February 9, 2006 1:20 PM PST
Without Inouye, Gateway searches for new direction
Gateway announced that Inouye resigned Thursday, days after the company reported a decline in fourth-quarter sales through its direct and professional channels. Inouye was brought into Gateway along with the purchase of eMachines to instill operating discipline and bolster the company's retail strategy following years of shotgun strategic decisions.
But as a public company, Gateway needed to find room to grow, and the board of directors appears to have decided that Inouye was not the man for that job, analysts said Thursday.
At one point in the late 1990s, Gateway was flying high as a successful PC company with a well-known brand. But the contraction of the PC market in the early part of the current decade hit the company especially hard compared with its rivals, and even now it hasn't fully recovered. Founder and former CEO Ted Waitt attempted to rebuild the company around a consumer electronics strategy and its own lineup of retail stores, but those efforts did not pay off.
As a result, Gateway purchased eMachines in January 2004 and announced a return to its PC roots. The idea was to position eMachines' brand as a low-cost PC and the Gateway brand as a more expensive category, while also attempting to boost PC sales in more profitable categories like corporations and direct customers. The strategy worked at retail, with Gateway gaining market share and posting quarterly profits. But its professional business never took off and the direct business endured a poor fourth quarter, the most important PC buying period of the year.
Inouye's lack of progress in building those higher-margin businesses appears to have led to his departure, said Roger Kay, president of Endpoint Technologies Associates. The decision must have come together fairly rapidly, as Kay was set to visit Gateway's Southern California headquarters to meet with Inouye in two weeks, he said.
New interim CEO Rick Snyder said on a conference call Thursday it was Inouye's decision to resign.
"Ultimately, he was responsible for the company and the results, and had to take it to the next level," Kay said. "He was a good operating guy, but this seems like a failure of imagination."
It's extremely difficult to compete in the PC business as a low-cost retail provider, said Stephen Baker, director of industry analysis with NPD Techworld. Dell and Hewlett-Packard, the two most successful PC companies, use their PC sales as a way of supplementing higher-margin businesses like servers or printing, where Gateway is not relevant, he said.
Inouye's focus on improving component sourcing and streamlining product lines staunched the bleeding on Gateway's income statement, but more is required of companies that have to answer to shareholders, Baker said. "It seems that if they can't do it, it's probably impossible for somebody to be a PC-focused public company," he said.
Some feel otherwise, however. Prudential Equity Group put out a research note Thursday advocating that Gateway pull back from the direct and professional markets so that it may cut overhead and focus on the things it does best, namely retail PC sales to consumers.
And in light of Lenovo's purchase of IBM's PC business, others wonder if the PC market is ripe for more consolidation. As the Lenovo deal was coming together in late 2004, Gartner issued a report claiming three major PC vendors would exit the market by 2007. Gateway's troubles have prompted speculation that the company might be up for sale.
Snyder strongly denied that Gateway was pursuing a sale as part of its current strategy. And several analysts wondered who would want to buy the company. It's possible that a Japanese or Chinese PC vendor such as Fujitsu might be interested in Gateway, but Gateway still has a chance to survive as a standalone business if it can expand internationally and improve its marketing image, said Leslie Fiering, research vice president at Gartner.
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