Inc Gateway - Move To The Internet

In 1996, Gateway was spending roughly $90 million on advertising annually to continue bolstering its name recognition. By then, the firm had become the world's tenth-largest computer company with earnings of $250 million on sales of $5 billion. It was second only to Dell Computer Corp. among direct sellers of PCs. According to a March 1997 issue of Success, the firm achieved that success because Waitt had made "a number of critical calls that put Gateway ahead of its industry. In 1988 it was the first to make EGA color monitors standard on all its systems. In 1990 it was the first to make Windows standard on all systems. In 1994, before anyone else, it made the Pentium chip standard. That same year Gateway was first to make CD-ROM drives standard on all its systems. And in July 1996 it became the first computer maker to allow customers to custom-order and pay for a new computer over the World Wide Web." Clients could order customized PCs via the firm's World Wide Web site using a process similar to the one used by clients who placed telephone orders, which were typically filled in less than five days. Initially, some of the site's visitors would simply check prices and compare models before calling Gateway to formally place an order. Eventually, however, Web surfers became more comfortable with the idea of actually making the purchase online. Internet sales grew from $300 million to $700 million in 1997, as total annual revenues climbed to $6.3 billion.

The firm also began targeting business markets that year by launching its E-Series line of PCs for larger corporations. Designed to serve networked environments, each of the PCs offered in the E-Series line included Ethernet networking capabilities. To gain access to the server technology it needed to serve the networking needs of large enterprises, Gateway paid roughly $194 million in stock for Advanced Logic Research. The firm also diversified into Internet access with the launch of gateway.net, a service it developed in conjunction with UUNet Technologies, the predecessor to WorldCom. For a flat fee of $12.95 per month, purchasers of new Gateway PCs were able to use gateway.net software, which came bundled with the PC, to surf the Internet for up to 30 hours. These new activities reflected the firm's recognition that it needed to reduce its reliance on the PC market, which was nearing saturation. Price cuts by rivals like Dell and Compaq Computer Corp. forced Gateway to lower its prices by 12 percent.

With the millennium approaching, Gateway 2000 Inc. shortened its name to Gateway, Inc. in 1998. By mid-year, roughly 58 Country Stores spanning 26 states were in operation. A new pricing option, dubbed "Your:)Ware," allowed customers to pay a monthly fee for a PC, Internet access, and other options, as well as a guarantee that Gateway would repurchase the machine when a client was ready to upgrade to a newer model. Falling PC prices continued to hammer away at the firm's bottom line, prompting its relocation to San Diego, California, where it could access a larger pool of technological and managerial talent. In a major overhaul of operations, Waitt replaced 10 of 15 top executives.

In 1999, to attract new customers, Gateway began offering one year of free Internet access, with a limit of 150 hours per month, to those who purchased a Gateway machine costing more than $1,000. The firm also extended its e-commerce operations via an alliance with NECX Office and Personal Technology Center, one of the largest computer products etailers. According to the terms of the agreement, NECX and Gateway jointly operated SpotShop.com, which offered Gateway merchandise as well as peripheral equipment and software from other computer industry leaders. A deal with Yahoo! allowed gate-way.net users to customize their home pages via a new Gateway My Yahoo! application that operated as a news and shopping portal. In October, America Online (AOL) invested $800 million in Gateway to operate Gateway.net, the company's Internet service provider (ISP), which boasted 600,000 subscribers. Despite these efforts to diversify, PCs continued to account for 85 percent of earnings. However, Gateway made successful inroads into the corporate, education, and government sectors, as nearly half of total sales in 1999 came from these non-consumer markets. By year's end, 200 Country Stores were operating in the U.S., and Waitt had been succeeded as CEO by Gateway president Jeff Weitzen. Together, in the months prior to Waitt's resignation, Weitzen and Waitt reshuffled Gateway's increasingly diverse operations into six segments: systems, software and peripherals, service and training, Internet access, portals and content, and financing. Waitt remained chairman and charged Weitzen with the task of developing Gateway's peripheral, or "beyond-the-box," efforts.

Falling prices and near saturation in the PC industry forced Gateway to begin selling its PCs via traditional retail outlets in 2000. For example, the OfficeMax chain began carrying Gateway products that year. In an effort to cut costs, Gateway reached an agreement with rivals Compaq Computer Corp. and Hewlett-Packard Co. to create an independent Internet-based procurement operation for PC parts and supplies; each firm contributed $5 million to the new venture. Profits that year tumbled 26 percent to $316 million on revenues of roughly $10 billion; sales growth was just seven percent, compared to an average of 20 percent over the previous five years.

Unhappy with the company's performance, Waitt resumed his role as CEO, ousting Weitzen in January of 2001. In an effort to return Gateway to its core PC business, Waitt fired six of eight top executives and rehired several executives who had resigned during Weitzen's short tenure. He also closed 27 Country Stores and laid off 3,000 workers. While the firm continued to develop "beyond-the-box" products and services, PC sales once again became Gate-way's key focus. Competition intensified when rival Dell Computer slashed its prices by roughly 20 percent, forcing Gateway to once again reduce its prices. Losses in the first half of the year reached $523.7 million on sales of $3.5 billion. Believing drastic action was in order, Waitt slashed Gateway's staff by one-fourth in September 2001, releasing 2,200 international workers and 2,500 domestic employees. The cuts, estimated to save $300 annually, were an effort to offset the negative effects of the firm's lowered prices. However, Gateway also shuttered several international operations, which reduced revenues another 14 percent. After reducing its size, Gateway also began to look to its Country Stores, which offered services like online bill payment and small business technical support, as potential growth areas.