OT Gateway gambles on a new strategy
Posted on Mon, Dec. 02, 2002
By Sam Diaz
Mercury News
For the better part of 2002, the tech industry has been giving Gateway a beating -- and for good reason.
While the PC maker's primary competitors -- Hewlett-Packard, Compaq and Dell -- spent the year taking large strides to revamp themselves during the economic downturn, Gateway took baby steps.
As HP and Compaq finalized details of their merger, Gateway tried to attract interest in its redesigned PC line. While Dell courted overseas customers, Gateway tried to convince American consumers to buy into broadband and home networking services.
And while Dell and the new HP pitched their servers and services to the corporate world, Gateway was closing under-performing retail stores and laying off thousands of workers.
It was a business plan that analysts called unsustainable, at best, and many wondered when the Poway company would drive the last nail into its own coffin.
But then Gateway launched its latest business strategy, a plan that involves a new focus for its retail stores, a new logo and a move into other electronic products that not only carry the logo but also undercut competitors' prices.
``This is a transformation as a company and I don't use the word `transformation' loosely,'' said John Heubusch, Gateway's senior vice president of strategy and planning. ``I think what the company is undergoing is a radical transformation of what it sells, how it sells and who it sells to.''
Gateway had to do something. The company was founded in Iowa as a PC maker in 1985 and was losing with its main product. PC sales fell 19 percent in the third quarter compared with last year. Likewise, sales were down 18 percent and 30 percent during the second and first quarters of 2002 compared with 2001.
Revenue shrank 37 percent to $6.1 billion in 2001 compared with $9.6 billion in 2000. Gateway has reported losses of $229 million for the first three quarters this year.
Gateway hopes the fourth quarter fares differently as sales of other tech products get folded into the mix.
In October, Gateway placed some 150 consumer electronic products, from MP3 players and handheld computers to digital cameras and digital camcorders, on the shelves of Gateway Country stores across the country, a scenario similar to what Apple Computer is doing in its stores.
New logo, new line
Around the same time, it switched its longtime cow-spot logo to a variation of the letter ``G'' with more of a high-tech feel to it, Heubusch said. Gateway's new logo is the symbol for a computer power button turned on its side, according to its Web site.
The logo was released recently when Gateway followed the lead of Dell, which recently put its name on a printer and handheld computer, by announcing its first branded product outside of the personal computer line: a 42-inch plasma television that sells for $3,000 -- about half the price of other plasma TVs on retail shelves.
But some fine print comes with this TV. For now, the set is not a high-definition set but is capable -- like many other plasma TVs -- of showing high-definition programs with an added converter box, which usually runs less than $500.
Not being a high-definition TV could be a big deal, said Phillip Swann, president of TVPredictions.com in Santa Monica. Consumers willing to drop thousands of dollars on a plasma screen are probably savvy about high-definition programming, he said.
``If somebody is looking to spend that kind of money and if you can't get HDTV with it, there's going to be a lot of explaining to do in that living room when it comes home,'' Swann said.
But already, prices of plasma TVs have come down -- perhaps in response to Gateway or maybe as a potential boost to the holiday shopping season.
Attention this season is directed toward MP3 players, digital cameras and digital camcorders.
Gateway is hoping that the relatively low TV price will bring customers into the stores. Once they're in, consumers are bound to be impressed with the showcased products, live demonstrations and knowledge of the sales staff, Heubusch said.
``The sales process at the big-box stores is a kid in the PC department who is there to sell, sell, sell,'' Heubusch said.
Customers want guidance, he said.
Heubusch said Gateway's research found that more than 90 percent of the digital camcorders sold today are used much like analog camcorders were -- folks shoot and store video on the tapes and never do anything more with them.
``They have no notion of how to use the PC to make movies and lay music over that video,'' he said. ``What's the purpose of buying a digital camcorder if you don't use it for what it can do?''
Sales staff is key
Gateway, much like Apple, is trying to show consumers how these products work with the computer. But will consumers bite?
Andy Neff, an analyst with Bear Stearns in New York, said it's tough to think of any one company that has been successful with its own retail store.
But Tim Bajarin, president of Silicon Valley tech research firm Creative Strategies, is optimistic that the Gateway store -- carrying the cachet of a well-known brand name -- will attract foot traffic much like Apple stores have, especially in parts of the country where folks are still being wowed by the innovations of consumer technology.
``Technology is not simple to sell,'' Bajarin said. ``The more knowledgeable the salespeople, the better.''
Going head to head with the likes of Dell, Apple and the big-name retail chains could be a challenge for Gateway, though Heubusch counters by saying, ``We've only been at it for a month or so. Give us six months. You'll see.''
Still, he understands the skepticism.
``Wall Street's concerns about our cost structures are well taken,'' Heubusch said. ``But we have a difference of opinion with Wall Street. They think our costs should be attacked by closing stores. We think of the stores as being a salvation.''
Bajarin isn't selling Gateway short. He's seen the company fall and rise again too many times.
``Gateway is one of those companies that seems to have 900 lives,'' he said. ``Every time you think they're about to go under, they resurrect themselves. It's fascinating to see the reinvention of Gateway on an annual basis. If there's one thing I've learned it's that you can't count them out.''
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