COMPUTERS Gateway is fighting to stay alive

Gateway is seeking to revive sales and reinvent itself.
LOS ANGELES TIMES
TOLEDO -- Ray Stanton is a perfect customer for Gateway.
When he started looking for a computer for his 81-year-old mother recently, he didn't expect to buy one. But after visiting the Gateway store here, he walked out with his mom's first PC -- a $1,500 system with a flat-panel screen and a combination printer and scanner.
"The staff was very courteous and extremely knowledgeable -- more than at the fast-moving, off-the-shelf retailers," Stanton said.
Gateway, based in the San Diego suburb of Poway, Calif., needs a lot more customers like Stanton. And it needs them fast.
The company's revenue has plummeted from $9.6 billion in 2000 to an estimated $4.4 billion in 2002.
With Gateway's share of the cutthroat PC market slipping uncontrollably, some analysts are predicting the company's eventual demise, despite the $1 billion to $1.2 billion in cash it currently has on hand.
"Gateway is probably more valuable dead than alive," said Los Angeles technology consultant Martin Pichinson.
Deals and more deals
Hoping to generate more business, Gateway has been selling a no-frills computer for as little as $399. In December, the company went one step further: It offered the low-end model for free to anyone who purchased a high-end $3,500 desktop or a $2,400 laptop.
To some, such a promotion seemed more appropriate for a fast-food chain -- buy one burger, get another at no charge -- than a purveyor of technology.
"It sounds like you have a very desperate company," said Pichinson, founder of Sherwood Partners, a tech-sector crisis-management and debt-restructuring company.
Still, Gateway's strategy involves more than giveaways and price cuts. The company is trying to reinvent itself by branching out beyond computers and such traditional peripherals as printers.
Its foray into higher-margin digital equipment and "beyond-the-box" home entertainment could breathe new life into the company.
Gateway's 272 stores and Web site now carry consumer electronics items such as digital cameras, MP3 music players, video cameras and an enormous 42-inch plasma television that can hang on a wall.
Indeed, Gateway's problem isn't its merchandise, analysts say. People like the products and rave about the customer service. The company's brand value is on par with industry leader Dell Computer Corp., according to independent research studies.
Stanton dropped by the Gateway store because he trusts the name, even though he uses a Dell PC. Once inside the store, it took him all of 20 minutes to make his purchase. "It was nice to get in and out quickly," Stanton said.
Here's the problem
Despite this level of customer satisfaction, Gateway is taking a beating in a world of slowing consumer demand for PCs and relentless price competition.
Its U.S. market share dropped to 6.1 percent in the third quarter of fiscal 2002 from 7.5 percent during the same period in 2001, according to market researcher Gartner Dataquest. Over the same period, Dell's share grew robustly, to 28.9 percent from 25 percent.
Gateway has taken a beating on the stock market, as well.
"Gateway is not a stock that I would own at any price at this point," said Joseph Beaulieu, an analyst with equity research firm Morningstar Inc. and an owner of a Gateway computer.
"They're losing money, and they have no viable business plan to turn things around."
This kind of talk is tough for Gateway -- the kind of company that many people are inclined to root for.
Chief Executive Ted Waitt, 39, started the company 17 years ago in an Iowa farmhouse with a rented computer and a $10,000 loan guaranteed by his grandmother.
Like Michael Dell, Waitt was an entrepreneur with a vision of low-cost supply emphasizing value and customer loyalty. Sales quickly ballooned.
Gateway has maintained a down-home, folksy feel. Until recently, its shipping boxes were white with large black spots reminiscent of a cow.
Ads stressed customer service and its knowledgeable, friendly staff members who are available to demystify the often-intimidating beige box that houses a PC.
But costs soared, especially with regard to its stores, as the competition became more ruthless.
Steps taken
In 2001, Waitt returned to the company he had left in 1999, and he moved its headquarters to Southern California from South Dakota. He also cut Gateway's work force by 10 percent, shut down its Internet service and began closing more than 50 stores nationwide.
Still, that hasn't been enough.
"It appears Gateway's aggressive pricing strategy is not working," said technology analyst Joel Wagonfeld of Banc of America Securities.
"Either Gateway's expectations for the quarter were far too optimistic, or the company is losing share, both of which do not augur well for the stock."