The Cow in Winter
No one said the big time was easy. How Gateway, a onetime tech star, became a former FORTUNE 500 company.
(FORTUNE Magazine) – IT'S IMPOSSIBLE TO SAY for sure when things went haywire for Gateway. But it's a safe bet that the PC maker's long, slow slide began sometime during its meandering journey through an endless series of business plans. The company started with a good one: Like Michael Dell, Gateway founder Ted Waitt realized that PCs were becoming a commodity business, so he focused on delivering products at a lower price than his rivals. Back in 1991, FORTUNE went out to North Sioux City, S.D., to get a close look at the PC maker and its then new business model: selling computers directly to customers. "Its fast ascent," FORTUNE wrote, "shows how the rules of management and marketing change as an industry matures."
A few years after that article appeared, the mission creep began. First there were the Gateway Country Stores, which opened in 1996. Then the company pushed Internet access (1998), relocated headquarters to California (same year), sold branded consumer electronics devices (2002), and merged with another PC company called eMachines in 2004. A Slate.com columnist once suggested that Gateway had dallied with more models than Donald Trump; Morgan Stanley analyst Rebecca Runkle says, "I've been following the company since 2000, and it's had almost as many strategies as years."
Today, Gateway is still the No. 3 PC maker in the U.S., after Dell and Hewlett-Packard, and it sells more computers in this country than Apple. (For more on HP, see "The Hurd Way," on page 92.) But Gateway is a shadow of its former self. In 2005, the first year the company has shown a profit since 2000, it earned $6.2 million on $3.9 billion in revenue--a margin of 0.2%--and lost its place on the FORTUNE 500, where it had been for over a decade. (It debuted in 1992 at No. 331, peaked at 194 in 2000, and by 2004 was down to 495.) Last year the average selling price of a PC from one of the top ten American makers was $1,280, compared with just $730 for a Gateway machine, according to IDC. The company's stock has been trading below $3 per share--about half what it was early last year and less than a fifth of its price in March 2001. Gateway now leases out parts of its space in North Sioux, although the two-story buildings are still painted in the black-and-white cow pattern of the company's glory days.
So what happened? "We took a simple business and made it more complex than it needed to be," says interim CEO Rick Snyder, in an interview at the North Sioux facility. Not that Gateway's descent into needless complexity was always obvious. Throughout the 1990s, Gateway grabbed market share with friendly service and funny ads, like the "Prince of Thieves" spoof that showed Waitt and his staff as Robin Hood and the Merry Men. And the brand had many loyalists: "Gateway was the PC-world equivalent of Apple," Snyder says. "Here you have a different choice, you're going to get taken care of better than anyone else, and you're going to get some excitement." But that bond with customers was never as strong as Apple's.
Meanwhile, all the running around, chasing after business models took a huge toll on results. When Jeff Weitzen succeeded Waitt as CEO in 2000, says Charles Wolf, a technology analyst with Needham & Co., "execution just went to hell." Waitt came back for three chaotic years; then eMachines CEO Wayne Inouye took over when the companies merged. After almost two years of lackluster results, Inouye resigned. Snyder, who was Waitt's No. 2 from 1991 to 1997 and has been on the board since then, took the helm in February. (Snyder, who also runs Ardesta, a Michigan venture capital firm, declined to seek the CEO job permanently, but he'll run the company through the summer and remain chairman after that. Waitt was unavailable for comment.)
To turn things around, Snyder wants to take Gateway back to its core values--being a fun place to work for employees and a "friend and trusted guide" to consumers--and increase direct sales as well as land some nice, juicy, high-margin business accounts. Gateway never did develop the corporate sales muscle of Dell or HP, and the task isn't any easier now. "If a company isn't profitable, there isn't a large corporation or government organization that's going to buy from them, because who knows if they're going to be around?" says Rob Enderle, principal analyst for the Enderle Group. Thanks to Inouye's cost cutting, Gateway recently closed some major public-sector deals--with the Department of the Interior, the U.S. Navy and Air Force, and the states of New York and California.
Snyder believes Gateway can boost direct sales by focusing on the high-end and midrange systems that appeal to power users and other committed dweebs. The company has a hit with its $600 21-inch widescreen LCD monitor and is introducing a new, ultra-light laptop with a clean Apple-ish design.
If the new machine is a hit and Snyder and his crew come up with more, Gateway might even regain its well-deserved reputation for innovation: It made one of the earliest media-center-style computers, called Destination; opened a chain of stores before Apple; and introduced a line of flat-screen televisions before Dell. But while Waitt, the ponytailed visionary, was looking toward the future, boring old Michael Dell was obsessing over efficiency, thinking about how quickly a PC could be assembled rather than how fast it ran. As it turned out, execution was everything.
With the kind of discipline Inouye imposed--and the kind of marketing Gateway used to be known for--Snyder says there's no reason the company can't keep surviving the PC price wars. "I'm not sure there are a whole lot of fundamentals that have changed in the PC business," he says. "This has always been a dog-eat-dog business. How big the dogs are and how badly they bite others have varied, but the dogs have been there forever."
That's undoubtedly true. Whether one of those dogs is named Gateway is another matter. This company has to be tasty takeover bait for a bigger player looking to make inroads in the U.S.--perhaps Lenovo or Acer (whose CEO recently denied rumors that he was interested in a merger). "If you think about the consumer market in the U.S.," Wolf says, "I don't know how they survive alone."
REPORTER ASSOCIATE Jia Lynn Yang contributed to this article.