Gateway pricing takes the low road

Summary:The PC maker is trying to lasso new customers by pitching its prices low, inching below former budget niche leader Dell in the process. It could end up costing the company dear.

Gateway wants to hold on to the past--specifically, the low PC prices of 2001--to better its future.

The computer maker, which has introduced several inexpensive PCs since the beginning of the year, is aiming for price leadership. So far, at least, Gateway appears to have reached its goal: Many of its PCs are now priced lower than those from Dell Computer, before rebates and special offers.

Dell had been the price leader until earlier this year, when it switched from cutting prices to holding the line on them. Since then, it has been working to avoid passing on to customers the rising cost of components such as memory. But analysts say that Dell has actually begun to inflate prices by redesigning many of its systems with higher-performance components such as faster processors.

While Dell is inching up, Gateway is touting the lower prices of its PCs as a way to regain customers and thus boost its market share after a disastrous fourth quarter.

Pricing has been a tough issue for Gateway. Some of the company's current problems can be traced to a failure to be more aggressive on prices in 2001, as it focused its efforts on selling services and other "beyond the box" items. Other PC companies, Dell in particular, cut prices and undercut Gateway's customer base.

These days, Gateway thinks it has things figured out. It is paring prices and running a new advertising campaign designed to woo consumers back. The latest ad, designed to promote Gateway's $1,499 500x music PC, teams CEO Ted Waitt with the company's trademark Holstein cow, driving an 18-wheeler on a desert highway and singing along to the Devo song "Whip It." The ad will debut on Saturday.

"We're selecting what we believe are price points that are sweet spots. We, Gateway, want to provide the best (bundle) in the market," Randy Farwell, Gateway's director of product marketing, said in a recent interview.

While many PC makers continue to offer rebates and other promotions, he said, "right now, we're on the track of offering the best value from the get-go."

Analysts say Dell could find itself in the odd position of having to be careful not to lose sales to its lower-priced competitor. But while Gateway appears to have the edge on prices at the moment, analysts have taken a fairly harsh view of the tactics used to get there.

"I wouldn't be surprised to see Gateway pricing below Dell. It's trying to stem (market) share erosion and actual gain share, while Dell is balancing profitability with growth," said Brooks Gray, an analyst with Technology Business Research. "Gateway may sacrifice a couple of quarters of profitability just to maintain its market share."

The difference between Gateway's current actions and what Dell did in 2001 is that Dell was able to slash prices and maintain profitability, though at a reduced level, but Gateway will lose money after adopting the strategy. Gateway has said it expects to post a first-quarter loss of $100 million to $120 million excluding restructuring charges.

How the prices stack up
Gateway's new prices are competitive. The new 300LE desktop, for example, starts at $599. It is configured nearly the same as Dell's new SmartStep 150D and Dimension 2200, but the Dimension, with a 1.2GHz Celeron processor, 128MB of RAM, a 20GB hard drive and a 15-inch monitor, starts at $669.

The companies diverge at the optical drive, however. Gateway includes a more desirable CD-rewritable drive, while Dell offers a CD-ROM. Dell's CD-RW upgrade typically costs about $60, but the company is offering a free upgrade to a CD-RW through April 30.

Dell's non-configurable SmartStep 150D, meanwhile, offers the same processor, memory and hard drive, along with a CD-ROM drive, for $599, equaling Gateway's price.

Competition is intense at the $599 mark. Many PC makers offer their entry-level machines at or near that price at retail level.

Compaq Computer's Presario 5400, for example, starts at $569, and HP's Pavilion 310n starts at $574. The spring lineup from budget PC maker Emachines, meanwhile, begins at $474 before rebates. Its T1120 PC, for example, offers a 1.2GHz Celeron, 256MB of SDRAM, a 40GB hard drive and a CD-RW drive for $574 before rebates.

To gain an edge at retail, Gateway has also begun stocking a small number of PCs at all but 12 of its 277 Country store retail outlets in the United States.

Meanwhile, some of Gateway's high-end PCs are also less expensive than the Dell computers they compete with. The $1,499 500x music PC includes a 2GHz Pentium 4, 512MB of memory, an 80GB hard drive, a 15-inch, flat-panel display, and Boston Acoustics BA745 speakers with subwoofer.

Dell's Dimension 4400 with the same hardware and Harman Kardon HK-695 surround-sound speakers with subwoofer came to $1,758 before rebates on Dell's Web site Friday morning. Dell also includes a free upgrade to a DVD drive. The company is offering a $75 mail-in rebate on the PC through April 3.

Gateway's 700x desktop, priced at $1,999, includes a 2GHz Pentium 4, 512MB of RDRAM, an 80GB hard drive, a pair of CD-RW and DVD drives, and a 17-inch, flat-panel monitor.

A Dell Dimension 8200 configured with the same components, including a 2GHz processor, 512MB of RAM, a 80GB hard drive, a 17-inch flat panel and the closest possible CD-RW and DVD drives, priced out around $2,420 on Dell's Web site Friday morning. Dell is offering a $200 mail-in rebate on the machine through April 3.

Gateway isn't just after Dell. It's also trying to steal Apple Computer's thunder. Gateway will soon release another all-in-one PC with a flat-panel monitor. The Profile 4, which comes out this summer, will feature a 15-inch screen, and a later version will feature a 17-inch screen. Sales of these all-in-one computers have picked up since the introduction of Apple's latest iMacs. Gateway's 500S and 500SE are similarly configured to the low-end and midrange iMac but cost hundreds less.

Dell, meanwhile, enjoys a much stronger market position as the No. 1 PC seller in the world. As a result, it can afford to command somewhat higher prices, analysts say. It can also afford to lower prices if necessary.

But money talks. Many PC buyers, as they have become more sophisticated, have come to realize that PCs from all of the top companies share many of the same components, Gray said. As a result, price, service and support have become the chief differentiators between companies.

"I think they'd definitely consider looking to Gateway for a lower-price PC," he said.

Topics: Hardware

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