Gateway Plunges, Apple Continues to Rise
Last week Gateway announced results that by virtually all accounts (except Gateway’s) were a disaster. The stock dropped precipitously and the company now has a market value of a scant $1.7 billion. Considering the company reports about $1.2 billion in cash on the books, Gateway, net of cash, trades for a meager $500 million.
In remarks from the company’s founder who triumphantly declared that Gateway had returned to profitability in the quarter (a modest net profit of $9.4 million including an extraordinary gain of $5.1 million), he stated that Gateway had chosen to focus attention on high-end systems as opposed to stabilizing sales and market share. Analysts viewed his remarks as an effort, figuratively speaking (in my words, not theirs), to put lipstick on a chicken. His comments did not reassure analysts or investors. Gateway’s reported sales were off more than a $1 billion from the year-ago quarter. Gateway also announced the closing of 19 underperforming Country Stores and the closing of several offices that provide a variety of support services.
It appears that Gateway has capitulated its share of the low-margin PC market to rival Dell. Absent an attractive consumer product to reignite consumer interest, what chance does Gateway have to survive? Their business model is no longer competitive when compared to industry leader Dell and Gateway offers nothing compelling in terms of new technology or innovative product design.
In contrast, Apple continues to gain market share and mind share among consumers. Apple’s stock continues to rise and interest in the stock, (gauged by recent daily trading volume) has increased. Does Gateway have a future as a major PC maker? It may soon lose its position as the #4 US PC maker to Apple.
Personally, I’m sympathetic to a company that at one time sparked innovation in the PC business (in Gateway’s case it wasn’t innovative technology but the development of a different business model). I’m also sympathetic to the fact that the company’s founder has returned to the business in an effort to restore the company to health. However, this is where the similarities with Apple come to an end.
Gateway’s decision to forsake market share in the fourth calendar quarter in order to return to nominal profitability was not the best decision (IMHO). Gateway had a loyal consumer base. It appears that the company has not catered to that base in order to revive sales and maintain market share. Can Gateway follow Apple’s example and return to sustainable profitability? Without innovative products to offer consumers I believe stabilizing the company’s sales and profit picture will be extraordinarily difficult.
In contrast, the brilliance of Apple’s approach to the market becomes more clear.
I can’t really see a good point in the still on-going Wintel price war. Except for the obvious good part to it (consumers pay less), it presents a whole list of problems:
-bad component quality. I’ve seen component quality go down with each year. Compaq used to be really reliable. Now, they’re iffy. I won’t even start about Dell. Being “king of the price war” only happens through some serious cost-cutting.
-environmentally unfriendly: this hasn’t been mentioned a lot, but a lot of PC companies have dropped considerably in the “green list” these years, simply because they’ve resorted to cheaper and less environmentally friendly ways of manufacturing boxes.
-commodization: with the price war, the difference between one company and another seems to have virtually vanished. To take up my Compaq example again: they used to have a great following in the business market because their hardware was reliable. This has all but eroded. All PC box-makers are the same, which diminished brand loyalty considerably. We now just buy from the guys which are cheapest…
-razor-thin margins: Just how long will Dell be able to keep on doing this. They’re down into the single digits already! The problem is that people will be expecting these cheap boxes even when the price wars are over. Therefore, there really is no “end to the tunnel” here.
Just some thoughts…
Resident “Crazy Belgian of TMO”™
“It takes twenty years or more of peace to make a man; it only takes twenty seconds of war to destroy him.”
– King Baudouin I of Belgium
GTW vs. AAPL: The Graph.
Fairly interesting comparison there. Gateway sways wildly, while Apple slowly but fairly surely rises. (six month period) Of course, this graph isn’t entirely accurate, as GTW’s peak is at a little over $11, while AAPL’s is close to $24.
Curse your sudden but inevitable betrayal!
DT, I have to take issue with the idea that Gateway abandoning its market-share fight was a bad move. Dell will beat them 6 ways to Sunday in the price game, and the longer Gateway slugged it out, the longer they would bleed great rushing rivers of red.
Dell is destroying the PC industry, and I think that Gateway’s only chance is the rout they are taking.
Editor - The Mac Observer
Favorite (but less relevant than it used to be) Quote: Microsoft’s tyranny lies not in its success, but in the way it achieved and maintains that success.
Here’s an interesting conundrum: Is it better to sacrifice market share or customer loyalty?
As discussed earlier, the PC market price war is taking a huge toll on the quality of the brand name systems. A number of folks have expressed concerns lately over the decreased quality in systems, and the recent fall of Dell from Good Guys to Rogue at http://www.consumeraffairs.com is a good illustration of this. One of the anecdotes I use to describe this was while waiting at the bus-stop outside Gateway Country, and watching a man coming out of the Gateway store head off another customer walking in, and convinced her to buy a Dell instead. She never had a chance to set foot in the store.
Market share in the PC works is not nearly as important as it is for Apple. If a PC user goes from Dell to Gateway, they retain the use of all their hardware and software options. Mac market share includes a different OS and standard hardware configuration, and needs a sizable percentage of the market to entice developers to write software and drivers for the OS.
I think it’s clear that Gateway has lost this round to Dell, both by losing market share in the price war, and by losing customer loyalty in the attempt to slash prices. Shifting away from the focus on marketshare is not necessarily a bad choice for them, but I am concerned that the damage already done by sacrificing customer loyalty, and the continues pressure from Dell in the price war may be too extensive for them to return to sustained profitability.
Instant Philosopher; Just add hot topic and stir.
I agree that market share isn’t everything. But in Gateway’s case, considering the huge investment (and huge lease liability on its books) for the Country Stores, without consumer sales they have little left but massive monthly lease payments without the revenue to support them.
Further, as a Wintel PC vendor, what do they have to differentiate their products from Dell or even HP-Compaq? I don’t see the sharp fall off in sales from the year ago period as a harbinger of good things. Once buyers change brands what does Gateway offer that might win them back?
Gateway did have a loyal customer base among consumers. Failing to address their needs or provide a competitive product (even at a razor-thin margins) would have permitted the company to maintain its critical mass.
Reaching nominal profitability through cost cuts can’t go on forever. At some point sales need to increase. Without significant volume purchasing power, Gateway is further hampered in its ability to compete with Dell and HP-Compaq because their component prices may rise as a result.
My concern is that we are witnessing an “incredible shrinking computer company” that has no plan to revive sales and win back customers.
If their new model is to compete with Dell only in areas where there are decent margins, they will need to do more than close 19 stores. They will need to radically change the company’s focus and provide solutions mainly to the enterprise market rather than consumers.
Considering the huge lease liability on its books, can Gateway successfully make the change?
By the way, I’m really enjoying this exchange
Gateway announced last week (week ending Friday 3/1) that they no longer forecast profitability at any time during 2002. The company is focusing on building market share by competing with Dell and others on price. Following Wednesday’s announcement, GTW opened decidedly lower on Thursday and closed the week at under $5.00 per share.
In other Gateway related news, a representative from the company will testify on behalf of the nine dissenting states that are seeking tougher sanctions against Microsoft. As the smallest of the major PC makers, Gateway apparently sees itself on the losing side of the current Windows licensing arrangements.
Although Apple is only a bit larger than Gateway in terms of overall revenue, Apple’s market value is more than five times larger than the value of Gateway and when the valuations are compared net of cash for each company, Apple’s valuation grows to roughly twelve times that of its hardware competitor.