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Michael J. Fox to stump for computer retailer Gateway

Feeling the PC-sales crunch, Gateway hires the Emmy-winning actor to herd more customers to its 300 Country stores and help increase income from software and services.

Michael J. Fox has gone from Spin City to Gateway Country.

Gateway has drafted the veteran actor for television spots that will air on Friday night. New York-based McCann-Erickson developed the ads, through which Gateway hopes to bolster brand awareness and herd more customers to its 300 Country stores. The faux-rustic retail outlets have become a crucial part of the company's sales strategy, as it relies on income from services rather than hardware to prop up its sagging bottom line.

"Gateway is clearly trying to drive volume to the stores and sell consumers lots of services," said IDC analyst Roger Kay. "Driving traffic to the stores is something Gateway has to do to increase its profits."

Gateway has successfully used the stores to sell consumers margin-rich extras, such as training and service contracts. But with a sudden slowdown sapping PC sales, the company is putting more emphasis on "beyond-the-box" software and services.

The move comes as Gateway looks to recover from devastating fourth-quarter results revealed last week. San Diego-based Gateway shocked observers with a loss of $94.3 million, or 29 cents a share. Analysts had expected earnings of about 37 cents a share. The company also announced it was laying off 10 percent of its work force and initiating other cost-cutting measures.

Gateway, like other computer makers, is reeling from a sudden fourth-quarter downturn in PC sales. The company reported that sales during the lucrative Thanksgiving period fell about 30 percent from a year earlier, which was in line with declines seen by other PC makers.

Preliminary data released Friday by research firm Dataquest put fourth-quarter PC growth at 10 percent worldwide and 6.4 percent in the United States. Slowing PC demand, particularly from the consumer sector, walloped Gateway in the fourth quarter. The company's U.S. PC sales dropped 9 percent year-over-year, according to Dataquest.

The change in PC buying hit other consumer PC makers hard. Apple Computer on Wednesday reported a loss of 73 cents a share, with revenue down 57 percent from a year earlier.

Shifting sales
Already, Gateway had been shifting profitability away from hardware to software and services sold through Country stores. In the third quarter, beyond-the-box sources accounted for more than 50 percent of net income. But during the fourth quarter, with hardware sales sagging, that figure jumped to 100 percent.

Gartner analyst Ken Knox said that the shift in profits "is not surprising, given how badly the hardware did. Gateway's PC sales numbers are just dismal."

One result was that Gateway kicked off a brutal PC price war last week, slashing prices to drive unit volume and with it additional services revenue. Technology Business Research analyst Brooks Gray said Gateway typically sells up to five additional high-margin items with each PC sold through its Country stores. More hardware sales could mean more high-margin software and services sales.

Gateway is offering a 933MHz Pentium III system with 64MB of RAM, a 17-inch monitor and a free printer for $999. A 950MHz model based on AMD's Athlon processor--with DVD drive, home networking and 17-inch monitor--goes for $1,099.

"Clearly, Gateway management is trying to increase unit shipments through price-cutting," Gray said. "The only problem I see is that I believe Gateway's manufacturing and assembly is far less efficient than its major competitors. So they could be sacrificing profitability at the hardware level in order to boost services."

With the exception of a Christmas promotion, Gateway typically does not carry stock in the stores. The company uses the retail outlets to showcase products, take orders and offer additional services, such as training.

The Fox factor
Knox was guarded about whether the ad campaign "would be enough to drive a lot of traffic to the stores."

But Gateway spokesman Brad Williams emphasized the ad campaign is about more than the Country stores.

"It's really about personifying the Gateway brand through someone that has broad appeal across a huge segment of the population and who has been very selective about his endorsements," he said. "We're proud to have somebody that picky about their endorsement deals sign on with our brand."

In a separate agreement, Gateway has agreed to be the technology provider to the Michael J. Fox Foundation for Parkinson's Research. The actor retired from Spin City last year mainly because of his advancing struggle with Parkinson's disease. Fox will be paid an appearance fee for the TV spots, Williams said.

Gateway is No.4 in U.S. PC shipments and No. 6 worldwide, according to Dataquest. The PC maker had 3.8 percent worldwide market share in 2000, down from 4 percent in 1999. In the U.S., Gateway's market share also dipped, to 8.6 percent in 2000 from 9 percent a year earlier.

Competitors Compaq Computer and Dell Computer led the worldwide PC market in 2000, with, respectively, 12.8 percent and 10.8 percent market share, according to Dataquest. In the U.S., Dell led with 19.1 percent share, followed by Compaq at 15.4 percent.