Gateway Country Goes to War

Last week Gateway resumed hostilities in the PC price wars, announcing numerous price cuts and signaling what chair and chief executive officer Ted Waitt calls a plan "to start setting the pace again with our competitors."

Certainly, the price cuts and supporting ad campaign are drawing attention. But changing strategy and renewing a price war with Dell is a risk, say some analysts. It may even be the last thing the embattled company--which has announced several rounds of layoffs--should do to win customers.

"You'll never take Dell on price," says Rob Enderle, research fellow at Giga Technology. "Dell can fight this battle all day long," he says, citing Dell's efficient manufacturing processes and massive economies of scale. By challenging Dell on price, Gateway is setting itself up to lose money, Enderle says. A company that says it's willing to be unprofitable--even as part of a strategy--doesn't give buyers much confidence that it will stick around, he adds.

Despite Gateway's hearty assets (more than $1 billion, according to executives), Enderle says consumer perception is that Gateway is in trouble. "I think the perception is widespread, and I think this strategy will fuel that perception and increase the problem," he says. "The fact that I know better doesn't make a difference in the market."

Gateway executives, however, are confident their pricing strategy will spur some much-needed market growth.

"What we're focusing on is going back to the basics of our business," says Mike Flanary, vice president of communications solutions. "Gateway had been known for providing the best value plus feature sets plus customer service."

"We got away from that," Flanary admits. Corporate strategy shifted in 2001, when the company worked hard to reach profitability. "We went after the high-margin transactions, which kept us from participating in certain parts of the market," he says.

Razors and Blades

The bottom line: Gateway needs to sell more PCs, Flanary says. "We did the math. If we sell more PC's we'll [also] sell more of our value-added products and services."

Does that mean Gateway is willing to lose money on each PC sale? Flanary won't go that far, but says cryptically that "Gateway is willing to invest in acquiring long-term relationships with customers."

For example, Gateway will sell you a PC cheap in order to then help you set up your home network. "You can buy wireless nets from 500 different places, but Gateway has a national in-home service that can do it for you today," Flanary says. "We know how tough that can be, so Gateway will be your IT partner," he says.

The nature of Gateway Country stores will change as well, he says. Traditionally, you could look at products there but you still had to place an order for later home delivery. Gateway plans to offer more cash-and-carry PCs--something it has previously done only during the holidays. "You will see us experimenting with some immediate-gratification programs through the stores," Flanary says.

Down the road, Gateway also hopes to draw more visitors into stores by showcasing innovative products that position the company as a technology leader. "I think you'll see some things from us later this year that will address the cool factor," Flanary says.

If Gateway can execute its plan--and if it can generate some much-needed excitement in the PC industry--its long-term chances improve dramatically, says Giga's Enderle. "If they can get people in the door with low-priced PCs and then wow them with better designs, then I'm more confident about their plans," he says.

New Course Correction?

Customer concerns about Gateway's future are based more on superstition than reality, says Roger Kay, director of client computing at IDC. Kay says he's less worried about consumer perception than the reality that Gateway seems to be changing its strategy too frequently.

Wall Street has forced Gateway to react--first by pursuing profitability and now by chasing market share--but its customers don't care about any of that, Kay says. "I think it is very dangerous to keep shifting strategies--people don't know what you're supposed to be," he adds.

Gateway's Flanary admits the company's strategy has evolved over the past year.

"When Ted [Waitt] came back, there were a couple of very clear items that needed to be dealt with. The biggest one was the balance sheet of the company," Flanary says. (Waitt stepped down as chief executive officer in December 1999, but remained chair. He returned as CEO in January 2001.)

"We made some conscious decisions not to go after every potential customer who wanted a PC," he says, referring to the company's focus on higher-margin system bundles. "In the fourth quarter, we focused on flat-panel systems, broadband--stuff that's not geared toward $599 PC customers."

As a result, Gateway lost some market share but posted a profit by year-end. The company exited 2001 with $1.2 billion in cash and marketable securities, and no debt, he says. Gateway is counting on those reserves to enable it to capture more customers by cutting PC prices, he says.

Buy With Confidence

In the end, Kay says, the average consumers shouldn't let fears about Gateway's profitability stop them from buying its PCs. In the highly unlikely event the company were to fail, it wouldn't leave customers hanging, he says.

While the collapse of direct-PC companies Quantex and Cybermax in 2000 left many customers in the lurch, Kay says Gateway customers wouldn't face the same dilemma. The company has weathered many ups and downs since its founding in 1985. "Somebody would inherit the warranties--it's really not a concern," he says.