Lance Ulanoff

Things are not always as they seem.

A few months ago Gateway made what many consider a brilliant move and gobbled up upstart competitor eMachines. I think the two companies are using the term "acquisition" in the loosest possible way. The best way to understand what really transpired is to look at the two companies' histories.

eMachines has spent the last six years or so building incredibly affordable systems that offer decent, dependable performance. The company also moved quite quickly from the direct space into the retail channel, where it had some success at outlets like BestBuy.

Gateway's history is perhaps better known. Founded in 1985, it went on to become one of the most popular direct-sales PC manufacturers in the world. By the early '90s it was the sixth-largest PC manufacturer, and the trademark cow-spotted boxes even began showing up in popular TV shows like ER. The future seemed bright for Gateway (I was a fan and bought a PC from them in 1992). But even as the company's star (along with the profile of the pony-tailed CEO Ted Waitt) was rising, there were grumblings in the user community about Gateway's tech support. Customers couldn't get through or get good answers, the volume of calls was rising, and product quality seemed to be falling. Gateway was crumbling under the pressure of its own success. The company did overhaul its support services and the complaints died down, but Gateway never seemed to really recover from its first big stumble. Dell is partly to blame. That company was strong in the early-to-mid--90s and stayed the course when Gateway faltered.

It was during this time, 1996 to be precise, that Gateway opened the first of its country stores (eventually opening close to 300). More recently, it suffered from a bit of an identity problem. The company swung back and forth between the small-business enterprise market and the broader, but more fickle, consumer market, and in 2002 it began branching out into other consumer electronics areas like LCD TVs and digital cameras. The CE products, usually OEMed from other manufacturers, have been priced right and sell fairly well (in late 2003, Gateway's sales of CE products were rising while its bread-and-butter PC business was taking a tumble). The retail stores, however, were abysmal failures. I can see why; you can't expect to win when you offer only one company's brand at a brick-and-mortar retail outlet. People demand choice. The Gateway Country store offered only one.

Clearly, recent Gateway moves have looked more like floundering than a solid business plan.

The eMachines acquisition sounded like a smart move, but the more I read about it, the more I wondered: Who acquired who? Virtually all the major executives at Gateway, including Ted Waitt, have stepped aside in favor of eMachines' honchos. The new CEO, Wayne Inouye, made the decision to shutter all of Gateway's 180 stores. Our sister publication eWeek reported that some people within the company are considering putting Gateway systems into the regular retail channel. The company is even moving from its Poway, CA headquarters to a location near eMachines' home in Irvine.

Maybe the only thing that shows that Gateway was the one that acquired eMachines is the money that changed hands (and it's doubtful that eMachines had enough capital—reportedly, the deal was $50 million and a stock swap of 50 million Gateway shares), but extremely level heads on one or both sides apparently realized that Gateway was in trouble and that everything would have to change for it to survive.

Change is easier when you have a template and people know what to do with it. So, in my estimation, the Gateway folks accepted the eMachines' template and the people who make it work. I'm sure not everyone stepped aside with a smile, but someone in there deserves a big pat on the back for doing what's truly best for the company and its customers.

Now all that's left to do is watch the new Gateway (or as I like to call it G-Machines) roll out new products and see if the eMachines philosophy can help Gateway succeed or if the old Gateway confusion will drag the company down.

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