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Gateway considers iBelong investment

The PC maker, looking to beef up its strategy of bundling Internet services with its PCs, may enlist the help of a start-up called iBelong.

Gateway, looking to beef up its strategy of bundling Internet services with its PCs, may enlist the help of a start-up called iBelong.

Gateway, the second largest maker of PCs sold via the "direct" sales approach, likes iBelong's ideas and has even started investigating whether to invest in the company, executives at iBelong confirmed.

The move comes at a time when PC makers are pulling out the stops to increase sales in a highly competitive and changeable market. A few years ago, PC makers wouldn't have bothered adding Internet services to their products. Now, all the major PC makers are adding services as a way to attract customers and hold on to market share.

Gateway was among the first to offer Internet service bundled with the computer. But it has faltered a bit in this area of late, stemming from legal wrangling with a previous Internet service subcontractor. The tussle illustrates the complexities that companies face in adjusting to the new Internet economy.

What has attracted the interest of Gateway and others is that iBelong's service targets certain groups--for example, those who buy Gateway PCs--or trade associations, and it builds "vertical portals" around those groups, with local news, weather, sports, and other "general interest" content.

The sites serve as an electronic gathering place for members that can also be customized to sell products and services related to the group's activities. The benefit for the group is that a portion of revenues from those sales goes back to the group's coffers instead of simply bleeding away to other commerce sites or retail stores.

Gateway could decide to integrate the iBelong service into its branded Internet service offering. It could then offer it to non-profit businesses, for instance, or it could be content to be a preferred provider of computer hardware and peripherals to allied groups. So far, says iBelong, Gateway is looking towards the latter type of relationship.

"We've talked to a number of companies about equity stakes, including Gateway," confirmed Shikhar Ghosh, president of iBelong, but said no deal has been formalized yet. Gateway has not yet decided what kind of a business relationship it will pursue, let alone whether or not it will invest in his company, he said.

"There is no agreement, nothing concrete that I can point to," said Ghosh, who brings with him credentials as chairman and co-founder of e-commerce software firm Open Market.

"We always evaluate new technologies and new strategies, but we have nothing to announce," said a Gateway spokesperson.

PC industry faces changes
Whatever course Gateway eventually decides to take, the conversations initiated by Gateway indicate the lengths to which PC companies need to go to find new, unexploded markets to continue their rapid growth--and illustrate the dramatic changes the PC industry has undergone in the last three years.

Increasingly, PC makers find themselves having to offer services outside of the PC hardware as prices have dropped dramatically since the sub-$1,000 PC began to make its mark in 1997. "We are seeing the revenue stream transition from being [oriented around] hardware to more service or e-commerce-centered revenues," said Ashok Kumar, a financial analyst with U.S. Bancorp Piper Jaffray.

In fact, several new studies from research firms such as Cahners-InStat and 4thWave suggest that the PC industry is undergoing a transformation from a product-oriented industry to a services-oriented industry. Those that don't make the transformation, in essence, won't be able to make money off boxes alone.

During the next two years, more than 90 percent of the PCs will be priced at less than $1,500 dollars, Kumar said, which compares to Gateway's current average unit price of $1,900. In addition, PC makers see that for every dollar spent on hardware, consumers spend $2 to $3 dollars in peripherals or software, so it makes sense to look at a variety of options as they scramble to protect their profit margins.

Gateway, while not the largest PC company in the world, has been among the leaders in finding "annuity revenues." The company's Your:)Ware purchase financing program has boosted profit margins, and was recently expanded to include businesses.

While the company isn't making money off the service itself, the company stands to benefit from being able to steer customers to a new ecommerce site called SpotShop.com to sell Gateway products and computer equipment that goes along with them.

Dell has embarked on a similar venture with its own online store, called GigaBuys and is also trying to expand sales to niche markets by offering an affiliate marketing program through a partnership with LinkShare.

Compaq, on the other hand, has been grappling with the changes brought about by the Internet. The company has tried to strike a balance between selling through "brick-and-mortar" stores, online resellers, and direct sales, mostly with mixed success. See related story.

Whatever their particular issues, what the Internet has done is make it easier for PC companies to sell services and products to customers in a more targeted fashion. iBelong is hoping to apply the portal concept to niche markets and at the same time bring buyers and sellers closer together.

iBelong: More than just another portal
But don't call iBelong just another Yahoo, even though both offer similar content aggregation and community-building capabilities.

"Most people spend time with groups that they are spending time with in real life," such as occupational groups like a teacher's union and other non-profit organizations, explains Ghosh on the difference between other virtual communities and the communities iBelong wants to build. The company is working to deliver content that is specific to a group's needs. For instance, a trade union may not want to see ads from a company it is boycotting, he said.

Whether Gateway helps with that process by adding a cash infusion remains to be seen.