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AOL partnership calls Gateway ISP into question

The PC maker kicks off a promotion offering one year of free AOL access for people buying a Gateway Essential 400 or 500 PC, but the promotion calls plans for its own ISP service into question.

Gateway is wasting no time stretching the legs of its partnership with America Online, but the far-reaching agreement appears to raise some strategic questions for the PC maker.

This past weekend, Gateway kicked off a promotion offering one year of AOL service with the purchase of a Gateway Essential 400 or 500 PC. The leading Internet service provider last month invested $800 million and entered into a broad marketing relationship with Gateway.

The deal also makes AOL the de facto ISP partner for Gateway and calls for AOL's service to be marketed alongside the existing Gateway.net service.

Such positioning seems to cast a shadow over the future of Gateway.net, which serves about 600,000 customers. While the service is likely to continue in the short term, it's hard to see new customers choosing to pay $129 a year for Gateway.net when the company is offering a year's free access with AOL.

Given that Gateway may have undermined its ability to attract new users, the move raises questions about the future of Gateway.net.

"AOL is obviously in direct competition to Gateway.net," said Technology Business Research analyst Brooks Gray.

"You will likely see a decline in Gateway.net over time," he added.

John Spelich, a spokesperson for Gateway, said "Gateway.net remains an ISP that has its own particular audience--a person who wants more personalization than AOL can afford them right now might find that to be a better choice."

Spelich said Gateway isn't planning on discontinuing Gateway.net, and that the company isn't marketing Gateway.net with any special deals because the company is transitioning towards using AOL's billing, network and content management systems for Gateway.net subscribers.

Certainly Gateway's ISP plans have certainly been malleable. Earlier this year, the company was offering a year of free Internet access with a new PC purchase as a means to gain Gateway.net subscribers. The plan has since been discontinued.

And this isn't the first time Gateway has supported a service that competes with Gateway.net. In September, the PC maker offered a rebate program through CompuServe, which is owned by AOL.

That program was intended for customers "who might not otherwise get online because Gateway.net doesn't meet their needs," Mark Ritter, Gateway's director of consumer product marketing, said earlier this fall.

Analyst Gray estimated that less than 50 percent of Gateway PC buyers choose Gateway.net for Internet access. "If people were going to AOL anyway, then this helps Gateway out," he said.

Gateway and AOL have said they will share profits generated from subscriptions related to the alliance, thus mitigating the "loss" of subscribers to AOL. "What we were not interested in with AOL was a 'bounty' relationship where we lost the relationship with the customer," Gateway chairman and CEO Ted Waitt said in a press conference last month announcing the AOL deal.

For its part, AOL will chip in with proprietary content and marketing. "We will work on [Gateway.net's] content and personalization," said AOL spokeswoman Wendy Goldberg.

"The first iteration of what we're going to do [with Essential PCs] is an advertising and promotional campaign on AOL for Gateway computers. It will go live in a week or so on AOL's proprietary service," Goldberg added.

Gray speculated Gateway.net may change into a personalized portal with AOL picking up "access for the masses."

Gateway is promoting the AOL giveaway in TV spots and on its Web site. The two companies also are planning a host of other promotions and cobranded products.

"We will engage in software and hardware marketing [and have a] Gateway.com hardware store featured across all our brands," said Goldberg.

But as the two companies strengthen their relationship, AOL too faces some tough decisions, said analysts, particularly in wake of Microsoft's partnership with Tandy. That deal will place Microsoft stores inside as many as 7,000 RadioShack outlets. Microsoft hopes the arrangement in part will win customers for the Microsoft Network.

AOL, which also had been vying for a deal with RadioShack, may turn to Circuit City, said Merrill Lynch's Peter Caruso. With 617 stores, Circuit City would be the next best choice for AOL, he said.