Will Ted Waitt Be Gateway's White Knight- Again?

by Toni Duboise
Senior Analyst, Desktop PCs

Following Gateway's calamitous Q4 results, the company's founder Ted Waitt reclaimed the helm as chief executive officer. Since Waitt's departure a year ago, the company was commanded by Jeff Weitzen and continued to show growth until the most recent quarter when the entire PC market was hit by a sudden slump in US consumer demand. Relying on the US consumer market as its primary focus, Gateway suffered more than its rivals registering an 80,000 decline in Q4 shipments compared to a year ago. This translated to a dismal $94.3 million loss in revenue and a decline in US market share (9.3% in 4Q99 compared to 8.1% in 4Q00). While a slowdown in consumer sales was perhaps tolerable due to the overall market situation, declining market share was apparently too much for Waitt to bear and the likely cause for Weitzen's unceremonious departure.

Gateway was certainly not alone in underestimating the warning signs of slowing economic conditions and failing to foresee the shortfalls of the past season. Yet, a key flaw in Gateway's implementation exists in its lack of providing a more aggressive pricing structure in a field where "price is king"- a result of ramped up competition in the PC space. Shortly after taking over the reins of the company, Waitt himself indicated Gateway's lack of competitive pricing as a reason for the company's problems.

Gateway, a company that prides itself on being in touch with its customers, seriously lost touch with regard to pricing. One needs only compare Gateway with its direct PC rival, Dell. A base model comparison of Gateway's Essential 700 and Dell's Dimension L series, both equipped with Intel's 700MHz processor, 64MB RAM, 10MB hard drive, 48x CD-ROM, 56k modem and 15" monitor, illustrates that Dell on top by as much as 12% with prices registering at $799 for the Essential PC and $709 for the Dimension.

The disparity broadens when Gateway's high-end Professional s is compared with Dell's equivalent Dimension 8100. When both models are configured with Intel's 1.4GHz Pentium 4, 128MB RAM, 32MB VRAM, 48x CD-ROM and 56k modem with no monitor option, the Professional is priced at $1,819 in contrast to the Dimension's $1,599 price tag. The only real difference between these two models is that the Professional model is equipped with a 45GB hard drive versus a 40GB hard drive for the Dimension. The additional 5GB of storage space, however, hardly accounts for the $220 price difference, which equates to another 12% competitive advantage for Dell.

Dell's 12% competitive edge is huge, especially in a time of escalated opposition. Such an edge clearly establishes that Dell is benefiting from its direct model strategy, allowing for the best price per performance through aggressive and timely component pricing. Gateway has the same crucial advantages in its direct model; however, they are not effectively implementing the same strategies.

It is no secret that the primary catalyst in the current PC battlefield is the slowing demand in US markets, an area where PC manufacturers reaped most of their glory in the historical "golden PC age". Though the PCs' golden age of 20+ percent growth rates is now a passé chapter, it does not equate to the demise of the PC. The PC has successfully integrated itself into our daily lives both at home and at work. Let's face it though: beyond economic factors, the PC is reaching a level of saturation in US markets, and without renewed technological advances to spur PC sales, the market is in a state of decline. The current reality is that the PC is in a period of heightened competition and ruthless price wars, requiring that manufacturers pay extremely close attention to the competition as an essential survival tactic.

In his press conference held early Tuesday morning, Ted Waitt, armed with a new management team, declared aggressive price restructuring as one of the top priorities in the company's planned return to profitability. Thus, we should be prepared to see a new Gateway, focused on aggressive pricing, rising out of Waitt's restructuring plan. While pricing may not be the sole savior for Gateway, as initiatives such as "beyond the bo"X continue to bring increased margins for the PC maker, it may allow Gateway to stem the tide of losses which resulted in the recent decline in the company's market share. Although closing the price/performance gap with Dell will be tough, it is a necessary step that should bring Gateway back in touch with its grass roots: a company intimately involved with each and every customer.

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