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Gateway inks PC deals with Sun, OfficeMax

The PC maker unveils new alliances with Sun and retail chain OfficeMax as part of a five-year plan that the company says will boost revenue to $30 billion by 2004.

Gateway today unveiled new alliances with Sun Microsystems and retail chain OfficeMax as part of a five-year plan that the company says will boost revenue to $30 billion by 2004.

Under the deals, Sun will recommend Gateway PCs to its customers, while Gateway will include Sun's desktop application software--which competes with similar Microsoft products--on those personal computers. Sun generally makes the bulk of its revenue from selling servers and workstations to e-commerce companies. Future development and sales deals could emerge, the companies said.

Today's announcements, which came as Gateway chief executive Jeffrey Weitzen spoke at the company's annual meeting with financial analysts, underscore the computer maker's ambition to expand beyond the small business and consumer PC markets.

In addition, Gateway will invest $50 million in OfficeMax and effectively become the exclusive PC brand for the office-supply chain. Gateway will build and staff "store-within-a-store" outlets in more than 1,000 OfficeMax outlets and cross-promote the chain's Web site.

Finally, the PC maker also said it would invest $25 million in Linux distributor eSoft to develop Net applications and services for small businesses. Gateway will sell these services on a subscription basis, similar to how Application Service Providers (ASPs) make money.

Gateway stock rose more than 12 percent following the announcement to $64.44 in early trading. Shares have traded as high as $84 and as low as $28.37 in the past 52 weeks.

Today?s deals are all part of a substantial and fairly successful makeover at Gateway that began almost two years ago. Amid a serious decline in PC prices, Gateway launched a broad plan to expand its brand to new customers and to enter into new markets, such as Internet services.

While the strategy has had its setbacks, Gateway's plans have largely helped the company, analysts have said. For example, Gateway now plans to garner 40 percent of revenue from sales of Internet services, software and other non-PC sources by the end of the year. Earlier, Gateway predicted that 30 percent of its revenue would come from non-PC sources.

The company's growth goals are, however, fairly large. To hit the $30 billion mark, revenue will need to climb approximately 30 percent a year. In 1999, Gateway reported $8.6 billion in revenue, a 16 percent increase from the year before. Gateway executives also said they expect to see earnings grow 25 percent annually. Earnings, though, have been slowed by PC price pressures and other factors in the past. Fourth-quarter profits, for instance, came in lower than expected because of a shortage of Intel chips.

Analysts have attributed much of the turnaround to CEO Weitzen. Weitzen came to Gateway from AT&T as operating chief in early 1998 after the company was recovering from depressed earnings in the third quarter of 1997. Since then, Gateway has launched its Country Stores, expanded the types of products it sells on the Web, created its own ISP and entered into a complex deal with AOL that includes an $800 million investment by AOL in Gateway. Weitzen became CEO in January.

"He seems to be the guy," said Roger Kay, an analyst with International Data Corp., who added that there appears to be a connection between Weitzen's rise in the ranks and management shifts. "He appears to have a fairly Machiavellian approach, and that's good."

Among the deals today, the alliance with Sun is the most interesting, Kay said. With Sun, Gateway gains preferential access to significant technology as well as a large number of well-heeled corporate clients. Historically, Gateway has mostly sold to consumers.

Additionally, the deal gives Sun an opportunity to sell its "Portal Pack," a suite of desktop software. Gateway systems sold through the Sun deal will contain these packages.

The most notable element of the Portal Pack is the StarOffice suite of office programs, which competes directly with the dominant Microsoft Office. It also includes a suite of Internet software designed to bypass Microsoft: Netscape Communicator Web browser, the newest version of Sun's Java software, Sun's Jini networking software and other Java technologies.

"Sun is a big player. They represent the other camp, and Gateway has been a maverick and most likely the one break with the Microsoft-Intel camp," Kay said. "This is very helpful to Gateway, because it gives them access to very high technology."

The OfficeMax deal, by contrast, will give Gateway greater presence with its traditional target audience. Under the alliance, Gateway will erect store-within-a-store areas inside OfficeMax for selling Gateway PCs. Gateway will also create an icon on its interface for OfficeMax.

While Gateway will not cut similar deals with direct competitors, Weitzen left open the possibility that other deals outside of the office products store realm could occur.