Gateway to outsource new low-end PC

After two quarters of declining PC unit shipments, the Poway, Calif., company re-entered the low-price desktop fray Thursday with a $399 model, dubbed the Gateway 310.

But unlike Gateway's past desktops, the 310 can't be custom configured by customers, and it will also be manufactured by a third party. That represents a major departure for Gateway desktops, but the company says the new approach is essential to controlling costs.

Gateway has been through several business strategies recently and is now morphing itself into a consumer-electronics company with a slew of new products. But the company says selling more PCs is vital to its overall plan to return to profitably. Gateway's PC unit shipments slipped to 490,000 during the second quarter. It expects to use the 310 to grow shipments again while cutting manufacturing costs. If successful, the combination should bring Gateway's PC business back to profitability, the company has said.

"As we looked at our portfolio...it was very clear we had some cost and competitive challenges in our PC line, particularly on the low end," said John Engel, general manager of Gateway's desktop PC products. "In a nutshell, we're leveraging a new business model, a new outsourcing model for desktops at the low end. But from a Gateway perspective, it's similar to our portables and Profile (the company's all-in-one desktop), as well as consumer electronics."

Indeed, Gateway already works with outside manufacturers for products like notebooks and digital televisions. In doing so, the company helps reduce its development costs and bring new products to market more quickly. Gateway, for example, plans to refresh the new PC line often.

The lowdown on the low end
But achieving success in the PC market means effectively playing the low-price game. The majority of desktop PCs, as shown by trends in the retail PC market in the United States, are now sold for prices under $800. It's a tough market to be in, with manufacturers making only a small profit. But without a low-price presence, companies risk shipment declines and resulting component price increases due to lack of volume discounts, analysts say.

Gateway believes the strategy behind the 310 will help it solve the low-price conundrum by lowering its costs, thus allowing it to turn a profit.

"It makes a lot of sense. Obviously Gateway's core competency is changing. It wants to be the integrator and the designer, the one who has the vision, not necessarily the guy who owns the factory and screws the stuff together," said Steve Baker, analyst with NPD Group. "Given the things Gateway is doing now, it's closer to Gateway's core competency."

Gateway also gains a new desktop that more closely matches machines from competitors Dell, eMachines and Hewlett-Packard, whose prices all start between $350 and $400. Gateway's previous low-end desktop, the 300S, came in a special bundle with a 17-inch monitor and cost $799.

Gateway's lowest priced 310, the $399 310SE, comes with a 2.2GHz Celeron processor from Intel, 128MB of RAM, a 40GB hard drive, a CD-ROM and Microsoft's Works software as well as a modem and a set of speakers. It includes only a 90-day warranty, however. A one-year warranty costs extra.

The $599 310S includes a 2.4GHz Celeron, 256MB of RAM, a combination CD burner-DVD-ROM drive and a 17-inch monitor. The $799 310X, which will be available at retail stores Aug. 7, features a 2.4GHz Pentium 4 and comes with a CD burner and a DVD-ROM drive.

Gateway will also begin stocking 310 desktops at its stores during August, offering instant gratification to customers who might be cross-shopping Gateway stores with retailers like Best Buy. Gateway will likely stock other desktops at its stores in the future as well, Engel said.

"It's a lever we'll choose to use, but not something where we're going to load a bunch of inventory up in the stores," Engel said.