Gateway 2000, Inc.

610 Gateway Drive
North Sioux City, South Dakota 57049
U.S.A.
(605) 232-2000
Fax: (605) 232-2023

Public Company
Incorporated: 1985 as TIPC Network
Employees: 3,800
Sales: $1.7 billion
Stock Exchanges: New York
SICs: 3571 Electronic Computers; 5961 Catalogue and Mail Order Houses; 7371 Computer Programming Services

Gateway 2000, Inc., is the leading American seller of personal computers by mail. Started in the mid-1980s in a small Iowa town, the company grew by keeping its own costs at a rock-bottom level and undercutting its competitors on price. As its sales skyrocketed in the early 1990s, Gateway began to experience growing pains, as customers complained about low quality and poor service. The company moved to address these concerns while attempting to expand its market to include corporate buyers and European customers.

Gateway was founded in 1985 by Ted Waitt, who had attended two different colleges before returning to his family’s cattle farm in Sioux City, Iowa. After spending nine months working at a computer store in Des Moines, Waitt felt that he had learned enough about the business of selling computers to allow him to carve out his own market niche.

Waitt noticed that computers tended to be either inexpensive models with extremely limited capabilities or top-of-the-line models with capabilities that few people would ever need. He decided that a middle path made more sense, and devised a “value equation,” which stipulated that extra technology should not be added to a computer unless it provided extra value to a customer.

In addition, Waitt observed in his retail job that computers could be sold over the phone by an educated salesperson. This led to the idea that overhead could be virtually eliminated. Because he had no money to invest in his new business, Waitt took over some empty space in a farmhouse that his father’s shrinking cattle brokerage business had left empty, and moved in upstairs. Joining him in the business was Mike Hammond, the salesman who had trained him at his computer store job.

In September 1985, the two started up a mail order business that they called the TIPC Network. Waitt was 22 years old. Placing advertisements in computer magazines, TIPC sold peripheral hardware and software to people who owned Texas Instrument computers. Because these computers did not conform to the IBM-compatible standard, some considered them obsolete, and many computer stores did not offer additional features for the machines once they had been sold.

Waitt charged each of his customers a $20 membership fee, which gave him start-up capital. Because his costs were so low, he and Hammond could undercut competitors’ prices, and within four months, the fledgling business had racked up $100,000 in sales. Six months after they started, Waitt’s brother, Norman Waitt, Jr., bought half of the company and began to offer financial advice.

Waitt’s goal in starting the company had not been to sell computer accessories, but to sell computers themselves. In 1986 TIPC Network experimented with assembling its own computers, and even sold them to local customers. Nevertheless, these made only a small contribution to the company’s first-year revenues of nearly $1 million.

In mid-1987, however, TIPC was given an opportunity to break into the computer field when Texas Instruments inaugurated a program to let its buyers trade in their old machines for new, IBM-compatible units at a price of $3,500. Waitt and his partners decided that they could offer a similar IBM-compatible machine, put together from parts offered by other mail order dealers, for less than half as much. Employing Waitt’s value equation, and his sense of what customers would be willing to pay for, the company created a machine with two floppy disk drives of different sizes, a color monitor, a large memory, and a keyboard with function keys, and a cursor keypad for $1,995. TIPC’s competitors offered far fewer features for a similar price.

With the introduction of this computer, TIPC’s sales took off. In 1987 the company had revenues of $1.5 million. In the following year, TIPC changed its named to Gateway 2000, and the company’s sales exploded, hitting $12 million.

In expanding its product line beyond its initial Texas Instrument computer trade-in offer, Gateway eschewed research and development and a staff of designers. Instead, the company relied on Waitt’s own sense of what customers would want. “We didn’t do a whole lot of market research on it,” Waitt told Inc. magazine. “A lot of it was instinctive.” Hammond elaborated further: ’The first question would always be, ’would I buy it,’ “he told Inc. “Everyone wants smaller, faster, cheaper, so it’s a fairly educated guess.”

Gateway’s clientele of sophisticated users did not make high demands for service or back-up support and shopped on the basis of price. Accordingly, despite its rapidly increasing sales, Gateway was not forced to increase its overhead, and the company was able to keep its prices low. With its growth in sales, the company moved from the Waitt family farmhouse to a 5,000-square-foot space in Sioux City’s 100-year-old Livestock Exchange building (which had piles of cow manure standing in the halls), paying $350 a month in rent. Gateway’s offices were furnished with used furniture.

Because of Gateway’s rural Midwestern location, Waitt discovered that he could pay his employees $5.50 an hour and experience virtually no turnover. In 1988 the company began to supplement these wages with monthly cash bonuses based on profits.

Gateway’s advertising, too, was cut-rate, although effective. Eschewing the services of a professional advertising agency, the company’s founders devised their own promotions. Gateway strove to present an image of reliability and trustworthiness to counteract customer fears that their low-priced products were being supplied by a fly-by-night outfit. In the company’s first full-page ad, run in computer magazines in 1988, Gateway displayed a picture of Waitt’s father’s cattle herd, with the Sioux City water tower looming in the background. Playing on the novelty of the company’s Midwestern location, the ad asked, “computers from Iowa?” In this way, Gateway was able to remind customers that their products were manufactured in the United States. In addition, the ad stood out in a magazine filled with pictures of computers.

Spurred by these promotional efforts, which consumed only 2.5 percent of company revenues, Gateway sales continued their meteoric rise, reaching $70.6 million in 1989. By that time, Gateway had expanded beyond the confines of its second office, and the company moved to South Dakota in January 1990. This location was selected in part because South Dakota collected no income taxes. In addition, the company’s position near the exact geographic center of the United States helped to keep its phone bills lower.

In 1990 Waitt also hired an advertising manager, a local photographer, and a designer, and produced a series of eye-catching and humorous new Gateway ads that began appearing in computer magazines every few months to keep up momentum in the fast-changing industry. Rather than hiring models, the ads frequently featured company employees, particularly Waitt and his brother. An ad released in July 1990 showed Waitt dressed as an 1890s card shark, flashing a royal flush. Subsequent ads featured other company employees. One showed Gateway staffers standing in a pasture under the slogan, “we’re out standing in our field.” In a nod to its history, and in an effort to further play up its rural roots, Gateway adopted a cow as its mascot. The company began to ship all its products in white boxes spotted with black dots that looked like the markings on a Holstein. This black-and-white design also kept printing costs low.

By the end of 1990, Gateway’s revenues had nearly quadrupled from the previous year, to $275 million. In just five years, the company had grown 26,469 percent. This extremely rapid expansion brought problems of its own, and Gateway was forced to confront some of the consequences of its new size. “The biggest challenge for us right now,” Waitt told Inc. in 1991, “is figuring out how to add the necessary bureaucracy without becoming slow moving.” To expand the company’s executive pool, Gateway recruited six vice-presidents from large computer makers and a public accounting firm to help mastermind the company’s future growth. In addition, Gateway set up a number of new administrative branches. The company established a 20-member group to investigate new technology, and set up a “Road Map Group” to evaluate choices. Waitt began meeting with ten top assistants, known as the Action Group, every two weeks. Gateway hired a media buyer to systematize its advertising and established a five-member marketing department, which evaluated customer satisfaction by conducting telephone interviews.

To increase productivity in its manufacturing operations, Gateway built a new 44,000-square-foot building down the road from its headquarters in the summer of 1991. In constructing this facility, Gateway stuck to its low-cost, no frills philosophy, to create “the largest metal building I’ve ever seen,” as Waitt told Marketing Computers. “It’s a big ugly building, but its very functional,” he added. Inside this structure, Gateway reorganized its computer-assembly workers into separate teams. This change was expected to increase output by 30 percent.

Gateway also began an effort in 1991 to expand into lucrative corporate accounts. In the fall of 1991, the company began to run ads that showed a group of conservative executives huddled around a Gateway computer, with the slogan, “because we’ve stood the test of time.”

To further shore up its image as a legitimate computer dealer, Gateway began to divulge some quarterly financial results, in the form of press releases. The company also began to offer the more extensive customer service that corporate clients required, including training programs and troubleshooting procedures. By the end of 1991, Gateway’s sales had reached $626 million, and the company was named the fastest-growing private company in America by Inc. magazine.

Gateway doubled the pace of its advertising schedule in the following year, releasing new promotions every month. Created by a nine-member in-house team, the ads ran in nine different computer industry magazines, two of which were published weekly. The faster pace was designed to keep up with the company’s release of new products and changes in price for old ones.

With the vast increase in the volume of products it sold, Gateway had fallen somewhat behind in technological innovation. “We’ve been playing catch-up for the last two years,” Waitt told Marketing Computers in 1992. “We’re still not anywhere near where we want to be or need to be, but we’re improving our processes continuously and we’re learning from our mistakes.” As part of its program to regain the lead in technology, Gateway released a notebook computer, called the HandBook, which weighed 2.7 pounds, in 1992. Rather than trying to manufacture this new technology itself, Gateway had the HandBook made by another company.

Gateway also moved to diversify its marketing strategy. Rather than assuming that all customers had the same needs—good value for a good price—the company set out to target the special needs of different segments of the market. “You won’t see us introducing separate product lines, but you will see us doing separate sales and marketing efforts and a different level of customization,” Waitt told Marketing Computers.

By the end of 1992, Gateway’s sales had reached $1.1 billion, an increase of 76 percent over the previous year. At a time when other computer makers were reporting losses, Gateway’s earnings reached $1.1 million, as the company took the lead in the mail order computer business.

Gateway’s 1,500 employees were supplemented by 200 new hires at the end of 1992. These new workers were assigned to bolster Gateway’s sales and support staff in hopes of alleviating some of the company’s growing pains. The push to augment Gateway’s staff came as the company discovered that finding and training a large number of technical support and computer assembly workers in the middle of South Dakota was not an easy task.

Starting in late 1992, Gateway found itself deluged by a wide variety of customer complaints, alleging problems ranging from delays in delivery to improperly constructed computers. Gateway buyers complained that the company’s quality control had fallen apart, and that its efforts to address complaints were inadequate. The company blamed the shortcomings on extremely high demand for its products in the final quarter of 1992, which made it impossible for all orders to be filled.

Although Gateway’s revenues for the first three months of 1993 remained strong, as the company moved to clear its back orders, during the second quarter the company reported its first drop in revenues. The slowdown was attributed to the company’s quality control problems, and also to its aging merchandise, which needed to be updated with new products. Gateway responded with a color notebook computer and a sub-notebook based on a new computer chip, which had previously been in limited distribution.

In the fall of 1993, Gateway’s competitors began an effort to capitalize on its problems: the Dell Computer Corporation started an ad campaign boasting “performance that blows the gates off Gateway.” In addition, the company faced growing competition in the mail order field from industry giants such as IBM. To protect Gateway’s market share, and to insure future growth, the company made plans to move more aggressively into the corporate market, and to enter foreign markets.

To increase the company’s corporate sales beyond their 1992 level of 40 percent, Gateway formed a major accounts team, headed by a former IBM employee. The company’s technical support staff was doubled to more than 400, and its on-line technicians were doubled to 14, in order to better service corporate clients. Late in 1993, Gateway inaugurated a separate phone line to provide support services to companies, in which each company was assigned its own personal service representative.

In the fall of 1993, Gateway also opened its campaign to move into the European market. Previously, foreign sales had accounted for just three percent of the company’s revenues. In early October, Gateway opened a headquarters in Dublin, Ireland, with sales, marketing, support, and manufacturing facilities. From this base, the company began to sell mail-order computers in Britain. In the future, the company intended to branch out into France and Germany. This plan was complicated by well-established competitors and by the need to customize both machines and marketing programs for each country.

Both Gateway’s corporate sales initiative and its expansion into Europe brought with them higher costs than the company had experienced in its South Dakota sales and marketing operations. In an effort to offset the impact of those expenses, Gateway surprised Wall Street by unexpectedly announcing its intention to sell stock to the public in October 1993.

In December 1993, Gateway went public, raising $150 million through the sale of 10.9 million shares, which accounted for 15 percent of the company. Waitt and his brother retained the other 85 percent of Gateway. With this infusion of capital, the company planned to finance current operations, as well as its European push, and also expand its range of products to include printers, networking products, fax modems, and software. In addition, Gateway announced that it would consider the acquisition of other companies in its field.

In the spring of 1994 Gateway moved to further enhance its corporate marketing effort. The company announced a multifaceted overhaul of its support operations to placate disgruntled customers and win new ones. This program involved a two-year extension of Gateway’s one-year warranty, 24-hour-a-day phone lines for technical support, and one-day delivery for replacement parts. In May 1994, the company announced that it would continue to provide technical support free of charge, despite the fact that several of its competitors had begun to charge for these services.

Principal Subsidiaries:

Gateway Europe.

Further Reading:

Hyatt, Joshua, “Betting the Farm,” Inc., December, 1991.

Impoco, Jim, “Why Gateway Isn’t Cowed by the Computer Price Wars,” U.S. News and World Report, July 26, 1993.

Smith, Dawn, “Home on the Range,” Marketing Computers, December 1992.

Therrien, Lois, “’Why Gateway Is Racing to Answer on the First Ring,” Business Week, September 13, 1993.

Zimmerman, Michael R., “Gateway Seizes Moment,” PC Week, November 1, 1993.

Zimmerman, Michael R., “Gateway Plots New Corporate Program,” PC Week, April 25, 1994.

—Elizabeth Rourke

Gateway, Inc.

14303 Gateway Place
Poway, California 92064
U.S.A.
Telephone: (858) 848-3401
Toll Free: (800) 846-2000
Fax: (858) 848-2681
Web site: http://www.gateway.com

Public Company
Incorporated: 1986 as Gateway 2000, Inc.
Employees: 4,000
Sales: $3.4 billion (2003)
Stock Exchanges: New York
Ticker Symbol: GTW
NAIC: 334111 Electronic Computer Manufacturing; 334112 Computer Storage Device Manufacturing; 334119 Other Computer Peripheral Equipment Manufacturing; 454110 Electronic Shopping and Mail-Order Houses

Following its March 2004 acquisition of eMachines, Inc., Gateway, Inc. ranks as the third largest personal computer in the United States, trailing only Dell Inc. and Hewlett-Packard Company, with an overall market share of 7 percent as well as a 25 percent share of the U.S. retail PC market. Gateway stands as the eighth largest PC company in the world, with key international markets in the United Kingdom, Western Europe, and Japan. In addition to selling desktop and notebook PCs, Gateway also markets monitors, servers, networking and storage equipment, and accessories and peripherals, as well as a line of consumer electronics products, such as plasma televisions, digital cameras, MP3 players, DVD players and recorders, and home theater systems. Its products are sold via toll-free call centers, Internet web sites, and such retail chains as Best Buy, Circuit City, CompUSA, Costco, Fry's, Sam's Club, and Wal-Mart.

Mid-1980s Beginnings

Gateway was founded in 1985 by Ted Waitt, who had attended two different colleges before returning to his family's cattle farm in Sioux City, Iowa. After spending nine months working at a computer store in Des Moines, Waitt felt that he had learned enough about the business of selling computers to allow him to carve out his own market niche.

Waitt noticed that at the time computers tended to be either inexpensive models with extremely limited capabilities or topof-the-line models with capabilities that few people would ever need. He decided that a middle path made more sense and devised a "value equation," which stipulated that extra technology should not be added to a computer unless it provided extra value to a customer.

In addition, Waitt observed in his retail job that computers could be sold over the phone by an educated salesperson. This led to the idea that overhead could be virtually eliminated. Because he had no money to invest in his new business, Waitt took over some empty space in a farmhouse that his father's shrinking cattle brokerage business had left empty, and moved in upstairs. Joining him in the business was Mike Hammond, the salesman who had trained him at his computer store job.

In September 1985, aided by a $10,000 loan from Waitt's grandmother, the two started up a mail-order business that they called the TIPC Network. Waitt was 22 years old. Placing advertisements in computer magazines, TIPC sold peripheral hardware and software to people who owned Texas Instrument computers. Because these computers did not conform to the IBM-compatible standard, some considered them obsolete, and many computer stores did not offer additional features for the machines once they had been sold.

Waitt charged each of his customers a $20 membership fee, which gave him start-up capital. Because his costs were so low, he and Hammond could undercut competitors' prices, and within four months, the fledgling business had racked up $100,000 in sales. Six months after they started, Waitt's brother, Norman Waitt, Jr., bought half of the company and began to offer financial advice.

Waitt's goal in starting the company had not been to sell computer accessories, but to sell computers themselves. In 1986 TIPC Network experimented with assembling its own computers, and even sold them to local customers. Nevertheless, these made only a small contribution to the company's first-year revenues of nearly $1 million. Also that year, the company was incorporated as Gateway 2000, Inc.

In mid-1987, however, Gateway was given an opportunity to break into the computer field when Texas Instruments inaugurated a program to let its buyers trade in their old machines for new, IBM-compatible units at a price of $3,500. Waitt and his partners decided that they could offer a similar IBM-compatible machine, put together from parts offered by other mail-order dealers, for less than half as much. Employing Waitt's value equation, and his sense of what customers would be willing to pay for, the company created a machine with two floppy disk drives of different sizes, a color monitor, a large memory, a keyboard with function keys, and a cursor keypad for $1,995. Gateway's competitors offered far fewer features for a similar price.

With the introduction of this computer, Gateway's sales took off. In 1987 the company had revenues of $1.5 million. In the following year, Gateway's sales exploded, hitting $12 million.

In expanding its product line beyond its initial Texas Instrument computer trade-in offer, Gateway eschewed research and development and a staff of designers. Instead, the company relied on Waitt's own sense of what customers would want. "We didn't do a whole lot of market research on it," Waitt told Inc. magazine. "A lot of it was instinctive." Hammond elaborated further: "The first question would always be, 'would I buy it,"' he told Inc. "Everyone wants smaller, faster, cheaper, so it's a fairly educated guess."

Gateway's clientele of sophisticated users did not make high demands for service or backup support and shopped on the basis of price. Accordingly, despite its rapidly increasing sales, Gateway was not forced to increase its overhead, and the company was able to keep its prices low. With its growth in sales, the company moved from the Waitt family farmhouse to a 5,000-square-foot space in Sioux City's 100-year-old Livestock Exchange building, paying $350 a month in rent. The cow manure was cleaned from the building, and Gateway's new offices were furnished with used furniture. Because of Gateway's rural Midwestern location, Waitt discovered that he could pay his employees $5.50 an hour and experience virtually no turnover. In 1988 the company began to supplement these wages with monthly cash bonuses based on profits.

Gateway's advertising, too, was cut-rate, although effective. Eschewing the services of a professional advertising agency, the company's founders devised their own promotions. Gateway strove to present an image of reliability and trustworthiness to counteract customer fears that their low-priced products were being supplied by a fly-by-night outfit. In the company's first full-page ad, run in computer magazines in 1988, Gateway displayed a picture of Waitt's father's cattle herd, with the Sioux City water tower looming in the background. Playing on the novelty of the company's midwestern location, the ad asked, "computers from Iowa?" In this way, Gateway was able to remind customers that their products were manufactured in the United States. In addition, the ad stood out in a magazine filled with pictures of computers.

1990: Gateway Moves to South Dakota

Spurred by these promotional efforts, which consumed only 2.5 percent of company revenues, Gateway sales continued their meteoric rise, reaching $70.6 million in 1989. By that time, Gateway had expanded beyond the confines of its second office, and the company moved to North Sioux City, South Dakota, in January 1990. This location was selected in part because South Dakota collected no income taxes.

In 1990 Waitt also hired an advertising manager, a local photographer, and a designer, and produced a series of eyecatching and humorous new Gateway ads that began appearing in computer magazines every few months to keep up momentum in the fast-changing industry. Rather than hiring models, the ads frequently featured company employees, particularly Waitt and his brother. An ad released in July 1990 showed Waitt dressed as an 1890s card shark, flashing a royal flush. Subsequent ads featured other company employees. One showed Gateway staffers standing in a pasture under the slogan, "we're out standing in our field." In a nod to its history, and in an effort to further play up its rural roots, Gateway adopted a cow as its mascot. The company began to ship all its products in white boxes with black spots that looked like the markings on a Holstein. This black-and-white design also kept printing costs low.

By the end of 1990, Gateway's revenues had nearly quadrupled from the previous year, to $275 million. In just five years, the company had grown in value an impressive 26,469 percent. This extremely rapid expansion brought problems of its own, and Gateway was forced to confront some of the consequences of its new size. "The biggest challenge for us right now," Waitt told Inc. in 1991, "is figuring out how to add the necessary bureaucracy without becoming slow moving." To expand the company's executive pool, Gateway recruited six vice-presidents from large computer makers and a public accounting firm to help mastermind the company's future growth. In addition, Gateway set up a number of new administrative branches. The company established a 20-member group to investigate new technology, and set up a "Road Map Group" to evaluate choices. Waitt began meeting with ten top assistants, known as the Action Group, every two weeks. Gateway hired a media buyer to systematize its advertising and established a five-member marketing department, which evaluated customer satisfaction by conducting telephone interviews.

Company Perspectives:

Mission: To be the leading integrator of personalized technology solutions. Vision: To improve the quality of life through technology. Values: Leadership, Innovation, Caring, Honesty, Discipline and Focus.

To increase productivity in its manufacturing operations, Gateway built a new 44,000-square-foot building down the road from its headquarters in the summer of 1991. In constructing this facility, Gateway stuck to its low-cost, no frills philosophy, to create "the largest metal building I've ever seen," as Waitt told Marketing Computers. "It's a big ugly building, but it's very functional," he added. Inside this structure, Gateway reorganized its computer-assembly workers into separate teams. This change was expected to increase output by 30 percent.

Gateway also began an effort in 1991 to expand into lucrative corporate accounts. In the fall of 1991, the company began to run ads that showed a group of conservative executives huddled around a Gateway computer, with the slogan, "because we've stood the test of time."

To further shore up its image as a legitimate computer dealer, Gateway began to divulge some quarterly financial results, in the form of press releases. The company also began to offer the more extensive customer service that corporate clients required, including training programs and troubleshooting procedures. By the end of 1991, Gateway's sales had reached $626 million, and the company was named the fastest-growing private company in America by Inc. magazine.

Gateway doubled the pace of its advertising schedule in the following year, releasing new promotions every month. Created by a nine-member in-house team, the ads ran in nine different computer industry magazines, two of which were published weekly. The faster pace was designed to keep up with the company's release of new products and changes in price for old ones.

With the vast increase in the volume of products it sold, Gateway had fallen somewhat behind in technological innovation. "We've been playing catch-up for the last two years," Waitt told Marketing Computers in 1992. "We're still not anywhere near where we want to be or need to be, but we're improving our processes continuously and we're learning from our mistakes." As part of its program to regain the lead in technology, Gateway released a notebook computer, called the HandBook, which weighed 2.7 pounds, in 1992. Rather than trying to manufacture this new technology itself, Gateway had the HandBook made by another company.

Gateway also moved to diversify its marketing strategy. Rather than assuming that all customers had the same needs—good value for a good price—the company set out to target the special needs of different segments of the market. "You won't see us introducing separate product lines, but you will see us doing separate sales and marketing efforts and a different level of customization," Waitt told Marketing Computers.

By the end of 1992, Gateway's sales had reached $1.1 billion, an increase of 76 percent over the previous year. At a time when other computer makers were reporting losses, Gateway's earnings reached $1.1 million, as the company took the lead in the mail-order computer business.

Gateway's 1,500 employees were supplemented by 200 new hires at the end of 1992. These new workers were assigned to bolster Gateway's sales and support staff in hopes of alleviating some of the company's growing pains. The push to augment Gateway's staff came as the company discovered that finding and training a large number of technical support and computer-assembly workers in the middle of South Dakota was not an easy task.

Growing Pains in the Early 1990s

Starting in late 1992, Gateway found itself deluged by a wide variety of customer complaints, alleging problems ranging from delays in delivery to improperly constructed computers. Gateway buyers complained that the company's quality control had fallen apart, and that its efforts to address complaints were inadequate. The company blamed the shortcomings on extremely high demand for its products in the final quarter of 1992, which made it impossible for all orders to be filled.

Although Gateway's revenues for the first three months of 1993 remained strong, as the company moved to clear its back orders, during the second quarter the company reported its first drop in revenues. The slowdown was attributed to the company's quality control problems, and also to its aging merchandise, which needed to be updated with new products. Gateway responded with a color notebook computer and a sub-notebook based on a new computer chip, which had previously been in limited distribution.

Key Dates:

1985:

Working out of a Sioux City, Iowa, farmhouse, Ted Waitt and Mike Hammond launch TIPC Network, selling peripheral hardware and software to owners of Texas Instrument computers via mail order.

1986:

Company is incorporated as Gateway 2000, Inc.

1987:

Gateway begins selling IBM-compatible computer systems, priced lower than competitors.

1990:

Gateway relocates to North Sioux City, South Dakota; revenues quadruple that year, reaching $275 million.

1992:

Company releases its first notebook computer; revenues reach $1.1 billion.

1993:

Gateway establishes a marketing and manufacturing headquarters in Dublin, Ireland; company goes public.

1996:

Company begins opening retail showrooms in the United States; customers can now custom configure, order, and pay for a personal computer via the Gateway web site.

1998:

Company begins operating as simply Gateway, dropping the "2000"; headquarters are moved to San Diego.

1999:

Gateway, Inc. is officially adopted as the corporate name.

2000:

Company is hit hard by global PC industry downturn, leading to plunging profits and a net loss during the fourth quarter.

2001:

Massive restructuring is launched involving signifi-cant consolidation and closures of facilities and the elimination of 9,400 jobs; net loss of $1.03 billion is recorded.

2003:

Push into consumer electronics accelerates.

2004:

Gateway acquires eMachines, Inc. for nearly $300 million; it announces it will close its remaining retail outlets and begin selling Gateway products through third-party retailers.

In the fall of 1993, Gateway's competitors began an effort to capitalize on its problems: the Dell Computer Corporation started an ad campaign boasting "performance that blows the gates off Gateway." In addition, the company faced growing competition in the mail-order field from industry giants such as IBM. To protect Gateway's market share, and to insure future growth, the company made plans to move more aggressively into the corporate market, and to enter foreign markets.

To increase the company's corporate sales beyond their 1992 level of 40 percent, Gateway formed a major accounts team, headed by a former IBM employee. The company's technical support staff was doubled to more than 400, and its online technicians were doubled to 14, in order to better service corporate clients. Late in 1993, Gateway inaugurated a separate phone line to provide support services to companies, in which each company was assigned its own personal service representative.

During this time, Gateway also opened its campaign to move into the European market. Previously, foreign sales had accounted for just 3 percent of the company's revenues. In early October, Gateway opened a headquarters in Dublin, Ireland, with sales, marketing, support, and manufacturing facilities. From this base, the company began to sell mail-order computers in Britain. In the future, the company intended to branch out into France and Germany. This plan, however, was complicated by well-established competitors and by the need to customize both machines and marketing programs for each country.

Both Gateway's corporate sales initiative and its expansion into Europe brought with them higher costs than the company had experienced in its South Dakota sales and marketing operations. In an effort to offset the impact of those expenses, Gateway surprised Wall Street by unexpectedly announcing its intention to sell stock to the public in October 1993.

In December 1993, Gateway went public, raising $150 million through the sale of 10.9 million shares, which accounted for 15 percent of the company. Waitt and his brother retained the other 85 percent of Gateway. With this infusion of capital, the company planned to finance current operations, as well as its European push, and also to expand its range of products to include printers, networking products, fax modems, and software. In addition, Gateway announced that it would consider the acquisition of other companies in its field.

In the spring of 1994 Gateway moved to further enhance its corporate marketing effort. The company announced a multifaceted overhaul of its support operations to placate disgruntled customers and win new ones. This program involved a two-year extension of Gateway's one-year warranty, 24-hour-a-day phone lines for technical support, and one-day delivery for replacement parts. In May 1994, the company announced that it would continue to provide technical support free of charge, despite the fact that several of its competitors had begun to charge for this service.

In 1995 Gateway continued to grow, announcing plans to build an $18 million manufacturing plant in Hampton, Virginia, and acquiring 80 percent of an Australian computer maker, Osborne Computer Corporation. Revenues for the year were up again, to $3.7 billion, an increase of $1 billion over 1994. The year 1995 also saw a manufacturing plant opened in Malaysia to serve Far Eastern markets and establishment of the company's web site at gateway.com.

New Marketing Initiatives in the Late 1990s

Early in 1996 the company tried its hand at a new product, the Destination 2000, a combination PC and wide-screen TV. It was designed to be used as a home entertainment center that could also be linked to the Internet. Initial sales were slow, but the company had purposely invested a minimal amount in research and development. After a few months of barely perceptible sales, Gateway announced plans to offer Destinations through such retail outlets as Nobody Beats the Wiz and CompUSA. The price was also dropped by over 20 percent. During this year a small number of Gateway Country Stores were also opened in suburban locations. These stocked no merchandise, but were intended mainly to offer first-hand contact with the company's products. Computers were still ordered over the telephone and shipped directly to the customer. Within the next two years over 140 Country Stores were opened. Also in 1996 Gateway enhanced its web site to allow customers to configure, order, and pay for a personal computer online.

With Gateway's success came increased interest from other companies bent on acquisition. In early 1997 a $7 billion purchase offer from Compaq Computer Corporation was nearly finalized before being rejected by CEO Waitt. In May the company switched its stock listing from the NASDAQ to the New York Stock Exchange. A month later Gateway purchased Advanced Logic Research, Inc., a producer of server computers for business applications, for $196.4 million. This move was part of a newly intensified effort by the company to seek a larger share of the business computer market, as penetration of home PCs reached near-saturation levels. Later in the year, the company announced further measures to increase corporate sales, including removing the ubiquitous cows from its advertising in an attempt to refine its image. Gateway also formed a new subsidiary, Gateway Major Accounts, which focused on sales to business. The company concluded 1997 with record revenues of $6.29 billion and profits of over $1 billion.

During 1998 the company dropped the "2000" from the name it operated under, before the coming millennium made it obsolete (the official corporate name did not change to Gateway, Inc. until May 1999). The firm also moved its headquarters to San Diego, a move taken in part to be closer to the mainstream of the business world, and also because CEO Waitt wanted to live in California. Waitt was able to attract higher profile managers to the company because of the shift, and a slew of new top executives were brought onboard in 1998, including Jeff Weitzen, an AT&T Corp. veteran who was named president and COO. The new management team led an expansion beyond the cutthroat PC market, where brutal competition was steadily ratcheting down profit margins. Gateway pushed deeper into such areas as software, peripherals, services, training, and fi-nancing. The company also attempted to get a piece of the Internet pie, launching a new Internet connectivity service, gateway.net, which was made exclusively available to its customers, at prices comparable to America Online and other major services. In June 1998 the company also began to install Netscape Navigator software on its machines along with Microsoft Internet Explorer, which was being bundled with Microsoft's Windows 98. Gateway's Internet service was slow getting off the ground, with only 200,000 subscribers by the beginning of 1999. After a number of problems with the Internet service provider it had chosen, Gateway switched to MCI Worldcom.

Further changes came on the Internet front in 1999. Early in the year Gateway introduced a new offer whereby anyone buying a Gateway PC costing more than $1,000 could get one year of free Internet service via gateway.net. More than a third of Gateway PC buyers were soon signing up for the service, pushing the subscriber base to 600,000 by October 1999. That month, however, Gateway entered into an alliance with America Online, Inc. through which AOL took over the operations of gateway.net and invested $800 million in Gateway for a 5 percent stake. Among the other terms of the deal, Gateway computers began prominently placing the AOL online service on their desktop screens, and AOL began promoting Gateway computers on its various online properties. In December 1999 Waitt stepped down as CEO, remaining chairman, while Weitzen was promoted to president and CEO. For the year, Gateway posted record profits of $427.9 million on record revenues of $9.6 billion.

A Reversal of Fortunes in the Early 2000s

The astounding rise of Gateway came to a crashing halt in 2000 when the global PC industry fell into its worst slump ever. Gateway was hit particularly hard because of its greater reliance on the consumer and small business markets—the hardest hit sectors—and because of questionable management decisions. Soon after taking over, Weitzen began pushing aside old-time Gateway managers and instituted a number of new policies that hurt not only morale but also the bottom line. Weitzen also muddied the company's distribution strategy by launching deals to sell Gateway PCs through such channels as the OfficeMax chain and the QVC home shopping network. He also opened up 100 more Gateway retail stores in the United States. When archrival Dell instituted a price war in an ultimately successful attempt to grab more market share during the PC downturn, Gateway took a heavy blow and ended up suffering a fourth-quarter 2000 net loss of $94.3 million. For the year, net profits fell 26 percent, to $316 million, a figure later revised downward to $241.5 million. Gateway's stock fell 75 percent during 2000, from $72.06 per share to $17.99.

In January 2001 Waitt, a largely hands-off chairman but one who had grown increasingly concerned about the deteriorating situation at the company he had built, reassumed the CEO position, ousting Weitzen and several other top managers. In addition to restating downward the financial results for 2000, Waitt launched a thorough restructuring, brought back a number of old-timers, and adopted a "back to basics" approach reemphasizing Gateway's core business of selling PCs directly to consumers and businesses. Toward the latter end, prices were slashed, in some cases matching Dell's as well as those of the newly bolstered Hewlett-Packard, which acquired Compaq during this period. Cost-cutting initiatives during 2001 were massive. The workforce was reduced from 24,600 to 14,000 as U.S. call center facilities were consolidated; 33 retail stores in the United States and 11 in Canada were closed; manufacturing plants in Lake Forest, California, Ireland, and Malaysia were shut down; and substantially all of the company's international operations were shuttered in order to focus exclusively on the U.S. market. Gateway also moved its headquarters to Poway, a San Diego suburb, during 2001. Special charges for the year totaling $1.1 billion led to a net loss of $1.03 billion. Revenues plunged 38 percent, from $9.6 billion to $5.94 billion.

As the price war and decline in home-PC shipments continued, sales plummeted further in 2002, dropping to $4.17 billion. PC unit sales fell to 2.75 million from the previous year's 3.4 million. Gateway's share of the U.S. PC market dropped to 6.1 percent, down from 9.3 percent at the end of 1999. Gateway fell short in its attempt to counter the PC decline with a push into consumer electronics, such as plasma televisions and digital cameras. The company slashed its payroll by a further 2,500 employees as part of another restructuring that involved the closure of 19 additional stores, two telephone call centers, an engineering operation, and an Internet sales site. Pretax restructuring charges amounted to $109 million, contributing to a net loss for the year of $297.7 million. Gateway's stock ended 2002 trading at just $3.14 per share.

In January 2003 Gateway launched yet another restructuring to close 76 of its remaining 268 retail stores, resulting in the dismissal of 1,900 more employees. In April the company was forced to make another restatement of its past financial results, admitting that it overstated its revenue for 1999 through 2001 by $476 million. The Securities and Exchange Commission (SEC) followed up with a lawsuit filed in November 2003 that accused former CEO Weitzen, former CFO John J. Todd, and former controller Robert D. Manza of fraud, lying to auditors, and other violations of securities law. The three were charged with inflating revenue during 2000, when Gateway began struggling to meet analysts' expectations. The company itself reached a settlement with the SEC on charges of filing false statements and misleading investors, by agreeing to not violate securities laws in the future. No fine was levied on Gateway.

As these accounting machinations were playing out in the background, Gateway was stepping up its push into consumer electronics. During 2003 the firm introduced 118 new products in 22 categories, including DVD players, home theater systems, LCD televisions, digital projectors, personal digital assistants (PDAs), digital music players, and media center PCs that combined the functions of a computer, television, and video recorder. All 192 of Gateway's remaining retail stores were completely remodeled to better display this avalanche of new products. The portion of revenue deriving from consumer electronics and other non-PC products jumped from 19 percent in 2002 to 28 percent in 2003. Gateway also continued its effort to bump up its sales to business customers by enhancing its offerings of servers and storage devices. During the third quarter of 2003, meanwhile, the company restructured yet again, closing down its computerassembly operation in Hampton, Virginia, and making significant cuts at its PC assembly and refurbishing operations in North Sioux City and Sioux Falls, South Dakota. These and previous closures of manufacturing operations meant that Gateway was increasingly using contractors—mainly Taiwanese—to manufacture the notebook and desktop computers it sold. Job cuts of 1,700 left Gateway with just 7,400 workers by year end, fewer than one-third the total of three years earlier. The net loss of $514.8 million for 2003 reflected in part $148 million in restructuring charges. On a somewhat more positive note, Gateway managed to post a 2003 operating loss of $510.6 million, roughly the same as the 2002 total despite revenues having fallen a further 18 percent, to $3.4 billion. Once the nation's second largest computer seller, Gateway's market share of 3.7 percent was good for only fifth place, behind Dell, Hewlett-Packard, IBM, and upstart eMachines.

The "eMachining" of Gateway, 2004

After three straight years in the red, Gateway shifted gears in 2004. The company announced in January that it had agreed to buy the privately held eMachines for 50 million shares of Gateway stock and $30 million cash. When completed in March 2004 the deal was valued at nearly $300 million. Under the leadership of Wayne Inouye, president and CEO of the low-cost computer marketer since February 2001, eMachines had enjoyed nine straight profitable quarters through relentless cost-cutting and improvements in product quality and customer service. All of eMachines' computers were manufactured by third-party contractors, and they were sold through retail outlets, including Best Buy, Circuit City, CompUSA, Costco, Fry's, Sam's Club, and Wal-Mart stores. By early 2004, eMachines had captured 25 percent of the U.S. retail PC market. The company also distributed its products overseas through retailers in Japan, the United Kingdom, and Western Europe. Founded in 1998 and based in Irvine, California, eMachines had about $1.1 billion in sales in 2003. At the time of its acquisition by Gateway, it employed only about 140 people. By acquiring eMachines, Gateway jumped back up to the number three position among U.S. PC companies—with a market share of nearly 7 percent—and ranked as the eighth largest player in the world market.

Upon completion of the deal, Inouye, who before joining eMachines had served as senior vice-president of computer merchandising at Best Buy from 1995 to 2001, was named president and CEO of Gateway. Waitt remained chairman. Several top executives at eMachines took similar positions at Gateway. Further evidence of the "eMachining" of Gateway came in April 2004 when the company announced that it would close its remaining retail stores, dismiss their 2,500 employees, and shift to selling Gateway computers through third-party retailers—thereby adopting the eMachine approach. Direct selling via call centers and the Internet would nevertheless continue. Coupled with a previously announced cut of 1,000 jobs, mostly in manufacturing and support operations in Iowa and South Dakota, the workforce would thereby be trimmed to about 4,000 workers. Furthermore, Gateway also announced in April that it would close down its head office in Poway and move to California's Orange County, where eMachines was based. Further workforce reductions—perhaps reducing the payroll to around 2,000—seemed imminent as Gateway continued to adopt eMachines's low-cost model in its latest attempt to return to profitability.

Principal Subsidiaries

Advanced Logic Research, Inc.; Cowabunga Enterprises, Inc.; eMachines, Inc.; Gateway Accessory Stores, Inc.; Gateway Asia, Inc.; Gateway Companies, Inc.; Gateway Country Stores LLC; Gateway International Holdings, Inc.; Gateway Japan, Inc.; Gateway Manufacturing LLC; Gateway PC LLC; Gateway Technologies, Inc.; GW Holdings LLC; Nicholas Insurance Company Ltd. (Bermuda); North Merrill Maintenance LLC; Spotware Technologies, Inc.

Principal Competitors

Dell Inc.; Hewlett-Packard Company; International Business Machines Corporation; Apple Computer, Inc.; Sun Microsystems, Inc.

Further Reading

Beatty, Sally, and Evan Ramstead, "Gateway 2000 Plans Shorter Name, Longer Client Talks and No Cows," Wall Street Journal, April 28, 1998, p. B6.

Britt, Russ, "Computers & Technology Going Corporate: Gateway Changes Spots," Investor's Business Daily, October 30, 1997, p. A1.

Brooker, Katrina, "I Built This Company, I Can Save It," Fortune, April 30, 2001, pp. 94–96+.

Brull, Steven V., "A Net Gain for Gateway?," Business Week, July 19, 1999, pp. 77–78.

Flynn, Laurie J., "Gateway to Lay Off 2,500 with Closing of 188 Retail Stores," New York Times, April 2, 2004, p. C6.

Freeman, Mike, "Former Gateway Execs Accused of Fraud," San Diego Union-Tribune, November 14, 2003, p. C1.

——, "Gateway to Buy PC-Maker eMachines," San Diego Union-Tribune, January 31, 2004, p. C1.

Graves, Brad, and Andrew Simons, "Gateway's Retooling Begins with Move," San Diego Business Journal, April 5, 2004, pp. 1+.

Hesseldahl, Arik, "The McDonald's of Computers," Forbes, November 24, 2003, p. 170.

Hyatt, Joshua, "Betting the Farm," Inc., December, 1991.

Impoco, Jim, "Why Gateway Isn't Cowed by the Computer Price Wars," U.S. News and World Report, July 26, 1993.

Kasler, Dale, "Will TV-Like Computer Propel Gateway into the Big League?," Gannett News Service, June 13, 1996.

Kirkpatrick, David, "New Home. New CEO: Gateway Is Moo and Improved," Fortune, December 20, 1999, pp. 44–46.

Krause, Reinhardt, "The New America: Gateway 2000 Adding 'Nuances' to Direct-Selling Strategy," Investor's Business Daily, May 29, 1996, p. A4.

Kupfer, Andrew, "The Champ of the Cheap Clones," Fortune, September 23, 1991, pp. 115+.

McWilliams, Gary, "Gateway Buys eMachines to Boost Its Own Electronics Sales," Wall Street Journal, February 2, 2004, p. B1.

——, "Gateway Inc. Sues to End Contract with Web America," Wall Street Journal, January 20, 1999, p. B6.

——, "Under Gateway's Tree, Another Shake-Up," Wall Street Journal, January 6, 2003, p. A13.

——, "Waitt List: Gateway Co-Founder Starts Comeback Plan with a Restatement," Wall Street Journal, March 1, 2001, pp. A1+.

Palmer, Jay, "Big Moo-ve Ahead? Gateway's Current Woes Don't Dim Its Long-Term Prospects," Barron's, December 13, 1999, pp. 28, 30.

Ridgeway, Michael, "Gateway Executives Going Big City," Gannett News Service, August 28, 1998.

Smith, Dawn, "Home on the Range," Marketing Computers, December 1992.

Therrien, Lois, "Why Gateway Is Racing to Answer on the First Ring," Business Week, September 13, 1993.

Turner, Nick, "Gateway's Unusual Move: When Direct Meets Retail," Investor's Business Daily, September 29, 1998, p. A10.

Weintraub, Arlene, "Can Gateway Survive in a Smaller Pasture?," Business Week, September 10, 2001, p. 48.

——, "Gateway: Picking Fights It Just Might Lose," Business Week, September 9, 2002, p. 52.

——, "Powering Up at eMachines: How Did Wayne Inouye Turn a Reviled, Money-Losing PC Maker into a Winner?," Business Week, November 17, 2003, p. 77.

Wingfield, Nick, and Gary McWilliams, "AOL to Invest $800 Million in Gateway," Wall Street Journal, October 21, 1999, p. A3.

Zimmerman, Michael R., "Gateway Plots New Corporate Program," PC Week, April 25, 1994.

——, "Gateway Seizes Moment," PC Week, November 1, 1993.

—Elizabeth Rourke

—updates: Frank Uhle, David E. Salamie

GATEWAY, INC.

Gateway, Inc. is a leading personal computer (PC) maker in the U.S. with a 15 percent share of the market as of 2001. The firm sells its machines by phone and via the Internet. Operations include 15 call centers, five manufacturing plants, and 275 Country Store showrooms. Declining prices and market saturation in the PC industry prompted the firm to diversify into Internet access services and other Web-based ventures in the late 1990s.

EARLY HISTORY

Gateway was founded in 1985 when partners Ted Waitt, who dropped out of the business management program at the University of Iowa, and Mike Hammond launched TIPC Network, a computer mail-order business, in the Waitt family farmhouse in Sioux City, Iowa. The upstart was funded by a $10,000 loan from Waitt's grandmother. Initially, customers were charged a $20 membership fee to gain access to TIPC's mail order inventory, which included peripheral hardware and software for Texas Instruments computers. Within four months, TIPC generated $100,000 in sales. In 1986, the company began assembling its own computers; however, sales of these machines accounted for only a small percentage of annual revenues, which reached $1 million.

In 1987, Gateway developed an IBM-compatible personal computer (PC) using components from other PC makers. Although Gateway's PC was similar to one sold by Texas Instruments, with two floppy disk drive and a color monitor, it cost only $1,995, roughly half the price of Texas Instruments' machine. The firm changed its name to Gateway 2000 in 1988, which proved to be a pivotal year for the direct-sales PC upstart as its low-cost machines, powered with 286 processors, began to garner attention. Increased growth prompted Gateway to move headquarters from the Waitt ranch to a 5,000-square-foot building. The firm also launched its first major advertising campaign, running a full-page ad in which a photo of the Waitt family cattle herd appeared above a caption reading, "Computers from Iowa?" In addition, Waitt launched a performance incentive program for his staff, rewarding hourly employees with monthly cash bonuses that were tied to profits. Efforts paid off as sales skyrocketed from $1.5 million to $12 million in less than 12 months.

Sales grew nearly sixfold in 1989, exceeding $70 million. In 1990, Gateway relocated to South Dakota, a state with no income taxes. The firm also launched several light-hearted advertisements that poked fun at its rural location and portrayed a Holstein cow as Gateway's mascot. Continued growth prompted Waitt to bolster his management team with six executives from large PC firms. Sales jumped to $275 million that year as the firm shipped roughly 225 PCs per day. Employees totaled 185. Gateway was named the fastest-growing private company in America by Inc. magazine in 1991. To house its expanding operations, Gateway built a new 44,000 square-foot headquarters building. The firm also began targeting corporate markets for the first time. Sales continued to soar, reaching $626 million.

In 1992, Gateway unveiled its first notebook computer, The HandBook, which weighed less than three pounds. The Handbook proved to be one of the few Gateway products that sold poorly in the early 1990s. Although the recession at that time had taken a toll on other PC makers, Gateway found its sales exploding as those in the market for a new PC began seeking out less expensive models. As a result, revenues exceeded $1 billion for the first time. Earnings of $1.1 million boosted Gateway into the first-place spot among mail-order computer companies. Because demand for its products was so high, Gateway found itself unable to fill orders. When clients began complaining about lengthy delays, as well as flaws with the computers that did finally arrive, the firm hired 200 new workers.

International growth took place for the first time in 1993, when Gateway opened a complex in Dublin, Ireland. That year, the firm completed its initial public offering (IPO), selling nearly 11 million shares for $150 million. Upon completion of the IPO, the Waitt family owned 85 percent of Gateway. The firm used the fresh capital to diversify into software as well as peripheral equipment, such as printers, fax modems, and networking devices. In an effort to improve service to its business customers, Gateway increased its support staff more than twofold, hired additional technicians, and added a separate phone line dedicated to providing support services to companies using Gateway machines. Although many rivals had begun to levy fees for technical support, Gateway continued to offer its services for free. The firm created a sales and customer support unit in Kansas City, Missouri, in 1994. International expansion continued with the creation of showrooms—which allowed potential customers to examine Gateway merchandise prior to making a purchase—in France, Germany, Japan, and the United Kingdom. Sales reached $2.7 billion that year.

Gateway made its first foray into the Pacific Rim in 1995, creating a manufacturing plant in Malaysia to make PCs. The firm also moved into Australia with the purchase of Osborne Computer, based in Sydney. Steady demand prompted the firm to create a third U.S. manufacturing plant, located in Hampton, Virginia, in 1996. To gain a foothold in Greece, the firm forged a distribution alliance with Dakos S.A. In a similar move, Gateway also inked a distribution deal with Al Yousuf Computers, based in the United Arab Emirates. Growth in Europe was bolstered with a new showroom in Sweden. New product developments included a large-screen PC and television set combo known as Destination; it was the first Gateway product to be marketed by traditional retailers. It was in the mid-1990s that Gateway also established its Country Stores Inc. subsidiary. Gateway's 8,000-square-foot Country Stores, similar to the firm's European showrooms, gave customers the chance to examine Gateway merchandise before purchasing it via mail or telephone. The first Country Stores were based in Connecticut and North Carolina.

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.

FURTHER READING:

Allen, Mike. "Gateway's 'Retrenching' Continues." San Diego Business Journal, September 3, 2001.

Brooker, Katrina. "I Built This Company, I Can Save It: Retired Gateway CEO Ted Waitt Shocked the Computer World When He Ousted His Successor and Seized Control." Fortune, April 30, 2001.

Conlin, Michelle. "For Whom the Dell Tolls." Forbes, August 10, 1998.

Gordon, Joanne. "Green Pastures for Gateway." Chain Store Age Executive, November 1997.

Holstein, William J. "Gateway Gets Citified." U.S. News & World Report, May 3, 1999.

"Internet Access: Gateway Breaks Ground with Internet Strategy." EDGE: Work-Group Computing Report, March 1, 1999.

Kirkpatrick, David. "New Home. New Ceo. Gateway Is Moo and Improved." Fortune, December 20, 1999.

Loro, Laura. "Gateway Raking In Online PC Orders." Business Marketing, October 1997.

"New PCs: Gateway 2000 Launches E-Series PCs Designed for the Corporate Market." EDGE: Work-Group Computing Report, May 26, 1997.

Popovich, Ken. "Gateway Moves to Stem Wounds—But High Inventory and Weak Consumer Demand Dog Faltering PC Maker." eWeek, February 5, 2001.

Warshaw, Michael. "Guts and Glory: From Farm Boy to Billionaire: Ted Waitt's Inspiring Story of Incredible Growth." Success, March 1997.

Weintraub, Arlene. "Can Gateway Survive in a Smaller Pasture?" BusinessWeek Online, September 10, 2001. Available from www.businessweek.com.

SEE ALSO: Dell Computer Corp.; Hardware; Waitt, Ted