What the Acer-Gateway deal means to the PC market

What the Acer-Gateway deal means to the PC market

For much of its first 15 years, Gateway Inc. was the popular and whimsical PC vendor of America's heartland, complete with cute black-and-white-cow-themed shipping boxes and humorous magazine advertisements.

Then the bottom fell out as other vendors learned from Gateway's success and brought tough competition to a marketplace where margins are thin and the only way up is through increased market share.

Now, with Monday's announcement that Gateway is being bought by competitor Acer Inc. in a US$710 million deal, the big questions become what happened to Gateway and what does its acquisition mean for the volatile marketplace of PC makers?

Ted Waitt founded Gateway as Gateway 2000 in his grandmother's Iowa farmhouse in 1985. Originally headquartered in North Sioux City, S.D., Gateway became a household name by the mid-1990s and had the direct-sales consumer market seemingly in its pocket. By the end of the decade, the company moved its headquarters to California and simplified its name to Gateway Inc., dropping the "2000."

Not long afterward, its market slide began.

"Over the last few years, it's looked more and more like Gateway was an acquisition target, [given] the way its business PC sales went [downward]," said John Spooner, an analyst with Technology Business Research Inc. in Hampton, N.H. "It was much more sizable than it is now," when its corporate sales amount to only about 100,000 PCs per quarter. "What Gateway's big problem has been in the last couple years is that while it was able to increase its sales at retail [stores], its direct sales to businesses decreased every quarter."

"For Gateway, the direction the company went into proved unsustainable in driving higher revenue and higher profit," Spooner said. "It's very competitive in retail and very difficult to turn a profit there, because margins are in the single low digits. They make Dell's latest 8% margins look huge."

After the company shuttered its Gateway Country retail stores several years ago, it lost sales to smaller businesses that liked being able to touch and test the machines before buying them. "It never really replaced that capability," he said.

Gateway is not alone in having its place in the market turned upside down in recent years. The once popular Compaq Computer Corp. was strong enough to acquire Digital Equipment Corp. in 1998 but was itself bought out in a $25 billion blockbuster deal by Hewlett-Packard Co. in 2001. Then the HP-Compaq merger took several years to really jell, and less than four years later, difficulties in managing the transition helped lead to the ouster of then-CEO Carly Fiorina in February 2005.

Powerhouse PC and laptop maker Dell Inc. hasn't always had smooth sailing either. Though it soared through the 1990s and into this decade as a market trendsetter, it has been humbled recently by quality problems and complaints about customer service, and by problems with its corporate financial reports.

Even IBM gave up its fight in the PC marketplace two years ago when it sold its PC business to Chinese PC maker Lenovo Group Ltd. so it could focus on its strong server and services businesses.

The former Micron Computer Co., which also had splashy and colorful ad campaigns in the 1990s through 2001, was purchased by buyout firm Gores Group LLC in June 2001 and was later sold off as MPC Computers, with a new focus on business, government and education sales.

With the Acer-Gateway deal in the works, the PC marketplace will likely be dominated by four major players -- Dell, HP, Acer/Gateway/Emachines and Lenovo, Spooner said.

If another round of acquisitions occurs, it will likely involve smaller companies like MPC perhaps buying Gateway's professional PC sales operations, which are on the block, or buying other smaller companies and adding to their own power, he said. "It's all about scale," he said. "It's just very difficult to compete right now. Basically what Acer is doing is what General Motors Corp. does. You've got different brands and they mean different things to different people, but the chassis is still the same. It actually doesn't mean a heck of a lot to the end user."

Charles King, an analyst at Pund-IT Inc, in Hayward, Calif., said that with PCs now largely become commodity products offering largely the same underpinnings, it's much harder to get people to buy by name rather than by lowest price. "Gateway was a company that did pretty well when PCs were differentiated products," King said, but it had a lot of trouble when consumers began to have other choices. "Budget-conscious buyers bought what was on sale," rather than buying a Gateway PC in a fun cow-spotted box.

Its low sale price clearly illustrates the kinds of problems Gateway has had in keeping itself vital, King said. "It's a reflection of the commodity status of the PC."

What Acer needs to do now, he said, is to make sure that it handles the transition well, using lessons learned from the HP-Compaq merger, which resulted in lots of growing pains. "Compaq could have offered HP a way to bring in new blood and make some new decisions," King said. "Instead, HP lost a lot of great Compaq executives and people along the way because they felt they weren't being valued properly. That's the kind of thing you want to avoid."

Joe Clabby, an analyst at Clabby Analytics in Yarmouth, Maine, said that for now, the Acer-Gateway deal is a nonissue in the marketplace. "It's not even on the radar screen," he said. "The big players have all sorted it out," leaving the smaller vendors to find their niches and take their small pieces of the pie.

For Acer, the Gateway name will be a plus because it gives the company more market share and a known nameplate, Clabby said.

What Gateway wasn't able to do in recent years was to follow Dell's highly successful and market-leading example of attacking its supply chain to reduce its component prices and bring up its margins overall, he said. "We're talking about marketing, we're not talking about technology," Clabby said.

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