Gateway has filed suit against Web America Networks for to failing to provide adequate Internet services to Gateway customers, and today announced it is now contracting with MCI Worldcom's UUNet to provide service to customers instead.
The fallout can be viewed as a symbol of the growing pains PC vendors may experience as they venture outside of their core businesses and attempt to tap revenue from joint ventures that leverage their customer base.
Gateway was the first major PC maker to start earning revenues by offering branded Internet services. Now, it is the first to sue because the partnership didn't work as planned.
The North Sioux City, South Dakota-based PC vendor contends in a suit filed in Delaware Chancery Court in Wilmington, Delaware, that Web America, a closely held Internet service provider, failed to provide easy Internet access and email services to Gateway computer-buyers who signed up for Gateway's ISP service, "Gateway.net."
Customers complained of busy signals when attempting to connect their computers to Web America's network, problems accessing email, and said they were constantly getting disconnected from the network.
"Gateway [and its Internet unit] have suffered injury to their reputation, loss of customers, and other incalculable damages," the suit said. Gateway is now attempting to rescind the agreement with Web America and is seeking unspecified damages.
Web America officials weren't available to comment on the suit.
In a previously unknown suit filed on January 8, however, Web America sued Gateway in district court in Dallas, Texas. Among several allegations, Web America said in the suit that Gateway misappropriated "trade secrets" regarding the pricing and provisioning of its services by engaging in contract talks with other service providers, and that Gateway has wrongfully defamed the company's reputation.
The company is seeking damages related to lost business, as well as punitive damages. Moreover, it is also seeking a temporary restraining order and injunction to prevent Gateway from "advertising, promoting, bidding, contracting or offering for sale" any Internet service that uses Web America's trade secrets.
Gateway's "Gateway.net" program was one of the first to tie PC sales with Internet access, generating an ongoing revenue stream in the form of sharing money from user subscription fees. Ironically, the company also appears to be the first to sue the service provider it subcontracted.
Of late, though, the company's efforts to provide high-speed access to power users have paled as the rest of the PC industry has tuned in to the fact that Internet use is one of the primary drivers of PC sales. Dell, which lags behind Gateway in sales to the consumer market, has been particularly aggressive in signing deals with Internet service providers that hook customers up via DSL or cable modems. Compaq, the largest PC maker in the world, has a number of intitiatives with service providers as well.
"We chose to work with UUNET, because they continue to maintain the industry's most reliable, rigorously managed, and most widely deployed network," said Jim Von Holle, Gateway's director of Software and Internet Services, Gateway, in a prepared statement.
Besides a more reliable service provider, the deal also gives Gateway a chance to boost its efforts to provide multi-megabit Internet access to customers.
UUNet has previously said it plans to offer DSL service with more than 600 dial-up numbers in markets such as San Francisco, Los Angeles, Boston, New York, San Diego, Chicago, Washington, D.C., and others by March. DSL is a technology that allows high-speed data transfers over standard copper phone wires.
Bloomberg contributed to this report.