Gambling with Gateway

CNET News.com's Michael Kanellos says that fear is a great motivator, which is part of the reason Gateway remains one of the more interesting computer companies to watch.

Michael Kanellos Staff Writer, CNET News.com
Michael Kanellos is editor at large at CNET News.com, where he covers hardware, research and development, start-ups and the tech industry overseas.
Michael Kanellos
4 min read
Fear is a great motivator, which is part of the reason Gateway remains one of the more interesting computer companies to watch.

The Poway, Calif.-based PC maker has teetered on the brink of crisis for the last several years. Back in the first quarter of 1999, its glory days, Gateway saw U.S. shipments grow 40 percent over the year-earlier period, second only to Dell. The company also moved up to tie Hewlett-Packard for fifth place worldwide.

Since then, Gateway has endured quarterly losses, management changes, layoffs and market share declines. The tumble forced it out of international markets, many of which are growing faster than those in the United States.

Now, it is amid a bid to acquire Emachines, whose top executive, Wayne Inouye, would become Gateway's third CEO since 2000. Critics have said that Gateway may have to merge into a larger company or fade away.

The critics, however, are ignoring one of Gateway's latent strengths: It will try almost anything once.

Gateway, for instance, was the first major PC maker to offer its own Internet service and one of the first to aggressively bundle ISP services into the price of computers. True, no one will get a MacArthur "genius grant" for that one, but it became a standard marketing tool for the rest of the industry.

The company also pioneered the push into consumer electronics. Although some often trace the "convergence" trend back to a speech by Apple Computer CEO Steve Jobs in January 2001, Gateway and then ally America Online unfurled a home electronics strategy in November 2000, three months earlier.

Then there are the stores--Gateway made that move first, too. (But this Apple-Gateway relationship is a two-way street. Gateway followed Apple into all-in-one computers with, among other PCs, the Astro, which looked like a space helmet from a kid's show.)

Inadvertently, the company has also been at the forefront of another phenomenon that will likely become a trend: namely, that the road to consumer electronics nirvana is paved with potholes and broken glass. In the mid-1990s, Gateway began to sell the Destination, a PC with a big-screen TV. It failed. Then, in 1997, it bought Amiga to get into devices. That fizzled. The November 2000 strategy unraveled in 2001.

Gateway has become a leader in fancy TVs, but only in its fourth attempt at consumer electronics.

Primal fear
A primary driving force behind the company's experiments, of course, has been desperation. Gateway makes PCs, and standardization has created an environment where a couple of Cub Scouts with a soldering gun and a UPS drop box can compete with multinationals.

Getting out of PCs, though, isn't a realistic option, just as it wasn't an option when analysts suggested IBM and Hewlett-Packard do it. What would they do with all the extra time (and real estate) on their hands? Take on Jennifer Convertibles in the discount sectionals market?

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But even without the fear of doom, Gateway has typically been less rigid than some competitors, relying less on McKinsey reports or focus groups than gut instinct about popular tastes. It owed its early success, after all, to Holstein graphics and a South Dakota address. If IBM's motto is "think," Gateway's is "no money down."

The proposed acquisition of Emachines may mark another clever shift. For years, the so-called "direct" business model pioneered by Dell, and to a lesser degree Gateway, flourished. It cut out the middlemen, which gave manufacturers the additional profit margin or extra cushion for a price war. Customizing computers was also a snap.

The direct model, however, may be losing some of its edge. Customers don't customize that much. Gateway insiders have acknowledged that most people buy the recommended configurations.

Additionally, the growth of home theater systems, Wi-Fi, digital video recorders and the like mean that more customers will probably need help, which generally portends a swing back to stores. Dell, in fact, has recently seen its customer satisfaction level drop.

In other words, the direct model may be at its high-water mark. A recent report from IDC predicts that direct PC sales already account for 53 percent of sales, but the figure won't change from now through 2007.

"Increasingly the major retailers will become the general contractor for consumer electronics and home offices?just as Home Depot and Lowe's provide services in the home improvement area," the report states.

A combined Gateway and Emachines will be the low-price leader in retail. At the same time, the relationships that Emachines has established could allow Gateway to get its branded cameras, TVs and DVD players into nationwide chains. Simultaneously, it can continue to sell directly to customers who want to buy off the Web. The larger volumes of goods that the company will be able buy from Intel and Microsoft will further qualify it for better discounts.

The Emachines acquisition may not return the cow to its former glory, but it may prevent it from getting gored.