San Diego Magazine / November 2003 / The Gateway Gamble

 Email  Print  Feed

The Gateway Gamble

Once upon a time, there was an Iowa farm boy who tossed away his pitchfork for a motherboard and began building computers to order for the clamoring throngs in the big cities. Gateway Incorporated was born.

The company became known for its folksy TV commercials featuring the pony-tailed CEO sitting in a stable, where he gets business advice from a bovine. Ted Waitt, the cow whisperer. “Personal computers will take you off the farm and into a big Southern California city, where winters will be warm and life will be good,” Holly the Holstein said.

And so it was. The company blossomed—but so did the competition. Upstart Dell Computer Corporation refined the direct sales model and horned its way to the head of the herd as technological innovation and price wars combined to make PCs cheaper than ever before. Meanwhile, the market shrank, and those rosy projections of PC sales growing beyond mathematical probability were erased with a disgusted stab at the delete key.

By late 2000, Gateway was, as they say down on the farm, knee-deep in cowpats. The company stunned Wall Street, announcing that fourth-quarter revenue would be $500 million short of expectations. The stock went into a tailspin, falling 39 percent in one day to a new 52-week low of $17.49. The stock had traded as high as $81.50 the year before.

Jumping on the Internet bandwagon, the company forged a deal with America Online to hawk the Touch Pad Internet appliance. The limited-function device, along with an MP3 audio player, was part of Gateway’s “connected home” concept. But it never connected with consumers.

By early 2001, Draconian measures were necessary to cut costs and stem the flow of red ink. More than 2,000 employees were let go, and Waitt, who had turned the company over to his hired hands, took the reins again—but in the unfamiliar role of corporate slasher. Jeff Weitzen, CEO for barely a year, was gone as the company lurched toward a half-billion-dollar loss for the quarter.

But things got worse. Gateway lost $1.03 billion in 2001, and another $309 million last year. This year won’t be much better, as it extends its string of quarterly losses. The company has reorganized a total of four times in less than four years, paring its 24,000-strong workforce to fewer than 8,000, closing a third of its Country Store retail operations and pulling out of international markets.

The latest ax fell in September when manufacturing facilities in Virginia and South Dakota were shuttered and computer assembly was outsourced overseas. At press time, there was the possibility of layoffs at corporate HQ in Poway, which has a staff of about 600. (San Diego Magazine was assured, however, the company is not leaving town.)

The surprise was that the latest round of “right-sizing” didn’t come sooner, says Rob Enderle, principal analyst of Santa Clara–based Enderle Group, a personal technology consulting firm. “They took longer than they probably should have,” he says. “Most of the other vendors have outsourced and shipped most of their manufacturing capacity offshore to lower costs and increase margins.”

Founded in 1985, Gateway had been ranked as the number-three computer maker but was edged out by IBM earlier this year. Dell remains king of the PC hill with $35 billion in annual sales, followed by Hewlett-Packard, which swallowed Compaq Computer Corporation in 2001.

Something had to change as Gateway stock flattened and the company became worth more at the butcher shop than running with the bulls on Wall Street. The cow was sent out to pasture when horse sense suggested consumer electronics. That’s where the growth is, Waitt figured, deciding to break from the herd mentality. It was either “Broaden your vision beyond the PC barnyard, or call the glue factory.”

And with the zeal of a recent convert, Waitt is transforming Gateway into a consumer electronics company that, by the way, also sells computers. Late last year, the company introduced a line of plasma-screen TVs that significantly undercut competitors’ prices. They were an instant hit. That toe-in-the-water beginning was the first step in a series of new-product announcements as the company becomes a “branded integrator of technology solutions.”

The born-again firm is on track toward its stated goal of introducing 15 Gateway-brand consumer electronics products by Christmas. Those we’ve seen so far include a line of digital cameras (still and video), MP3 players, and a DVD player that connects with a personal computer either wirelessly or by ethernet to play streaming video or slide shows on that wall-mounted plasma TV screen. Non-PC revenue made up 28 percent of Gateway’s second-quarter 2003 sales, up from 24 percent in the first quarter. Next year, the goal for non-PC revenue is 32 percent, and 40 percent in 2005.

Mind you, the company is still selling computers, including a $399 entry-level box, as well as a broad line of laptops and notebooks and servers for home and small-office networks.

The Country Stores are also becoming a thing of the past. Gone are the silos and farm implements, replaced by home furniture to create an airy, hearth-centric, living-room setting dominated by a big-screen TV. The Mission Valley location is one of five pilot stores showcasing the redesign. And the cow is back—with wings.

Maverick Waitt is hopping the fence in search of a greener pasture. But can he outrun Hewlett-Packard and Dell, which has, significantly, dropped “computer” from its name? Both companies are moving into the high-end TV and consumer electronics business as the concept of the networked home takes hold.

Gary Sutton, a former CEO, corporate turnaround specialist and another La Jolla–based Iowa transplant, is not convinced. “Gateway’s move into plasma screens proves their skill at finding profitless growth businesses,” says Sutton, author of Corporate Canaries: Avoid Business Disasters with a Coalminer’s Secrets, slated for publication next year. “Their move into consumer electronics puts them at the mercy of retailers and in slow-growing markets to a level they’ve never experienced,” he adds.

T. Scott Edwards, executive vice president of Gateway’s consumer business group, respectfully disagrees. He argues that by entering the $100 billion consumer electronics arena, Gateway has latched on to a sustainable growth model.

“Longer term,” Edwards says, “it provides us with another beachhead in the American household by which we can start bringing in technology, and over time these technologies will start converging with each other.”

Gateway’s advantage is its direct-to-consumer model that eliminates the costly middleman, says Edwards, who used to work for Sony. Dell also sells direct, but only by phone and via the Internet. Gateway is confident its retail showrooms are critical to selling consumer electronics.

The company has three things going for it that make the transformation successful, Edwards explains. “Number one, we have a better strategy,” he says. “Number two, we have a much stronger senior management team that bring world-class competencies in the these diverse areas. And number three, we have this guy called Ted Waitt and a corporate culture that believes someone has to stand up for Main Street America and what they need from technology.”

Gateway is not only transforming itself, it’s on a crusade. Gateway is going to save us from the technology bullies. The strategy is to offer consumers what they want, not gadgets so loaded down with geeky buttons, bells and whistles that only rocket scientists can use them.

“Main Street America doesn’t want all those features, because they don’t know how to use them, and even if they did know how to use them, they didn’t really want them anyway,” Edwards contends. “The more we can strip out some of those features people don’t care about, the more it helps us bring cost-competitive products to the market.”

The financial jury is still out, but so far, investors like what they see. The stock has more than tripled in value since bottoming out at $2 a share in February, and at press time it was closing in on the $7 mark.

If nothing else, any of those 12,000 or so laid-off workers who own Gateway stock will have one thing to smile about while they’re standing in line at the employment office.