What the Acer-Gateway deal means to the PC market

The move means yet more shuffling in the volatile computer market

For much of its first 15 years, Gateway Inc. was the popular and whimsical midwestern PC vendor in America's heartland, complete with cute black-and-white cow-themed shipping boxes and humorous magazine advertisements.

Then the bottom fell out as other vendors learned from Gateway's success and brought tough competition to a marketplace where margins are thin and the only way up is through increased market share.

Now, with Monday's announcement that Gateway is being bought by competitor Acer in a US$710 million deal, the big questions become what happened to Gateway and what does its acquisition mean for the volatile marketplace of PC makers?

Gateway was founded in 1985 as Gateway 2000 by Ted Waitt in his grandmother's Iowa farmhouse. With its headquarters in North Sioux City, S.D., Gateway became a household name by the mid-1990s and had the direct-sales consumer market seemingly in its pocket. By the end of the decade, the company moved its headquarters to California and simplified its name to Gateway, dropping the "2000" moniker.

Not long after, its market slide began.

"Over the last few years it's looked more and more like Gateway was an acquisition target, even the way its business PC sales went downward," said John Spooner, an analyst with Technology Business Research. "It was much more sizable than it is now," with only about 100,000 PCs being sold to businesses each quarter today. "What Gateway's big problem has been in the last couple years is that while it was able to increase its sales at retail stores, its direct sales to businesses decreased every quarter."

"For Gateway, the direction the company went into proved unsustainable in driving higher revenue and higher profit," Spooner said. "It's very competitive in retail and very difficult to turn a profit there because margins are in the single low digits. They make Dell's latest 8 percent margins look huge."

After the company shuttered its Gateway Country retail stores several years ago, it lost sales to smaller businesses that liked being able to touch and test the machines before buying them. "It never really replaced that capability," he said.

Gateway is not alone in having its place in the market turned upside down in recent years. The once popular Compaq Computer -- which acquired Digital Equipment in 1998 --was itself bought out in a US$25 billion blockbuster deal by Hewlett-Packard in 2001. But the merger took several years to really gel and less than four years later, difficulties in managing the transition helped lead to the ouster of then-CEO Carly Fiorina in February 2005.

Powerhouse PC and laptop maker Dell hasn't always had smooth sailing either. Though it soared through the 1990s and into this decade as a market trendsetter, it has been humbled recently by quality problems, customer service and support complaints and by financial restatement issues.

Even IBM gave up its fight in the PC marketplace two years ago when it sold that part of its business to Chinese PC maker Lenovo Group so it could focus on its strong server and services businesses.

The former Micron Computer Co., which also had splashy and colorful ad campaigns in the 1990s through 2001, was purchased by buyout firm Gores Group in June 2001 and later sold off as MPC Computers, focusing now on business, government and education sales.

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