Business Week: October 30, 2000
News: Analysis & Commentary
Commentary: How PC Makers Are Reprogramming Themselves
Time was, Compaq Computer Corp. was the bellwether stock in the personal
computer business. In the early 1990s, investors looked to it, software giant
Microsoft Corp., and chipmaker Intel Corp. for clues about the industry's
health. Then along came Dell Computer Corp., which sold millions of computers
directly to consumers, first by phone and later via the Web. The upstart soon
unseated Compaq as the hardware company to watch when taking the industry's
pulse. No wonder Wall Street swooned when Dell, Intel and Apple each issued
earnings warnings last month--sending their stocks south.
Then on Oct. 12, consumer PC maker Gateway Inc. announced profits had
surged by 35% while sales grew by 16%. ``The sky is not falling,'' said John
J. Todd, Gateway's chief financial officer. ``In fact, the market is still
solid.'' The Street breathed a sigh of relief and the following day pushed
Gateway's shares to $52 from $43. Now, analysts are calling Gateway the
prototype for the industry. ``Gateway is running with a model that gives them
an advantage over everyone,'' gushes Chase H&Q analyst Walter J. Winnitzki.
But is Gateway actually a new bellwether? Not really. The PC business used
to be governed by fairly simple rules: Make millions of boxes as cheaply as
possible and keep the prices falling for ever-faster machines. It was a model
that worked because the market was young and customers weren't sophisticated
enough to ask for anything other than the boxes that were being delivered.
Today, the industry is far more fragmented. Dell is chasing business
customers, Compaq is making headway with handhelds and Net access devices,
and Gateway is focused on consumers. And buyers, many of whom own more than
one computer, want a broader range of devices such as notebooks, handhelds
and simple machines for surfing the Web.
BEFORE THE FALL. At the same time, the market is far more treacherous. Nearly
everyone agrees that sales of PCs are going to plateau in the next five years
as the market becomes increasingly saturated, and will start falling soon
thereafter. How companies fill that void will separate the eventual winners
from the losers. Gateway's promising numbers make clear it's on to something.
Its answer has been to concentrate on ``beyond the box'' revenues:
software, training classes, financing, Internet service--anything that can be
bundled with a PC to boost the margins on a sale. More than half of Gateway's
profits come from such add-ons, compared with about 15% at major rivals,
according to Chase's Winnitzki. Says Gateway CEO Jeffrey Weitzen: ``We're
building a business that's about more than just the PC.''
Gateway is finding new ways to reach consumers, too. Since 1996, the
company has opened more than 600 Country Stores and kiosks in OfficeMax
locations--retail outposts where customers can test and order a machine. The
stores also provide a platform for selling services such as classes, which
offer margins as high as 90%, compared with the company's 23% gross margins
overall.
That formula may not be the prescription for every PC maker. But
competitors are pursuing similar paths. Apple, for instance, is contemplating
its own retail chain. And Hewlett-Packard Co. now sells its wares at kiosks
in Circuit City, Staples, and Best Buy stores.
Gateway was early to recognize that the business of selling PCs has
changed, and will likely prosper because of it. But while investors should
watch Gateway for ideas on how to run a PC company, they should not look to
it--or any other rival--as a proxy for the industry's health. The PC market
of old has become too fractured to be represented by any one company.
By David Rocks
Rocks covers the computer industry from New York.
Copyright 2000 The McGraw-Hill Companies, Inc. All rights reserved.
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