that, such as bringing back the ability to configure a PC on the Web site? We are headed back toward configurability. Frankly, I think we took our eye off the ball when it came to the Web, and we are rebuilding the architecture to allow us to truly configure to order. There are markets such as the game market in the premium desktop space that require that you offer some customization to customers. It's something that we are definitely committed to, and at this point, I will leave it at that.

Are you eyeing non-U.S. markets seriously? International is an area that a lot of people ignore. Our ability to become a global brand does exist. American brands are widely sought-after around the world, and products that can offer greater value through either speed to market or through better configuration for the price are sought-after around the world. And with our business model, I believe that we can be competitive in just about any market in the world.

The announcement that Best Buy will carry Gateway's PCs was a big win. How did that come about, and what comes next? It came about because of a lot of hard work, and I think it came about because Best Buy, through its due diligence, intelligence, and general market power, was able to understand the value of the Gateway brand in the computer space. What it means to us is going from 188 outlets that were company-owned to more than 600 outlets. It's tremendous exposure that we could never do on our own. We are not stopping with Best Buy, so just hang on.