Gateway chief looks beyond the desktop

While some chief executives are motivated by future prospects, others thrive on tackling challenges right in front of them.

Gateway chief executive Jeff Weitzen belongs with the latter group. An 18-year veteran at AT&T, Weitzen joined Gateway in 1998 as president--inheriting a sagging stock price and sliding profit margins.

Since then, the company has become a leader in devising ways to tap markets beyond the PC. For example, Gateway became one of the first PC makers to heavily promote its own branded Internet services.

Weitzen talked to CNET News.com about the PC maker's future in devices, including cell phones, as well as the company's deals with America Online and Sun Microsystems.

CNET News.com: You were sort of a lifer at AT&T. How did you end up at Gateway?
Well, actually the way it occurred was that Ted (company founder Ted Waitt) knew somebody who knew somebody who knew me. It was never put together through the headhunting community, which is obviously how most of these things usually happen. Ted just called me.

I wasn't enormously familiar with Gateway, but I knew the brand, I'd seen their advertising, I obviously knew a little bit about the space. And he said he'd really like to get together and talk about some opportunities. And so I figured if he was willing to come to New Jersey, I was willing to talk to him.

Gateway had gone through some fairly turbulent quarters at that time when you arrived (in early 1998). Was the company mostly faced with temporal problems, or were there deeper cultural issues?
Ted was very open right up front and basically said that the business was getting a lot larger, that there are a number of really great people at Gateway, but a lot of people did not have scale experience, working in a large-scale environment. It's a lot different running a $10 billion dollar company than it is running a $2 billion dollar company.

And at the same time, Ted also recognized and was very open about the fact that business was changing. Component parts were coming down, but a lot of other costs in the business were not coming down. For example, it cost just as much to sell a $3,000 PC as it does to sell a $1,000 PC.

Gateway at a glance

HQ: San Diego, Calif.   Chairman: Ted Waitt   CEO: Jeff Weitzen   Employees: 21,000   Annual sales: $8.6 billion   Annual income: $428 million   Date of IPO: Dec. 1993   Ticker: GTW   Exchange: New York More: Gateway quotes Gateway news Gateway message boards Bloomberg (11/10/99)

What was the strategy you hit on?
Well, first of all we recognized that it's extremely important to get into a recurring revenue business. Up until the point when Gateway started to introduce Internet access, (consumer) buying decisions were completely separate. People thought about buying a PC, and then they brought the PC home and they said "Oh, OK, now I need to think about an Internet service provider." They'd either ask their friends or their family or neighbors or they'd kind of wander into the Microsoft registration server and see who was in there or maybe they got a disk in the mail from someone, but it was a completely disconnected process.

Once you started implementing these programs, did the results show up pretty quickly?
They did, and what you've seen as a result of it is that our income has slowly but surely become far more diversified. In the first quarter of this year, 25 percent of our income came from things outside the box itself.

What does this mean in the future? Are PC makers going to become marketing organizations for all things digital? Will Gateway be known as a PC company?
No, I think that Gateway will be known as a kind of a trusted provider of integrated information solutions. And I know that sounds in many respects kind of trite and that "solutions" term gets used an awful lot, but if you kind of peel away who Gateway is, we're a couple of different things: We're a marketing and distribution company, we're a logistics company, and we are a systems integrator.

Gateway has been cutting a lot of alliances. You have the Sun alliance and an alliance with AOL. Is this how the computer market is going to evolve, with different conglomerates teaming up against each other?
One of the principal things that drove our relationship with AOL to begin with was that we had a very common vision of where the world was going and neither of us had the ability to deliver on our own.

Or the ability to compete against each other directly as yet.
For them and us, we were either going to strike up a partnership with them or we were going to wind up competing with them. What was clear was that AOL had the communications and the content capabilities, but they didn't have device capability. At the same time, they saw that they had to have a partnership with someone that was going to be able to network devices together.

How does the Sun deal work?
The Sun deal is a relatively straightforward deal. Sun is looking to provide more complete solutions for their customers, and they recognize the Wintel desktop world does exist inside their customer environments.

And we're a natural partner for them because we have great hardware...and we really don't compete with them. We don't sell into the same market that they sell into. And so we're very natural partners in that respect.

How about cell phones and handhelds?
You'll see us move absolutely into the world of the PDA and into the world of cell phones. In fact, we already have moved into the world of cell phones in the U.K. We're in a partnership with British Telecom to provide a WAP-enabled business.

Do you think you'll be doing branded products and services or will Gateway resell products from Palm or Nokia?
It might vary by device, and I think you'll probably see three different versions of it. One, you might just see us use somebody else's PDA. Another might be where we re-badge something--we don't manufacture it ourselves but we do use our logo on it. And a third would be where we manufacture it ourselves.

As far as devices go, how big of a challenge will it be to make money off these things? Companies right now are subsidizing the hardware costs through service fees, but that definitely cuts into the overall profit opportunity.
I think what people need to understand is that the devices themselves are not free. Anything that comes with a flat panel instantly costs money.

The point that we've been trying to make is this is more than being about form factor and it's more than just being able to browse the Internet. This is about a combination of form factor and application. That's the only thing that's going to drive a compelling need to have one of these new devices.

Still, almost nobody has made any money off appliances.
And nobody has sold many of them, even the guys who were almost giving them away. And in my view, the reason for that is because having that appliance and just being able to browse the Internet and having a standard browser on it--they're trying to confine you into a content space.

When we introduced the appliances that we talked about back in early April with AOL, those appliances are going to do more than just have instant Net access through AOL. I know that was kind of the focus of that announcement, but the real key is going to be what the content is going to look like.

(We are) going to create compelling applications that say "The reason I want that on my kitchen countertop is because it provides all kinds of functionality that's crucial for me to have in the kitchen; it'll make my life easier."