Source: Aug.10th issue of Forbes, "For whom the Dell tolls"
By Michelle Conlin
WHEN THE HISTORY OF THE PC is written, the name Theodore Waitt will have an honored place-but that's not what's concerning the brilliant 35-year-old founder of Gateway these days. In a business where you grow or die, Gateway's growth has clearly slowed.
Suddenly the trends in the personal computer business are going against Waitt.
Ever since he dropped out of the University of Iowa and began cobbling PCs
together on his dad's farm 13 years ago, Waitt has marched to his own drummer,
operating far from Silicon Valley and selling souped-up boxes to wireheads and
tech-savvy users for an average cost of $2,253.
Two years ago high-end users were half the PCmarket. Now they only make
up 25%, as more than half the market is now in machines that cost less than
$1,500. In this price-conscious market, Gateway has been under intense pressure.
Its average selling price for its units dropped 12%last year and 3% in the
first quarter of this year.
Like Michael Dell, Ted Waitt pioneered direct selling of computers, but with this
difference: Whereas Dell concentrated on the corporate market, Gateway sold
mostly to individuals-a bad mistake. Five years ago Dell lost $36 million on
sales of $2.9 billion, while Gateway earned $100 million on sales of $1.7
billion. Last year? Dell's sales of $12.3 billion were double Gateway's. And
Dell earned $944 million, almost nine times as much as its South Dakota
competitor. Though business customers make up 30% of Gateway's sales,
they're mostly small and midsize shops.
Moreover, Dell has a 10% market share in the high-margin business of
servers, those computing storage device units. Now that desktop and notebook
prices are tumbling, servers-with average prices of $7,500-are providing some
price stability. For every 33 desktops or notebooks Dell sells, it also sells a
server. Gateway's ratio: 94-to-1.
"You are going to see a server marketing campaign geared toward small and
midsize businesses," Ted Waitt told FORBES. But for now the numbers tell the
score: Dell Computer's operating income margins rose, from 9.2% in 1996 to
10.7% last year, while Gateway's sank, from 7% to 4.6%, in the same period.
To hold on to its consumer market base, Gateway is spending an average of
$685,000 a pop to open so-called Country Stores, retail showrooms that carry no
inventory but let potential customers try out Gateway machines and place orders.
Gateway has already opened 58 stores in 26 states, and plans to open 42 more by
the end of this year.
In another bow to the consumer market, Gateway announced a new financing
gimmick in late May called Your Ware. Consumers pay, say, $50 a month for a
$1,249 desktop that comes with videogame software, Internet access and a promise
from Gateway to buy the unit back if you trade it in for a newer model. But after
three years, for example, Gateway would only pay you about five cents on the
dollar, says Piper Jaffray's Ashok Kumar. Gateway gets fees from the Internet
service provider and the financing company, MBNA.
But consumers may not be enticed. The average interest rate is about 17%, which
is about 11/2percentage points above the average charge-card rate.
Not only has Dell blitzed the commercial market, it is also crowding Gateway
in the consumer market. In the first quarter of this year-versus the fourth quarter
of 1997-Dell's consumer unit growth was up 6%; Gateway's slid 7%. Overseas,
Dell's unit sales increased 70% in the first quarter of 1998, nearly six times
Gateway's unit growth.
In apparent recognition that he can no longer go his own highly individualistic way,
Waitt is moving Gateway's headquarters to San Diego-a growing high-tech
center-from the cow pastures of North Sioux City. Gateway is still healthily in the
black-earning $110 million last year-but it is clearly losing momentum. This is not a
business where you want to lose momentum.
forbes.com |
