Gateway Chief Is Looking Beyond Hardware

SAN MATEO (06/05/2000) - E-commerce started with PC sales, and Gateway 2000 Inc. was one of the first companies to sell products via the Web. Today, Gateway is still an e-commerce leader, and once again it finds itself at the forefront of change that is affecting the business model of many brick-and-mortar companies.

InfoWorld Editor at Large Ephraim Schwartz sat down with Jeffrey Weitzen, president and CEO of North Sioux City, South Dakota-based Gateway, to talk about recent strategic partnerships the company has made and its plans to become an ASP (application service provider) in the future.

InfoWorld: As one of the first e-commerce Web sites can you talk about where Gateway's e-business stands today?

Weitzen: We actually were the first PC vendor to sell systems over the Internet back in 1996. And since then, we've obviously expanded our product line to over 30,000 products plus 7,000 software titlesInfoWorld: What is Gateway's standing in terms of PC sales?

Weitzen: First quarter, we were fourth overall in units shipped in the U.S.

InfoWorld: PC penetration to the home has never really gotten much beyond 50 percent. Do you think a window of opportunity is now closed and that those numbers are never going to get more than that?

Weitzen: I think probably as you get into the maybe US$300, $400 price range that that will certainly open up another opportunity.

InfoWorld: Businesses appear anxious to get PCs into the home. Do you think the next step will be to give them away as we've seen Ford and American Airlines do?

Weitzen: Yes. Actually, we just did a very large deal with Avon. Avon is trying to get PCs [to sales reps] so they can interact with their sales reps around the globe in an electronic fashion. And so we've just done a deal with Avon to enable that to happen.

InfoWorld: How many PCs are you talking about?

Weitzen: I think about a half million is probably what's out there. On a global basis, it was up to 3 million.

InfoWorld: So they are deploying over 500,000 PCs to their sales reps at home?

Weitzen: Yes, it's all home, because that's where their reps are. They're trying to get technology into the hands of those people, and we're working with them to do that.

InfoWorld: Will you go beyond just the box? Will you be an ISP for them as well or anything like that?

Weitzen: It's a PC, it's Internet access, and then we currently have the opportunity to sell software and training and other things along with it.

InfoWorld: What is Avon's business benefit [of providing PCs to its sales representatives]?

Weitzen: Not just for Avon, but I think many companies will be doing this principally because they want to have better interactions with their employees.

They're doing it as a benefit so that employees can have access to the technology. I think they believe that it'll make them better employees and more educated [employees]. And I also think that there are a lot of efficiencies that they see as a result of it as well. Think about it from a benefit standpoint. Instead of calling a benefits hotline and tying up an operator, [one has] the ability to log in and find out exactly what the latest state of your benefits are, [such as] how much medical you've used and where you are on the deductible. All those kinds of things can now become completely electronic.

So I think there are a lot of efficiency cost savings associated with getting technology into the hands of your employees.

InfoWorld: And any other deals similar to that?

Weitzen: There's a lot of activity in this market right now.

InfoWorld: Are your sales people going out and trying to sell this concept, or are you just waiting for the phone to ring?

Weitzen: No, we are being proactive.

InfoWorld: What are other issues facing Gateway right now beyond just hardware issues?

Weitzen: Beyond-the-box capabilities are extremely important. The beyond-the-box strategy is basically to step back and think about a customer's full set of needs around the computing experience, which absolutely does not begin and end with the PC hardware itself. It extends into a lot of different places: software, Internet access, services. Training is extremely important; financing is extremely important. And so there are a whole host of things that become very important around the computing experience. And so for us, it's not about just providing world-class hardware, but it's also [about] providing a lot of those beyond-the-box capabilities so that a customer can come to us and basically do everything with us, as opposed to trying to piece things together.

InfoWorld: So now Gateway offers an Internet service, an ISP service, and training. Do you want to be an ASP?

Weitzen: We'll be delivering an ASP service through a relationship with eSoft. eSoft has a software architecture that sits on a server. It has what I would call modular functionality so it can be used for something as simple as allowing multiple users to share Internet access. It can also step up and provide e-mail capability [and] Web hosting capability. It can provide firewall and VPN capability. It's also built so that it can [internetwork] with ASPs and work in such a manner where ASPs can basically write to the eSoft platform and in essence take portions of the code and house it on the eSoft platform.

InfoWorld: Does Web hosting and hosting in general eat into your hardware sales?

Weitzen: A lot of small and medium-size businesses are doing it. We're in a relationship with Verio where basically we will be in partnership with them, providing Web hosting solutions as well as basic ISP capability, ranging from dial service through DSL service.

InfoWorld: Does this reduce Gateway's sales of servers?

Weitzen: No, I don't think it will for us. First of all a very small percentage of our business is servers. Clearly Web hosting doesn't impact desktops. In fact, if anything it all drives more hardware sales. Because obviously, ultimately, that even for a hosted service, a company's got to access back into that host site and interact with it. And that's all it is: just kind of a billboard.

InfoWorld: Do you think the phrase 'post-PC era' is legitimate? Is there a post-PC era?

Weitzen: I do not believe that the PC is dead by any stretch of the imagination. It's still a very broadly functioning box, and for anyone who wants to be able to do a fairly broad set of functions, a PC is probably still going to be a very important element of any future model that I can envision.

But I do believe that you are going to see a lot more appliances driven by desire to be mobile or special purpose that are going to emerge. [For example], we announced three Internet appliances. And we announced in Europe, with British Telecom, a WAP [Wireless Application Protocol] application where we're providing a unified e-mail client. So whether you're accessing it from your cell phone or from your desktop, you've got a unified e-mail client and complete seamlessness between the two devices and synchronization between the two devices. And we're actually the first player in the U.K. to do that. We do see the PC playing a very important role in the future, but we don't see the world being dominated by PCs. We absolutely see the advent of Internet appliances that will be used for specialized applications, that will go into places and form factors that PCs really can't fit, [that] will obviously be mobile in nature.

InfoWorld: What keeps you up at night?

Weitzen: Transforming from a highly transactional hardware supplier to one that is much more of a services and solutions provider. If there is a 10-step process to making that transformation, I'd say we're at step two on that 10-step transformation.

And so I'm constantly thinking about how we take that next step. How do we get to step three, and how do we get to step four, and how do we get to step five?

And the other thing, which I think is probably fairly common for most CEOs, particularly in the high-technology [industry], is, how do we continuously attract and retain the best people? Just to give you an example, over the course of the last several quarters, we've begun to build the percentage of our income coming from outside the box pretty rapidly. And I can tell you that we if you go back to last year, I guess what, second quarter we did 10 percent.

Third quarter we did 15 percent. Fourth quarter we did 20 percent. So I think 20 percent of our income is coming from things other than the box.And first quarter this year, it was 25 percent. And we've already stated to the Street that when we exit 2000 that 40 percent of our income is going to come from other than the sale of boxes. That doesn't mean 40 percent of our revenue is coming from outside the PC. So everything that we do around the box is pretty much more profitable than the box itself. And if somebody told me that two years from now we made no money from the box itself, I wouldn't find that either shocking or troubling.

Executive: Close-up

Jeff Weitzen

Gateway

Age: 44

Title: President and CEO

Salary: $790,000

Biggest success: Helping to move the company beyond its role as a system provider to one that also provides financing, Internet service, training, software, and peripheralsKey challenges: Ensuring that Gateway keeps adding value to customer-based goals.

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