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Readying Gateway's post-PC future

CEO Ted Waitt explains why he wants to move the company away from its roots as a PC maker. He's tried twice before to pull off a new strategy. Will the third time be a charm?

John G. Spooner Staff Writer, CNET News.com
John Spooner
covers the PC market, chips and automotive technology.
John G. Spooner
11 min read
NEW YORK--If Ted Waitt realizes his vision, the new Gateway will bear little resemblance to the old Gateway.

Eighteen years after co-founding what would become of one most recognized PC companies in the history of the computer industry, Waitt is working as quickly as he can to shed Gateway's image as a PC builder.

The plan is to mold Gateway into a new entity that Waitt describes as a "branded integrator"--essentially an outfit that offers a wide range of interconnected consumer electronics devices stamped with the company's logo and that does everything from installation to service. And oh yes, it will still offer PCs.

But while bold, the integrator push is Gateway's third new corporate strategy in three years. Waitt, Gateway's CEO, says the growth potential for the new consumer electronics products is enormous. At the same time, he says the company can help its own cause by tapping its own wealth of experience amassed from selling PCs directly and dabbling in retail sales.

After a long string of quarterly losses, investors are anxious to see a return to profitability. The company's once high-flying stock remains considerably off its 52-week high of $4.50. Waitt recently met up with CNET News.com to talk about his ambitions for Gateway and how he intends to pull off an ambitious transformation.

Q: What led up to Gateway's new branded integrator strategy, and what does it mean for the company's future direction?
As we went through 2002, we tried really hard to grow our PC business. We didn't execute as well on the growth side as we would have liked to, but we built a lot of capabilities. We launched our plasma television in the fourth quarter and launched a lot of our digital solutions product and started stocking those products in our stores. Our stores were primarily showrooms before that.

So when we compared the success of our plasma television versus the success of our other branded products, it really showed us that the Gateway brand could scale to a lot of different categories. If we look at our business model, in terms of being direct to consumers, we can take a lot more flexibility to be either aggressive on price or to make higher margins. Because they are our own products, we are in total control of our own destiny with Gateway branded products.

We have plans to launch at least 50 products across at 15 new categories of Gateway-branded products.
What will that mean in terms of new products?
Right now we have plans to launch at least 50 products across at 15 new categories of Gateway-branded products.

Such as?
We will have a full line of plasma (television) products, a full line of LCD TV products, a full line of digital light projectors, including both front and rear projection. We'll build that out with home theater products...so it's not just the television products, but also Gateway-branded home theater products.

If you own the PC and then own the TV environment...then you (can) also build the things that link those together. Those are our digital solutions products, (such as) digital audio--how do you get the audio from your PC to listen to it in your home stereo and have a good way to get out and listen to it in your car?

Will Gateway also push hard into digital photography?
Digital photography is another strongpoint, where you'll see Gateway-branded products and Gateway- branded solutions. Not just cameras themselves, but the products that go around the cameras--training classes, which we have the ability to do right now--and the accessories and those kinds of things, such as flash (memory) cards, paper and the cables. The ability to tie that to PC environment--if you want to watch a slide show of your pictures on your digital television, there should an easy way to do that.

Digital video is another category that's growing very rapidly for us. It's earlier in its development than the audio and the imaging, but that's another category that's really important for us--as is the connectivity piece, the home networking that ties it all together and allows it to connect.

How does this fit into the overall strategy?
We'll probably go to market with six categories of products. We still have desktop PCs, which we're simplifying...so we can have the resources to develop on the other categories, which are higher-margin, higher-growth categories.

Mobile PCs--we have a very rapidly growing mobile business. Digital television products, digital audio products, digital imaging products and the connectivity products. We'll go to market directly with those six categories and potentially video this year. Then we'll have the ability, once somebody comes in, to show them how it connects and how everything works together.

Will you continue to operate the retail stores or eventually phase them out?
We're going to invest in (Gateway retail) stores. We have 184 stores right now. We're going to refurbish and remodel all of those stores to be ready for the holiday season, so they will all look different, feel different and operate differently. We'll then look at that model and decide whether we want to build new stores based on the returns we're seeing on the new product lines.

We're taking PCs from the bulk of the (sales floor) space down to about 15 percent of that space because, frankly, there's not a lot of money in PCs. We have to allocate the space to the products that give us the best return--the products customers want to buy.

It sounds like a lot of this strategy is geared toward the holidays?
That's why we're moving fairly quickly. We've been planning for quite some time. Products just don't show up and you don't remodel stores overnight, but clearly we want to have everything ready for this holiday season. We will continue, as we move through 2004, with a stream of product announcements. It seems like a natural extension to move into new products after the plasma TV, but what about PCs? Are you abandoning them?
You'll see us get back into the lower-end, entry-level PC side. There's nothing exciting there. It's basically about, how do you hit low price points and not lose your shirt? But you'll also see some interesting things from us throughout the year--extensions of our Profile family of products. Getting the PC, in its Media Center format, into different variations...(such as) a consumer electronics form factor is something that's a possibility...On the mobile side, you'll see some interesting products because you can innovate more on that form factor. Still, it sounds as if Gateway would like to leave PCs behind and focus on consumer electronics.
My No. 1 goal is to transform the company to a branded integrator. That doesn't mean that the PC is not an important part of that whole
My No. 1 goal is to transform the company to a branded integrator.
strategy. It is a very critical part. It's a huge business and it's going to continue to be a huge business, but the economics of the PC business dictate that we have to do a lot of other product lines...in order to get the business of the company where it needs to be.

Those (new products) include products that we can own, that we can have more exclusive positions on, that we do fun and interesting things with. It is very hard to do these days in the PC world unless you have Microsoft's seal of approval.

But how do you plan to compete with companies like Sony and Best Buy?
We'll just use our e-commerce supply chain expertise and our (component) sourcing models, etc., that we've learned in the PC business. The PC business moves so rapidly and focuses so much on quality and so much on flexibility. (It contrasts with) an area like the consumer electronics business--which tends to have longer product life cycles and not as much change and tends to be controlled by a few players that tend not to move very fast and tend to have higher cost structures. It's really an interesting model.

Then take our direct model with our stores. It would be difficult to do (the branded integrator) without our store presence because people want to see the picture on a plasma TV before they buy it. They might do their initial shopping for that on the Web and might end up doing the final transaction via the Web or the phone. We're in total control of the total customer experience, versus Sony that has to sell through Best Buy.

We get the voice of the customer in product designs. They're not engineering-driven products. We're developing what we call a marketing specification for the products and we're working closely with suppliers to do something like one remote that works on our plasma TV, our home theater and also works with a satellite (TV) product. We have this goal to get everything on one remote and have it preprogrammed so that it works with all of our stuff. It might not work with your old VCR, but if you buy the Gateway TV, the Gateway DVD player and have a typical satellite receiver, it should work.

We've talked a lot about consumer electronics, but what about Gateway's existing business customers?
About 50 percent of our business is on the business side, small and medium business, government and education. That business is profitable today. It's a very important part of our business. We've got a front- office, back-office approach.

A lot of the 50 (new) products are in that space actually. A significant number are in the systems and networking (back-office area), such as server products, including four-way server products, various smaller-form-factor products and storage products.

The front-office approach (includes) products like our Profile PC. We can combine it with plasma TVs in conference rooms, products like projectors, and link those together. Those products work in the lobby, the conference room, the board room as well as vertical markets like the hospitality industry... and we can tie them together with the server back end to run them.

How do you tie this all together, and how is it different than what Gateway was doing in 2000 with its alliance with America Online and its Internet appliances and digital audio receiver?
Those devices weren't building true businesses. We saw the economics of the PC businesses declining. In 1997, we had a big management meeting...and we said we've got to do something different. Out of that came our beyond-the-box strategy, which started the noble notion of the perpetual PC, of give me $49 per month and we'll cover your PC and Internet access and everything else you want to buy to get your computer going.

That became...a beyond-the-box strategy, which was sell a PC and a group of businesses that existed around the PC, the access business, the financing business, the software and peripherals business and a learning and training business. But the core strategy was still to offer a PC and then up sell the various components around it. It was still totally PC-based. So the governor for your growth rate--although the company built pretty good businesses in the financing and the training business, the software and peripherals business and the Internet access business-was the PC. While these other businesses were higher-margin and higher-growth, they were still dependant on the success of PC.

And so what's going to be different?
What we're doing now is creating truly diversified businesses. We've created seven different product-line profit and loss statements. We will lead and go to market with TV products, with digital imaging products, with digital audio products, with connectivity products and they're running as real (profit-and-loss entities) that have to stand on their own. They'll work together and there will be some synergy between them. If somebody\buys a plasma television, then we'll say, "Okay, would you like installation with that? Would you like a home theater product? Are you familiar with our Media Center PC?"

It's more fundamentally diversifying our business away from that totally PC-centric mindset to a branded integrator where we're bringing a whole array of products and then have the ability underneath to integrate them into solutions

The TV is the center of the living room, in my opinion, rather than the PC. The question is, what drives the content that goes to the TV?
Customers might not necessarily come to Gateway anymore only for PCs?
Somebody might come in (to a Gateway store) because they want an LCD TV or a digital camera. But they might buy a PC, too. The question is, what happens to the PC business? It's going to be an important element...The consumer PC is primarily a loss leader. Inverting the equation, can you make the PC an up-sell? So, "Oh, by the way, would you like a PC with that?" We'll see what happens. Does that take the PC out of the center of the living room? That's the vision most companies still have, of the PC as the center of it all.
The TV is the center of the living room, in my opinion, rather than the PC. The question is, what drives the content that goes to the TV? It comes from a variety of sources. You have stored digital content. You have content coming over a wire or over a satellite. You need some kind of user interface to navigate that. The question is, is that a PC that's running it, or is it some kind of appliance device? We'll see. I think it's probably both. What do people want? Do they want to buy the whole thing?
I don't think they necessarily want to buy the whole thing. But they want everything to work together.

Some people come in and say they want the whole thing, but that's not most of them. Most people will buy one or two items and then add to them. We'll see how buyer behavior works. Most people will be in the mode of something like "I need a new television." But around the time they buy that television they tend to buy a lot of other stuff that goes with it...within 90 days.

Have you seen any kind of upswing in demand in the PC market?
The typical seasonal stuff. Usually this quarter starts to slowly build. April is probably the lowest month we see in the PC business. May starts to build a little bit. June tends to be a strong month for us in our institutional business--though it's too early to say how much of that is going to come through.

Have you thought about expanding internationally again?
We're doing things both in Canada and in Mexico. Those businesses are really pretty good. There's some really nice growth there and we've got some good relationships there. Once we get the product line that we want, that we know drives the kind of returns we would like to see and creates excitement...and get a retail format that we know works, then it does open up the possibilities of going back international again. But that's probably best-case a late 2004 or 2005 kind of timing. What are your personal plans?
I initially committed to five years. As long as I am still having fun and enjoy doing what I am doing, I'm going to keep doing it. I'm pretty fired up right now about the opportunities I see. I'm going to see this thing through, whatever that means, whatever that takes.