The gizmo gamble

Published 9:00 pm Wednesday, November 12, 2003

POWAY, Calif. – Ted Waitt had his eureka moment over a baccarat table two years ago at Comdex, the technology trade show in Las Vegas. His computer company, Gateway Inc., was hemorrhaging money and becoming an also-ran against Dell Inc.

Waitt and a longtime supplier began talking about the flat-panel TVs that were turning up in high-end electronics showrooms. They were sleek enough to hang on living-room walls like paintings, and offered sharper images than standard TVs. But with prices starting at around $5,000, few could afford them.

“Wait a minute, this is a no-brainer,” said Waitt, Gateway’s chairman and chief executive officer. What if he could sell the TVs at more competitive prices and still make a profit?

And so he did.

In the last year alone, Gateway has become a serious player in flat-panel TVs and entered hot categories such as digital cameras, camcorders and music players. Gateway stores got a $20 million facelift that relegated PCs to the back to make room for the new gizmos.

Other big changes are largely invisible to consumers. Gateway stopped manufacturing its products – save for some large, custom accounts – and hired outsiders to handle everything from shipping to employee benefits.

As a result, Gateway will employ 6,700 people by the middle of next year, down from 11,500 at the end of last year and 25,000 in 2000.

“It was just a gut-wrenching level of change,” said Rod Sherwood, executive vice president and chief financial officer.

The holiday season will be a pivotal test of whether Gateway’s gamble pays off. This week, the company is rounding out its lineup with more TVs, cameras and other devices.

The holiday results may determine the company’s chances of competing against the likes of Sony, Panasonic and Samsung. Gateway’s strategy has been rock-bottom prices.

Steve Baker, an analyst at NPDTechworld, gives Gateway high marks in such higher-margin categories as flat-panel TVs and digital cameras.

“My early impressions are that most of what they’ve done has been right,” Baker said.

Although last year’s Christmas season was disappointing for Gateway, Waitt concluded that his plasma TV idea was a winner that augured well for further diversifying away from the now-commoditized world of PC sales. The 42-inch TVs sold out quickly at $3,000 apiece.

So the ponytailed executive and a new cadre of lieutenants charted plans to remake the company.

Sherwood, a 49-year-old mountain climber who worked at Chrysler Corp. during its turnaround in the 1980s, joined in October 2002. Other newcomers were Joe Formichelli, 60, a former IBM executive who set out to overhaul manufacturing and distribution; Scott Edwards, 41, a marketer from Sony’s consumer electronics division; and Bill Parker, 56, who came from Gap Inc.’s Banana Republic chain to remodel Gateway’s shrinking chain of nearly 200 stores.

In May, Waitt boasted to analysts that Gateway could slash prices and still post healthy profits simply by avoiding the usual retail channels such as Best Buy and Circuit City. Instead, it would sell over the phone, the Internet and at Gateway’s own stores.

Around the same time, Gateway decided to close its PC assembly plant in Hampton, Va., eliminating 450 jobs. It hired Affiliated Computer Services Inc. to take over corporate functions from payroll administration to finance and accounting.

Waitt doesn’t discount Dell, saying instead he’s hoping to get a jump on the competition.

Dell is “extremely tough, they’re ruthless,” he said. “They’ll pay some lip service to (consumer electronics), they’ll wait and see what happens, they’ll test a few things out, then they’ll jump in in a bigger way. But by that time, we’ll have critical mass and there’ll be enough room for both of us.”

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