ARS Outlook:
Will Waitt Be Gateway's White Knight—Again?

The PC market is in a period of heightened competition and ruthless price wars, requiring that manufacturers pay extremely close attention to the competition as an essential survival tactic. So what's this mean to your ISP?

by Toni Duboise of ARS, Inc. [February 9, 2001]

Following Gateway's calamitous Q4 results, the company's founder Ted Waitt reclaimed the helm as chief executive officer. Since Waitt's departure a year ago, the company was commanded by Jeff Weitzen and continued to show growth until the most recent quarter when the entire PC market was hit by a sudden slump in US consumer demand.

Relying on the US consumer market as its primary focus, Gateway suffered more than its rivals registering a 7 percent, or 80,000 unit, decline in Q4 shipments compared to a year ago. This translated to a dismal 97K loss in revenue and declining US market share (9.3 percent in 4Q99 compared to 8.1 percent in 4Q00).

Grasping price is king
While a slowdown in consumer sales was perhaps tolerable due to the overall market situation, declining market share was apparently too much for Waitt to bear and the likely cause for Weitzen's unceremonious departure.

Gateway was certainly not alone in underestimating the warning signs of slowing economic conditions and failing to foresee the shortfalls of the past season.

Yet, a key flaw in Gateway's implementation exists in its lack of providing a more aggressive pricing structure in a field where "price is king" mentality—a result of ramped up competition in the PC space. Shortly after taking over the reins of the company, Waitt himself indicated Gateway's lack of competitive pricing as a reason for the company's problems.

Gateway, a company that prides itself on being in touch with its customers, seriously lost touch with consumers in when it came to market-right pricing.

For example, Compare Gateway's base model PC with its primary rival, Dell Computers. Gateway's Essential 700 is $799 and Dell's Dimension L series starts at $700, both come equipped with Intel's 700MHz processor, 64MB RAM, 10MB hard drive, 48x CD-ROM, 56k modem and 15-inch monitor. Dell wins on price, its base model is as much as 12 percent less than Gateways, and consumers tend to notice a $90 difference on identical units.

The price disparity broadens when Gateway's high-end Professional model is compared with Dell's equivalent Dimension 8100. When both models are configured with Intel's 1.4GHz Pentium 4, 128MB RAM, 32MB VRAM, 48x CD-ROM and 56k modem with no monitor option, the Professional is priced at $1,819 in contrast to the Dimension's $1,599 price tag. The only real difference between these two models is that the Professional model is equipped with a 45GB hard drive versus a 40GB hard drive for the Dimension. The additional 5GB of storage space, however, hardly accounts for the $220 price difference, which equates to another 12 percent competitive pricing advantage for Dell.

Dell's 12 percent pricing edge is huge, especially during a time of diminishing sales. Such an advantage clearly establishes that Dell is benefiting from its direct model strategy, winning market share with the best priced PCs.

Marketing to consumer realities
It is no secret that the primary catalyst in the current PC battlefield is the slowing demand in US markets, an area where PC manufacturers reaped most of their glory in the historical "golden PC age."

Though the PC market will not likely see 20 percent growth rates anytime soon, this does not equate to the demise of the PC market.

The PC has successfully integrated itself into our daily lives both at home and at work. Let's face it though—the PC is reaching a level of saturation in US markets, and without renewed technological advances to spur PC sales, the market is in a state of decline.

The current reality is that the PC is in a period of heightened competition and ruthless price wars, requiring that manufacturers pay extremely close attention to the competition as an essential survival tactic.

In his press conference, Ted Waitt, armed with a new management team, declared aggressive price restructuring as one of the top priorities in Gateway's planned return to profitability. So, we should be prepared to see a new Gateway, focused on aggressive pricing, rising out of Waitt's restructuring plan.

While market-right pricing is imperative, it may not be the only factor impacting Gateway's immediate future.

Getting out of the box
Gateway's "beyond the box" programs continue to bring the PC maker increased margins on past-sale services. This may allow Gateway to stem the flow of lost revenues, which resulted in its recent decline in market share.

Although closing the price-for-performance gap with Dell will be tough, it is a necessary step that should put Gateway back in touch with its grass roots—a company intimately involved with each and every customer.

The lesson for ISPs
So what's this mean for the average Internet service provider?

First, fewer US customers are buying PCs, so fewer households are going online. You will need to make the most of a fewer new-users by making the most of the subscribers you have—get involved with each and every customer.

Second, market-right pricing is imperative. If your Internet services doesn't offer the same features as America Online, then you should not price your services as such.

Third, if you're not generating additional revenue after the sale—with value-added service fees for training, filtering, and the like—then you're missing a major revenue opportunity.

If your Internet services are price right and you can generate incremental sales after you connect customers, your ISP business will remain competitive during market down trend. Your Internet service will win its fair share of new customers.

Take a lesson from Gateway before calamity strikes and you won't have to find a "White Knight" to rescue your business from diminishing returns.

 —End

 

Based in La Jolla, California, ARS Inc. provides business-to-business Competitive Market Intelligence. ARS specializes in the daily tracking and analyzing of the e-commerce, PC, and Networking markets. ARS is a comprehensive resource for competitive market intelligence about you company's products, pricing, margins, marketing activities, promotional campaigns, and channel programs.

   

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