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Commentary: Gateway reins in

Given the company's return to a strong focus on the consumer, small business, government and education markets, there is little need for a worldwide presence.

By Charles Smulders, Gartner Analyst

The PC industry is in crisis. Economic conditions and market saturation in the United States and Europe are slowing sales growth. Excessive performance, even on low-end machines, is leading people to question their need for upgrading.

See news story:
Gateway's make-or-break decision
Faced with these market conditions, the industry has chosen to cut prices to maintain demand--resulting in a vicious price war that has forced all vendors to focus on their operating expenses.

In this environment, there's no surprise in Gateway's announcement that it plans to lay off one-quarter of its worldwide work force, close manufacturing and support sites, and retreat from overseas markets. However, the company also faces some unique issues. After losing sight of its hardware business and choosing instead to focus on selling services and peripherals, Gateway's price competitiveness and customer satisfaction declined. Matters came to a head because of the price wars and decreased market growth in the United States.

Gateway founder Ted Waitt returned to Gateway in early 2001 and refocused the company's efforts on hardware. In the first half of the year, market conditions became increasingly difficult. Total U.S. PC home sales declined by 26 percent compared with last year. Gateway needs to cut costs and focus on its core business in the United States, which accounted for 87 percent of the company's total shipments in the second quarter of 2001.

In the longer term, Gateway may eventually need to have a presence in other regions, but not now. Given the company's return to a strong focus on the consumer, small business, government and education markets, there is little need for a worldwide presence to service the few large accounts it has.

Cutting back will help Gateway in the short term, but likely not further in the future. The company must take advantage of its 300 Country Stores by finding a formula to increase consumer and small-business traffic--otherwise, the stores will continue to drain profitability. The Country Stores could provide high customer interaction, but Gateway has not been able to realize the potential. Improving inventory efficiency and customer satisfaction will continue to be priorities for the company, and customer satisfaction will be a key metric to watch because call-center staffing has been cut.

Gartner believes that any real improvement in the PC market will not occur before the middle of 2002. The likelihood for vendor consolidation is high, and Gateway is a candidate. However, the company still retains control of its destiny. As a direct vendor, it should be able to change its business more rapidly than indirect vendors that have had to exit the market.

Although the company faces extreme challenges, it is the sixth largest PC vendor in the world and remains a significant force.

(For a related commentary on the PC industry in crisis, see Gartner.com.)

Entire contents, Copyright ? 2001 Gartner, Inc. All rights reserved. The information contained herein represents Gartner's initial commentary and analysis and has been obtained from sources believed to be reliable. Positions taken are subject to change as more information becomes available and further analysis is undertaken. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of the information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.