Gateway server promotion backfires

A promotion this month helps the company win some new server customers, but the effort backfires when it can't keep up with demand.

Stephen Shankland principal writer
Stephen Shankland has been a reporter at CNET since 1998 and writes about processors, digital photography, AI, quantum computing, computer science, materials science, supercomputers, drones, browsers, 3D printing, USB, and new computing technology in general. He has a soft spot in his heart for standards groups and I/O interfaces. His first big scoop was about radioactive cat poop.
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Stephen Shankland
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A promotion this month helped Gateway win some new server customers, but the effort backfired when the company couldn't keep up with demand.

Gateway unveiled the promotion in early June, offering $400 off its lower-end 6400 server with dual-processor support and a regular starting price of $999. A brand not known for its server line, Gateway took out full-page ads and plugged the deal on its Web site as part of its attempt to grab server customers.

Gateway anticipated shipment demand to grow about 50 percent and had increased manufacturing accordingly, said Chris Norman, director of server marketing. Instead, demand rose 200 or 300 percent.

"It hit a nerve with what I would consider to be a fairly technical community," he said, and called the promotion a success in gaining the attention of new customers. "We've definitely got consideration levels up in accounts that did not buy Gateway before."

Unfortunately for Gateway, the promotion generated ill will as well as attention.

"The promotion got (Gateway) in the door. But it also, at this point...soured me on the company for life," said Jason Holt, who ordered one of the computers for his employer, the California Polytechnic State University. "Any business (customer) reputation they had has been completely hammered."

Holt ordered his 6400 on June 5, the day he saw the ad, and was told that day the system should arrive on June 15. Since then, he's called back several times and been told it will arrive on June 18, June 21, June 25, June 27, July 27, and Sept. 3. Gateway's explanation for the delay varied with each call and included a shortage of floppy drives, motherboards, floppy-drive cables, power supplies, hard-disk cables, cases and processors.

Gateway is pulling in favors and taking all other possible measures to catch up with component demand. "We're flying in materials that normally would have been shipped ground," Norman said. "We're doing everything we can as a manufacturer."

Norman said the company recommends customers check their orders frequently, because Gateway hopes order delays will be reduced. "We're doing everything we can to pull in materials and pull in those lead times," he said.

The black eye came as Gateway struggles with an attempt to sell servers, an effort that has flopped for years and that is now compounded by a shrinking server market. Indeed, the market has been so bad that this week VA Linux Systems abandoned the server-hardware market altogether. As Gateway struggles to keep up with demand, most server companies are struggling to scale back production.

Gateway has "had problems building their server business for quite a while, ever since they purchased ALR" in 1997, gaining a company with its own server line, said Technology Business Research analyst Brooks Gray. "They had problems retaining the existing ALR installed base, and they've never really been able to increase their volume in any significant manner."

Servers are networked computers that range in power and price from the level of ordinary PCs all the way to that of million-dollar mainframes and beyond. Servers house information, such as K-mart's purchasing database, America Online's e-mail and the Amazon.com Web site, and exchange that information with other computers. Companies like to sell servers because the fancy models typically have higher profit margins and often tow along sales of lesser machines and services.

Market research company IDC estimated Gateway's revenue at $26 million in the first quarter of 2001, less than 1 percent of the $6.9 billion low-end server market. And in the years since Gateway's ALR-backed server push, Dell Computer has been able to make major inroads against No. 1 low-end PC maker Compaq.

"Gateway has had very spotty experience outside the consumer market," Aberdeen Group analyst Gordon Haff said, describing Gateway's server push as "halfhearted."

In the future, Gateway will focus on several specific server markets, including small business, education, and government, Norman said. The company hopes its expansion to offer storage products will help, he added.