The encyclopedia · Strategy & Leadership · Strategic decision · 2000–2007
Gateway grew from a $10K loan to 25,000 employees — then the PC price war killed it
Gateway 2000 was one of America's largest PC makers — then Dell's price war and a failed diversification strategy drove it to a fire sale.
Gateway
What happened
Gateway was founded in 1985 by Ted Waitt who borrowed $10,000 from his grandmother. The company grew rapidly through the 1990s, reaching $6.29 billion in revenue and 25,000 employees by 2000. It was known for its distinctive cow-pattern boxes and extensive chain of Gateway Country retail stores.
The bursting of the internet bubble in 2000 hit Gateway hard, particularly its small-office and home-office customer base. Compounding this, Dell launched a price war that squeezed Gateway's margins. The company posted a net loss of $1.03 billion in 2001 on revenue of $5.94 billion. Ted Waitt had rejected a $7 billion acquisition offer from Compaq in 1997, a decision that later appeared as a missed exit opportunity.
Gateway attempted diversification into consumer electronics with 118 products across 22 categories, all of which failed to stem the decline. It closed all 268 retail stores by 2004, shrinking from 25,000 to 1,800 employees. The company was acquired by Acer in 2007 for $710 million, a fraction of its former value.
Why it happened
- Dell's direct-sales model and price war destroyed Gateway's margins on its core PC business, which Gateway could not match with its retail store overhead
- The internet bubble burst in 2000 wiped out Gateway's core SOHO customer base just as the company had finished building out its retail infrastructure
- Diversification into consumer electronics and the failed Gateway.net ISP scattered resources without creating a new revenue base
- The 268 Gateway Country Stores became a fixed-cost anchor that could not adjust when demand shifted online
The lesson
A retail-heavy direct-sales model has no buffer when a leaner competitor starts a price war — fixed costs become a liability you cannot escape.
Sources
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