Gateway Finds its Way Back to Relevance, Thanks to Acer

By Scott Ferguson  |  Posted 2007-08-28

Gateway Finds its Way Back to Relevance, Thanks to Acer

When it first started in the mid-1980s, Gateway turned itself from a small company with cow patterned boxes into a powerhouse of a PC vendor that had the ability to mold and shape the personal computer market in new ways.

Now, Gateway once again has the ability to change the market place—only this time it will be as a newly acquired division within Acer, which purchased the struggling Irvine, Calif., vendor this week for $710 million.

Almost immediately after Acer, which is based in Taiwan, announced that it had purchased Gateway at a $1.90 a share, the two companies dropped a second piece of news on the market—Gateway would use its right of first refusal to bid for the parent company of Packard Bell, a large supplier of PCs to Europe.

It was an interesting move, since Lenovo had expressed interest in buying the French company to expand its struggling European operations. In an email to eWEEK, a Lenovo spokesman noted that it remains interested in Packard Bell, which could set up a fight between the new Acer and Lenovo for control of the company.

Outside of making waves in Europe, the joining of Acer and Gateway also represents a chance to shake up the U.S. market. While Gateway has managed to lose share during the past few years—it also has little international presence to speak of—Acer has been surging within and outside the U.S. with a line of sleek, low-cost notebooks.

To read more about what the Acer/Gateway deal means for the channel, click here.

The latest quarterly numbers from IDC show Acer increased its market share by about 163 percent in the second quarter of 2007, compared to 2006, in the U.S. In the worldwide market, the company increased its shipments by 55 percent during that same time.

When Acer announced its deal to buy Gateway, executives said that acquisition would create the worlds third largest PC vendor in terms of shipments. The combined entities are poised to ship 25 million PCs in 2008 compared to 20 million this year, according to an analysis by TBR (Technology Business Research).

However, a good quarter does not guarantee success. Richard Shim, who follows the PC market for IDC, said that Acer needs to do more than just combine its shipments with Gateways shipments to become a major player in the PC space. The company must now try to grow its business organically by using the Gateway name and its products to enhance its own line of consumer-centered laptops.

"Acer can not wait two years to maximize the value of this deal," said Shim. "It is a recognition of where the PC industry is right now and Acer can become vulnerable before it hits its stride. The other factor is the consumer market is fickle. It has grown really quickly in the last two and a half years and that kind of pace is not going to continue, which will add additional pressure. They have to get moving now to take advantage of their window of opportunity."

Page 2: Gateway Finds its Way Back to Relevance, Thanks to Acer

Gateway Finds its Way

Back to Relevance, Thanks to Acer">

The best model that Acer can follow is the way Hewlett-Packard followed up on its deal for Compaq, according to analysts. After a struggle in the beginning, HP has managed to firmly embed Compaq within the company, which is one of the reasons the company has successfully outmaneuvered Dell in the last few quarters.

Click here to read more the rising influence of the Chinese Yuan.

For Acer, the deal gives the company a chance to build around two well-known but faltering brand names—Gateway and eMachines. In its report, TBR notes that Acer has lacked a solid desktop offering, which it now has with Gateway. Acer also now has access to Gateways FX line of high-end desktops for enthusiasts and gamers.

This will also give the company a chance to compete in the desktop space against HP, Dell and Lenovo.

While Acer will have additional brands to sell and market, the company does not seem likely to change it branding strategy with the addition of Gateway, according to TBR. However, the move does mean that Acer will now have access to additional shelf space in retail stores, such as Best Buy, plus access to Gateways distribution network and parts suppliers.

"It gives Acer a lot more shelf space and another brand to play with that has some decent recognition in the U.S.," said Stephen Baker, an analyst with the NDP Group, adding that the purchase doesnt mean Gateways problems will disappear; the company has been losing market share with it own line of desktops as well as with its eMachine products.

"I think Acer is going to keep the Gateway products in the midrange position and in the entry level, while it tries to scale up with its own brand to hit that part of the market," Baker said. "I dont know how long the eMachine products will be around. Its pretty hard to manage three different brands."

The one drawback to consolidating some of the brands, Baker said, is that while it may jettison some unpopular or unprofitable products, it also creates more shelf space in retail outlets that companies like Dell and Toshiba would be eager to fill with new PCs.

While most of the talk concerning the Acer deal has centered on the consumer market, the enterprise side of Gateway is up for grabs. Acer said it is in discussions to sell the professional division of Gateway to an unnamed "third party," but how or when this will happen in unclear.

It does seem clear, however, that the other major OEMs are unlikely to buy the division.

"Acer does not expect to operate Gateways Professional segment, which sells PCs and servers to government, education and healthcare customers; Gateway intends to sell the business separately," according to the TBR analysis. "TBR believes it is likely to be sold to a lesser-known PC manufacturer or to a private equity company."

While the purchase of Gateway means that Acer can now make a significant impact in the PC market for the first time in years, it also signals the end of one of the more significant, independent vendors in the IT industry during the last 20 years. When the company first went public in the early 1990s, it was valued at more than a $1 billion.

When times changed, Gateway changed, too. However, its thinking always seemed to be just a little off from what the market wanted.

"For me, the story of Gateway will always be about timing," Shim said.

"When they first entered the direct market, they reaped the benefits for a long time," Shim added. "They were willing to go out on a [limb] with innovative products. They did a lot of stuff before competitors did and a lot of that karma eventually was spent up and they took a lot of risks that were always a little off. They pushed into retail a little too early and that didnt work for them. They then went into the digital home and they again were a little too early into the market."

"They just seemed to pick the wrong model at a time when they just started to grow," Shim said.

Check out eWEEK.coms for the latest news in desktop and notebook computing.

Rocket Fuel