Under a new alliance, the two companies will provide Web hosting, DSL service, data storage, e-commerce services and other functions to Gateway customers. Fees will range from $19.95 to $69.95 a month, depending on the service, the companies said.
Analysts have pegged Web hosting as a major growth market, as businesses increasingly outsource their information technology needs. In particular, expanding e-commerce strategies could spur the hosting market to reach $56 billion in revenues by 2003, according to Forrester Research.
Although PC makers are shipping more computers than ever, margins on hardware sales are shrinking--making services, leasing and providing Internet access more attractive.
"PC makers are realizing their products are commodities and are continuing to extend services," said Stan Lepeak, an industry analyst at Meta Group. "They have been trying get more services rolled out, but hopefully, they'll also recognize that this is just the start."
Lepeak said PC makers that are eyeing the Web hosting market for additional revenue streams need to take the next step by offering more complex managed service offerings such as application management, Web site maintenance and systems upgrades.
"Gateway is really offering plain vanilla hosting for people with basic (hosting) needs," said Lepeak, who added that the company's entry into the fast-growing market was a necessary step.
Last quarter, non-PC income accounted for 25 percent of the San Diego, Calif.-based company's overall profits. The goal is to boost that number to 40 percent by the end of the year, with 25 percent of profits coming from subscriptions and other "recurring" revenue streams, CEO Jeff Weitzen has said.
Although it has been one of the leaders in devising ways to tie new services to PC sales, Gateway is following its competitors into the hosting market.
Joel Yaffe, an analyst at Giga Information Group, said Gateway's move into the Web hosting field mirrors what its counterparts, including Dell Computer and Micron Electronics, have already done.
"(Gateway) is leveraging its brand identity to expand into the services market," said Yaffe, who also noted that Gateway, which doesn't have a high-end reputation like Sun Microsystems and Compaq do, already faces a highly competitive arena.
Yaffe added that PC makers' primary goal in the heavily touted hosting market is "to create an ongoing relationship with their customers" by wooing them to use their services as well as their hardware.
For Verio, the deal provides access to a fairly large and established customer base. Most of Gateway's business customers are small and medium-sized companies, the types of customers Verio targets. Currently, the Englewood, Colo.-based firm hosts more than 300,000 Web sites, according to company figures.
The agreement may also be tinged with a bit of revenge. Earlier this year, Verio complained about Dell's entry into the Web hosting business. Verio had been a larger server customer of the Round Rock, Texas, PC maker and frowned upon Dell's becoming a hosting rival.
"Why should we support one of our competitors?" Laura Zung, vice president of project management at Verio, said in February.
Gateway and Verio will develop services in conjunction with each other, although most will be marketed under the Gateway brand name, a Gateway spokeswoman indicated.