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Gateway phases out its ISP, Canada stores

The PC maker will effectively terminate Gateway.net by July 31 and has shut all 10 Gateway Country stores in Canada.

Gateway, the first major computer maker to aggressively bundle Internet access with PCs, is phasing out its branded ISP in favor of America Online.

The San Diego-based PC maker will effectively terminate Gateway.net by July 31, the company said Friday. The company will still act as an Internet service provider to a very limited number of people but will discontinue service to mainstream customers, said Marty Walsh, senior program manager in Gateway's Internet services group.

In a separate development, the company said it will shut all 10 Gateway Country stores in Canada, a cost-cutting measure that will affect about 220 employees.

Earlier this week, the company shut 27 of its 326 stores in the United States. A Gateway spokesman said the company will evaluate what to do with its 45 stores in Asia and 27 retail outlets in Europe.

Meanwhile, Gateway is encouraging its roughly 160,000 ISP subscribers to shift to AOL. AOL actually serves as the underlying backbone of Gateway.net, and the fundamental differences between the two services are fairly small. The two companies are close allies on a number of projects, a relationship that dates back to AOL's $800 million investment in Gateway announced in October 1999.

"We're trying to make the migration as easy as possible," Walsh said. By eliminating its own ISP, Gateway will be able to rid itself of some marketing and administrative tasks.

Subscribers who shift to AOL before May 31 will qualify to get its service for $19.95 a month--$2 less than the typical AOL service--through July 2002.

Gateway.net subscribers can keep using their current e-mail addresses through the end of the year, when they will receive AOL addresses. In many cases, the only change will be that the address suffix will change from "Gateway.net" to "AOL.com," he said.

Gateway was the first major PC company to trot out its own branded ISP. Service kicked off in 1997 and became an integral component of the company's strategy to bring in revenue through financing, software, training and other "beyond the box" sources.

Before Gateway's shift, consumers typically signed up for Internet service only after they bought a PC.

The strategy of a simultaneous sale led to one of the marketing techniques that lead to an explosion of PC sales in 1999: the ISP rebate. PC makers, ISPs and retailers began to work in conjunction to offer $400 rebates on hardware purchases or to throw in a six to 12 months of free ISP service.

Although "beyond the box" revenues accounted for the vast majority of Gateway's profits at the end of last year, the company has decided to reverse itself and begin to focus its primary energies once again on PCs.

Gateway's new executives have said they aren't philosophically opposed to "beyond the box" revenue. Rather, they have emphasized that the company needs to first revive its share of the PC market.