February 9, 2006 1:20 PM PST

Without Inouye, Gateway searches for new direction

Gateway Chief Executive Officer Wayne Inouye did everything he could, short of reintroducing the cow, to bring the company back from years of quarterly losses. As a reward for his efforts, he's now looking for work.

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.

Wayne Inouye
Wayne Inouye

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.

Snyder
Rick Snyder

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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Gateway Inc., Stephen Baker, eMachines Inc., PC company, CEO

6 comments

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He did what?
"Gateway Chief Executive Officer Wayne Inouye did everything he could"

They don't even make a PC I might be interested in. They use super cheap MB's and they don't even offer a high end/gaming system or carry AMD processors.

Not everyone buys these top of the line systems but they are essential in mantaining a brand image. Anyone getting paid that kind of money should know this already.
Posted by Dachi (797 comments )
Reply Link Flag
Not their focus
Their focus appeared to be corporate and low-end machines.
Not that this direction was a right one, but it really looked like
that was their sole intent. The problems at Gateway are so deep
that I don't think anyone has a clue how to get them out of it.
They have absolutely no corporate direction, a board that only
seems to care when it is politically convenient, and management
that just does not get it. They have killed off everyone at that
company that made it what it used to be. They used to make
cutting edge machines on the PC side. They were the first to
truly create a multimedia entertainment system. They also had
many other consumer machine firsts. But, they waffled, much
like Apple did in the early nineties. They completely lost their
focus and then their minds, jumping from one market to the
next without giving the company ample time for it to succeed at
anything. From Plasma TVs to other consumer devices, from
high-end servers to bare bones cheap windows boxes. Instead
of nurturing any of their directions, they had the attention span
of a two year old in a room full of a million toys. It is really sad,
because their were thousands of people that worked for them
here in the US that really did get it, and really did care about the
company succeeding. Management and executives were too
busy looking to find fighting words with other manufacturers
than to address what really needed to be done at the two
companies.

I really think that the entire board needs to be dismissed, along
with upper and middle management seeing serious performance
evaluations and aptitude assessments. I understand that lots of
people have been stifled that really could make a difference at
Gateway, so maybe a second chance given to those with serious
aptitude, but otherwise, gut the upper management from the
top-down. Investigate and assess capabilities and desires of the
company and then begin to rebuild it, this time making public
their intentions. But, most importantly, they need to stick by
them until they at least have a chance to succeed. They need a
new leader that drives ambitions and goals, and knows how to
get them to fruition. They need to create a leadership team that
is capable of taking the brand back where it should have been
years ago. Good leadership starts at the Top. Great products are
envisioned from everywhere in a company, and great output
comes from a workforce that is stable and well-rounded. When
it was here in the US, it was stable and well-rounded.

Any company has the potential for greatness. Every corporation
has the ability to redefine themselves. Every individual within
that corporation or even company has the ability to make great
things happen. But, without any communication, any clear
direction and any sense of pride in the people the corporation
has under its umbrella, nothing will ever come to pass beyond
mediocre at best. Survival in the computer industry at this point
requires being better than the next corporation, having a drive
to achieve the impossible and the guts to see it through. Right
now, Gateway has very little of any of that. That is why they can't
make any progress other than survival, if you even call it that.

It was once said something to the effect "You've been knocked
down ... the gettin' up is up to you." Are you up to it, Gateway?
Posted by jasonemanuelson1 (82 comments )
Link Flag
For a very long time...
Gateway made machines that were exactly what you describe,
using top-of-the-line parts across the board. It was only during
the "Beyond The Box" years (when they started doing things like
the Destination systems and the wireless home concept that was
truly half-baked) that the company really went downhill.

The Country Stores were a good idea that failed because the
public was confused by the idea. Mot folks expect to get
something when they buy from a "retail" store. They did give a
little gift bag away for a long time, but that proved to be
expensive so it stopped.

And then there was the Service Center. A nice idea poorly
implemented.

The only way Gateway survives is to jettison everything they do
except making quality computers at competitive prices with
extremely good warranties. Getting back to the true basics that
made the company.
Posted by nightveil (133 comments )
Link Flag
Michael Dell says sell it and give $ to shareholders
Oh no, my mistake, that was Apple wasn't it.
Posted by technewsjunkie (1265 comments )
Reply Link Flag
yeah..
dell said that about apple.. but looking at gateway's share price, they might as well be bankrupt
Posted by assman (1101 comments )
Link Flag
 

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