Gateway's hope: Smaller is better

Under Waitt's vision, Gateway will be more than just a PC maker: It will serve as the IT department for the legions of consumers and small businesses that can't afford a chief information officer to help them manage their computers.

"We'll be your CIO," Waitt told CNET News.com on Wednesday night at the bash here celebrating the 20th anniversary of the IBM 5150 PC.

The only computer makers that offer such services now, Waitt said, are the so-called white-box makers--small companies that sell unbranded computers, often in conjunction with a service contract and software package.

Waitt, who started selling PCs out of an Iowa farmhouse in 1985, has already made significant changes to the business since his return as CEO in January.

In the wake of declining sales, the company this year has vastly shrunk the number of computer configurations it offers and closed some of its Gateway Country stores.

The company may also close factories and pull out of overseas markets in an effort to return to profitability.

But analysts worry that Gateway could be the odd man out, with Dell Computer applying enormous pricing pressure and Compaq Computer better equipped to offer services.

"I think Gateway is going to have a tough time," Lehman Brothers analyst Dan Niles said. "They are crammed between two guys trying to kill each other."

Faced with declining market share, other PC makers have tried an approach similar to the one Gateway is adopting. In the late 1990s, for example, AST Research tried a similar strategy after failing to stay in the top tier of PC makers despite buying Tandy's PC business.

Waitt has asserted that Gateway will become a smaller company. The company already has cut more than 3,000 jobs this year.

He doesn't believe Gateway needs to be the biggest company to be the best.

Waitt points to a company survey, which found that 34 percent of consumers would prefer to buy a Gateway over other brands, assuming price and features were identical.

"Scale in this business is not as important as people think," Waitt said, adding that one estimate states that big suppliers have only a 4 percent cost advantage over the smallest PC makers.

Of course, even 4 percent can make a big difference in such a low-margin business as PCs.

"I'm not worried about scale," Waitt said. "We have massive scale in the U.S."

While some consider Gateway's stores an albatross that adds overhead to an industry with razor-thin margins, Waitt said the retail outlets are critical to the company' new strategy.

"The stores are a huge part of what we're hoping to deliver--local service, local training," Waitt said.

As for the international markets, Waitt said a review of Gateway's overseas business has yet to turn up any market outside the United States where the company has the scale to compete.

Waitt said he had hoped to find evidence that some markets outside the United States could deliver the results that Gateway is looking for.

"I wish I had seen that," he said. "We're looking for it. It may come."

However, the prospects don't look all that good. Gateway's largest market share is in Ireland, where Waitt said the company has somewhere between 14 percent and 17 percent of the market. Gateway on Wednesday said it has submitted plans to close its operations in Ireland and Britain. The company also once had a good share in Japan, but Waitt said the company has lost its edge amid changes in that market.

"We haven't changed with it," Waitt said.

Needham analyst Andrew Scott said exiting international markets should help the company, but he added that the real question is whether Gateway will be able to use its stores to sell enough services to make the outlets pay off.

Asking consumers to pay more, even if you are including training and other services, will be a tough proposition, Lehman's Niles said. "Especially in this kind of environment," he said, "the average consumer is not exactly feeling wealthy."

Waitt countered that Gateway needs to offer competitive prices. Yet, he added, "price is not everything."