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Gateway pins hopes on six-pronged strategy

The company is expanding its array of products and services in hopes of making money long after consumers purchase computers.

Gateway sold some $8 billion worth of personal computers in 1999--but that's nowhere near enough, company executives say.

The company is expanding its array of products and services in hopes of making money long after consumers purchase computers. At the Chase H&Q Technology Conference in San Francisco today, Gateway CFO John Todd detailed the company's new "hexagon strategy" for revenue and profit growth.

The plan aims to augment hardware sales with six new concentrations: financing, content, Internet access, software, service and training.

By 2002, Gateway hopes to behave more like a broad-based portal than a pure purveyor of hardware.

Instead of competing in what will eventually be a $103 billion market for PCs, Todd said, the San Diego-based company will compete in what is expected to be a $240 billion per year "PC solutions" business, encompassing e-commerce sites, Internet service providers, online advertisers and PC appliance makers.

"We'll have 22 million discrete customers by 2001. AOL has 22 million subscribers," Todd said. "But they do a much better job monetizing that customer base than we do. Think about that potential: We have an opportunity to access all these eyeballs."

Gateway and other PC sellers have a clear financial incentive to expand sales beyond hardware. Although PC makers are shipping more computers than ever, margins on hardware sales are shrinking--making services, leasing and the providing of Internet access more attractive.

Dell and Emachines also detailed long-term business strategies this week that expanded the companies beyond their original hardware focus.

Gateway was particularly blunt about the need to broaden its income sources: The average Gateway consumer spends $1,845 for a computer and related items, generating a mere $133 in profit for the company.

By contrast, computer users spend an average of about $6,000 over five years on hardware, software, Internet access, e-commerce transactions and other online expenses. Gateway estimates its profit on the five-year revenue stream from an individual customer to be about $1,200.

More significantly, the cost of acquiring and retaining customers for five years is not much greater than the cost of acquiring them for the initial hardware purchase: about $250 for each customer over five years, compared with $115 to entice the customer to buy the PC in the first place.

As part of its expansion efforts, Gateway last month announced an alliance with Verio to offer Web hosting and services to small and medium-sized businesses. The companies will provide Web hosting, DSL service, data storage, e-commerce services and other functions to Gateway customers.

Gateway's secondary goal for the year is cost-cutting. The company says it can wring out waste from every department--especially the returned merchandise department.

Gateway consumers returned $46 million worth of hardware in 1999. But only one out of four total returns were because of fickle consumers who changed their minds indiscriminately. Three out of four returns were because of a system defect, such as the shipment of the wrong product or a product damaged in the factory.

Gateway has spearheaded a major cost-cutting initiative in the returns department, reducing costs by $12 million in the past year.

"You really find significant margin opportunities," Todd said. "We can take that and reinvest back into the business."