The Real Reason Gateway Failed Spectacularly

Gateway, Inc. was on top of the world in the 1990s. The iconic cow-spotted company dominated computer sales for years throughout this decade, far outperforming rivals in the market by insurmountable margins. And yet, Gateway failed to survive only a decade after reaching $10 billion in annual sales. What happened? How did the computer company go from the top of the world to the bottom of the heap in seemingly no time? The answer is a bit more complicated than you might think. Learning the real reason Gateway failed spectacularly will require a much closer look.

Why Gateway Mattered

In its glorious years, Gateway countered the notion that tech companies were synonymous with sleek, futuristic, or humorless aesthetics. They started on a cattle farm and stuck with that farming look for their entire history. It was charming and appealing, endearing it to the average consumer. While other tech companies marketed to savvy buyers, Gateway and its farmhouse look appealed to the average customer. It was a genius ad strategy that paid off big time for them.

Gateway also found success with its unconventionally affordable products. Their first offering, the Astro, was the first name-brand PC to retail for under a thousand dollars. Not only did they appeal to the average consumer with their more accessible branding, but also with affordable prices. This helped to destigmatize cutting-edge tech as something only wealthy elites could own.

Gateway’s Reception from Critics

Throughout the late 1980s and early 1990s, Gateway was hailed as a working-class hero. Their farmhouse look and affordable products made them a trustworthy brand. Looking back, today’s critics pin Apple’s development of the Apple Store on the success of Gateway’s own retail locations in exclusively rural and suburban areas. Moreover, critics see Gateway’s cow motif as an early example of a high-end brand with an endearing sense of humor.

Gateway Specs

How Gateway Failed: A Complete History

Mike Hammond, Ted Waitt, and Ted’s brother Norm founded Gateway — then Gateway 2000 — on a farm not far from Sioux City, Iowa. Despite the company’s somewhat remote founding, it still managed to find success through the sale of computer parts. However, Hammond and the Waitts wanted more. They wanted to sell low-end computers. More specifically, the Astro – an all-in-one PC – and the first to retail for less than a thousand dollars.

Thanks to continued success in the parts world and some clever advertising, Gateway’s computer sales eventually took off in a major way. The company skyrocketed from $1.5 million in revenue in 1987 to more than $70 million in 1989. By the end of 1990, that number had reached $275 million. They continued leveraging clever advertising with the farming motif alongside other funny ads. The company also started shipping its computers in the now-iconic cow print boxes.

Gateway opened up a spattering of retail stores in rural and suburban areas throughout the U.S. Keeping with the cow look, Gateway adopted a farmhouse style for their stores and labeled them “Gateway Country Stores.” Hammond and the Waitts brothers were a long way off from their humble beginnings in the Waitt family’s farmhouse, but spiritually, it seemed like they were still right there in that old building. They were on their way to becoming the fastest-growing private company in America.

Early Signs of Imminent Failure

In some instances, experiencing exponential growth in a short time can cause just as much harm as it does good. This was Gateway’s main issue as the 1990s began. How could they keep up the rapid pace of 26,469% growth in value in just five years without getting bogged by unfulfilled orders? The answer, it seemed, was first to grow the number of executives at the top. Gateway hired VPs from half a dozen other large computer brands in addition to a new accounting firm to help guide their growth in the right direction.

From there, the company turned to its manufacturing operations. To keep up with this growth, they’d need to grow themselves. In the summer of 1991, Gateway got to work on an enormous 44,000-square-foot building to increase manufacturing speeds. Established not far from Sioux City headquarters, Gateway prioritized affordable, unexceptional construction that put functionality first and foremost. It was a “big, ugly building” — their words, not ours — but it got the job done. And yet, it still wasn’t enough to make them comfortable.

1991’s sales exceeded $625 million. By 1992, that number increased to more than a billion dollars. Who could possibly keep up with this kind of astronomical growth and still deliver the same quality products that got them there in the first place? Undoubtedly, even today’s tech titans would struggle with such a task. As to be expected, Gateway failed to maintain its quality standards. While sales surged, product quality dipped, and shipping became a nightmare, not to mention awful assembly. Their unprecedented success was threatening to become an unmitigated disaster.

The Eventual Demise of Gateway

Hammond, the Waitts, and their fellow executives attempted to pass the blame for the drastic dip in quality. They blamed the customers, the people who made them successful. Their excuse was that increased demand for Gateway products throughout 1992 had made it impossible for them to maintain their quality standards and fulfill orders on time. It was time to make a change. They unexpectedly went public on the New York Stock Exchange in 1993, selling more than 10 million shares for $150 million.

It wasn’t enough. The second quarter of 1993 was the first drop in revenue in the company’s history. Gateway broadened its product line and even expanded operations to Europe. They also massively increased their customer service operations to offset those complaints of poor quality and assembly. For a moment, it seemed this strategy would work. Years 1994, 1995, 1996, and 1997 saw continued growth year-over-year. Compaq offered to buy Gateway for $7 billion. The deal almost went through, but one of the Waitts brothers said no.

Instead, Ted Waitt hired Jeffrey Weitzen, a veteran of AT&T, to run the company. Weitzen immediately changed Gateway’s ad strategy, shifting away from the cattle farm motif. He also moved the company to California and dropped the “2000” from the company’s name. Weitzen’s hiring proved to be a terrible move, to say the least. At the turn of the century, Gateway Country Stores were closed, the product line was spread even thinner into less meaningful consumer electronics, and their attempt at starting an internet service went over like a lead balloon.

Why Gateway Failed

Historians peg Weitzen and company as the reason for Gateway’s ultimate demise. 2001 saw a net loss of more than a billion dollars and a mass firing of more than 9,000 employees. Sales and stock prices continued to plummet in 2002, with the company dropping another 2,500 employees and closing dozens of stores. Weitzen and two other higher-ups were charged with fraud in 2003. There was seemingly no way Gateway could ever come back from such astronomical failure. Then, they made a purchase.

Gateway was far from the #1 spot on the sales charts. But, with the acquisition of a burgeoning up-and-comer, eMachines, they immediately shot back up to #3. This single purchase brought in more than a billion in sales in 2003. It was a long way off from the nearly $10 billion Gateway enjoyed some years back, but it was enough to instill some hope in the failing company. Little did they know, though, that they had already failed. Nothing could bring back the company. Nothing, except a sale.

The eMachines purchase did all right for Gateway for a few years, but behind the scenes, they had never truly stopped cutting costs and taking losses. Manufacturing, sales, and development had been offloaded or outsourced to third parties by the mid-2000s. It still wasn’t enough. The only way out was to sell. That’s exactly what they did in 2007, selling to Acer for $710 million. Once the sale was complete, it was finally official: Gateway failed, once and for all.

Why Did HP and Dell Succeed?

Gateway made several catastrophic mistakes in its final years. From the fraud going on at the top to their failure to keep up with high demand to their poor traversal of the dot-com boom, Gateway failed by the mid-2000s. Their competition made it out on top, though. How did this happen? Let’s look at two possible factors:

• Strategic sales models
• Surviving the dot-com bubble
• Laptops

Sales Models

While the eMachines sale briefly put Gateway back in the #3 spot, it still wasn’t enough to take precedence over the #1 and #2 companies: Hewlett-Packard and Dell. What about these top two tech brands made them triumph over Gateway ultimately? The answer might be in the sales models. Gateway focused on retail stores to sell their electronics in the ’90s. HP and Dell dealt almost exclusively with direct sales. In other words, they only sold to school, research, and professional users instead of the higher costs and low profits of the consumer market.

The Dot-Com Bubble

With the dot-com bubble burst of 2000, venture capital and IPO availability in the tech sector was at a record low. As a result, tech companies worldwide saw massive sales drops in the years that followed. Thankfully for HP and Dell, they were prepared to weather the storm. HP merged with Compaq in 2002 — the company that tried to buy Gateway only several years earlier — while Dell strategically expanded beyond computers to include other consumer electronics.

Laptops

One of Gateway’s greatest mistakes was failing to embrace laptop computers. It doesn’t make much sense in hindsight. Gateway was one of the first to invest in affordable, functional PCs in the late 1980s. Why wouldn’t they have seen the same potential with the production of proprietary laptop in the 1990s? For whatever reason, Gateway failed to put up a laptop to compete with HP and Dell until it was too late to make a difference in their inevitable fate.

Could Gateway Have Survived?

There are many different business, consumer, and other related factors that keep a business afloat or sink it into obscurity. For Gateway to have survived they would’ve needed to make drastic changes to their business approach. If they had invested in branching out their production beyond just computers they might have been able to join rising tech manufacturers like Dell and HP.

Another simple but effective approach that might have improved their chances of survival was focusing on improving their customer service. Gateway had a good reputation among customers, however, there is always room for improvement. If they had put effort into making their customer service available 24/7 or through early internet pathways, that might have helped increase business.

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The image featured at the top of this post is ©Gateway, Inc., Public domain, via Wikimedia Commons.