Gateway attempts to outflank PC rivals
New products take spotlight
By BOB KEEFE
The Atlanta Journal-Constitution
SAN DIEGO -- Gateway Inc. hasn't led its competitors in much of anything for a very long time. But as the computer industry pushes into the broader business of consumer electronics, Gateway may be ahead of the pack for a change.
On Tuesday, Gateway introduced 14 products, from a budget-minded MP3 music player to a DVD recorder and two flat-screen televisions, in a move that solidifies its transformation from a PC maker to a marketer of gadgets and home electronics.
Since May, the company has introduced almost 100 new products, a wider array of consumer electronics offerings than any other domestic PC maker.
"We're about 90 percent done with what we needed to get done," Gateway Chairman Ted Waitt said in a telephone interview after announcing the new products. "Now it's time to execute."
There's little doubt that Gateway needs to do something different.
The company, which helped usher in the consumer PC business when Waitt co-founded it in an Iowa farmhouse in 1985, has fallen from being a leader in the industry to an also-ran.
Based in the San Diego suburb of Poway, Gateway has lost money in 11 of its last 12 quarters. Its stock price has dropped from about $80 a share four years ago to $4.58 on Tuesday. Since 2000, it has laid off or plans to lay off more than 18,000 workers.
Once the biggest seller of PCs by some measures, it now has only about 3 percent of the U.S. market. In the third quarter, when PC sales surged worldwide, Gateway was one of the few companies that saw its sales dip.
After watching other strategies flop, Gateway is now counting in a big way on the consumer electronics business.
The next two months will be critical. Traditionally, 40 percent of all sales of products like digital cameras, high-end televisions and DVD players come during the holiday shopping season, according to Scott Edwards, whom Waitt hired away from Sony Corp. this year to run Gateway's consumer business.
"We're hoping to see a big impact" in the fourth quarter, Edwards said.
For Gateway and other PC makers stuck in a maturing market, diversifying into consumer electronics is a strategy that seems to make sense.
Compared with the PC industry, the consumer electronics business is growing fast. Moreover, profit margins on some of those goods are 15 percent to 20 percent, compared with 4 percent or less for low-end computers.
"All these products have higher margins than PCs, and all are in growth categories," Waitt said. "And these are all markets on the rise, rather than the PC business, which is acting more like a mature market these days."
Of course, that's why other major computer makers -- namely Dell Inc. and Hewlett-Packard Co. -- also are jumping into the consumer electronics business. Dell recently announced it is selling its own LCD television, MP3 player and other goods.
Waitt, of course, knows firsthand how Dell can hammer his business.
While Dell and Gateway pioneered the direct-to-the-customer business model in their early days, Dell refined it to a science, leaving Gateway and most others in its dust.
"We've learned a lot from the past," Waitt said.
Gateway plans to do two things differently this time, he said.
First, it will push for innovation in design -- something that Dell and the PC business as a whole isn't known for.
Second, it will rely on its network of stores, which Dell -- while it has kiosks in malls -- doesn't have.
"Ninety-four percent of consumer electronics are bought at retail stores," Waitt said. "That's a pretty big piece of the business.
"Dell's a great competitor ... and a fast follower," he said. "But we're going to push the envelope on innovation, and we're going to offer more."
All the computer makers, meanwhile, also face stiff competition from traditional electronics retailers such as Best Buy, Fry's and others that have been in the game much longer.
The advantage PC makers have over traditional retailers is that many of the gadgets -- digital cameras or portable music players, for instance -- are dependent on the PC.
"They [Gateway and other computer companies] can all make various cases that they have something more -- specific knowledge, more customer care, suites of products that are designed to work together," International Data Corp. analyst Roger Kay said. "It's not everything, but it is a differentiating value."
Gateway may also have a significant advantage because of its head start, said Jennifer Gerlach, an analyst with technology research firm ARS Inc.
"Dell at the moment is a little behind the mark," she said. "And Gateway is ahead of the game in this round."
One of the areas where Gateway is already seeing the advantage of being ahead of its competitors is in the business of plasma TVs, where this year it became the sales leader. It also is moving toward the front of the pack in sales of digital cameras and home networking equipment.
"It feels good to walk into our stores," Waitt said. "It's the best product line we've ever had in the history of our company."
