Gateway sells AMD kit on the side

I HAVE BEEN aware of Gateway selling AMD kit since late last year. Of course, since then a lot of things have happened. Gateway bought the eMachines company last March, which sells AMD processor based PCs, so it can't claim its Intel only status any more. But its Gateway branded PCs and servers are still only flying the Intel flag. So even with the eMachines buyout, the challenges that are on its plate still apply to the Gateway brand.

This article was written late last year and has been updated. Some comments that were significant at the time have changed, but have been left in. What has changed, and additional commentary, are in square brackets.

Gateway selling AMD kit? I couldn't believe my eyes. But not just Athlon XP based parts - Athlon MP and Opteron as well. (1).

Just to backtrack on some history for those who don't know Gateway's past. In late 2001, the PC vendor announced that it would stop selling AMD processor based PCs. Intel must have celebrated with champagne when Gateway became an Intel only shop. But I bet the chip giant would never have guessed that Gateway would have to sell AMD kit piecemeal, so that it could help to stem its monetary losses - Gateway hasn't made a profitable dime for its last three financial years.

But it's not just run-of-the-mill kit that the IT vendor is selling. Whoever the Gateway buyer is knows their AMD parts. Gateway is selling the cream - Asus and MSI Athlon XP motherboards, and from Tyan, Athlon MP and Opteron mainboards.

On the processor front, the PC vendor is also selling Athlon XP and Opteron devices, but not Athlon MP. I'm sure that those who buy an Athlon MP motherboard from Gateway would like the option of buying the processor(s) as well.

[Gateway is not currently selling the AMD Opteron processor.]

Even though Gateway is selling Athlon MP and Opteron processor based motherboards, and it is also selling Gateway branded Xeon servers as well, it is not selling Xeon processors and mainboards as individual items, which won't go down well at Intel.

[This has changed since last year - a solitary Xeon processor is now available for purchase, but there are still no Xeon motherboards.]

Another sin of commission, as Intel will view it, is the fact that Gateway is not selling the Intel Celeron processor, especially when it has three AMD Athlon XP devices on offer. If actions speak louder than words, then it says a lot about what Gateway thinks about that crippled device. It's just a pity though that the PC vendor doesn't offer the AMD Athlon XP chip in its own Gateway PCs.

[This has also changed since last year. Celeron offerings have now appeared.]

Now that Gateway is selling Athlon XP, Athlon MP, and Opteron processor based components, one has to ask when AMD Athlon 64 based items will make it into the frame. It can't be too far away if the IT vendor wants to reap the revenue gains that its competitors are currently banking.

AMD processor based systems could help the bottom line
Gateway's strategy for returning to profitability hasn't inspired. It has diversified its revenue stream by selling non-PC products, which is all well and good. But if it can't manage its Gateway computer brand to be profitable, which is its core competency, can it reasonably expect financial success from its non-PC operations? It's like being the jack-of-all-trades but the master of none; it doesn't look like a recipe that will bring financial success.

If Gateway wants to repeat the profitable highs of the past, it really needs to be looking at a brand new business model. AMD processor based solutions should be part of its Gateway branded PCs and servers strategy. Isn't it now time that AMD brought Gateway fully back into the fold? That would help the IT vendor to bring to market PC and enterprise solutions that deliver more compelling value.

It is interesting to note that in late 2001, when Gateway announced that it would be phasing out its AMD processor based PCs, eMachines was preparing to launch its AMD Athlon XP based desktop.

With the eMachines purchase, AMD processor based solutions are now part of Gateway's overall strategic planning. But will it offer those in its Gateway branded line-up? If it did, the company's desktop and gaming PCs, and its servers as well, would have far more appeal.

In an earlier piece about AMD gaining equality in HP's US Pavilion desktop line-up, the price difference between similarly configured AMD and Intel processor based retail solutions was highlighted:

The starting prices of the Intel based Pavilion systems are misleading, as it's only when these PCs are configured like their AMD processor based brethren that the difference in cost becomes apparent. When these PCs are configured the same, Intel processor based offerings for top-line, mid-tier, and value offerings cost 17% ($225), 50% ($295), and 11% ($65) more respectively.

Because HP is able to offer its customers significant cost savings for similarly configured AMD processor based PCs, shouldn't Gateway customers have that choice as well?

Its gaming PCs could be given far more appeal by just adding to its line-up Athlon XP and Athlon 64 processor based solutions. We've already reported how the slowest Athlon 64 humbled the fastest P4 in gaming. I could go on, but I think Gateway already knows what the best bang for the buck gaming platforms are.

If Gateway wants to see an indicator of where the gaming market could be headed, it should take a look at TigerDirect's US Web site. The on-line retailer, not slow to grab an AMD processor based revenue opportunity when it sees one, has 67 gaming PCs on offer. As of today, 62.7% were AMD processor based - 37.3% Athlon XP, and 25.4% Athlon 64. So those figures would suggest that going forward, TigerDirect sees AMD processor based gaming systems being the greater seller. (2).

The company's server product is another line-up that is behind the technology curve. When the world+dog seems to be offering AMD Opteron based servers, Gateway's offerings look like they just came out of the Ark. Will Gateway be one of the last to get onboard the AMD Opteron train?

With the Gateway brand an Intel only shop, its selling of AMD kit shows that it understands the value of the AMD platform. But if the Gateway brand is to follow the profitable eMachines model, AMD processor based offerings will have to become part of that line-up.

Don't forget the past
History is a brutal teacher to those who forget or are ignorant of it. For the last quarter 1999, a shortage of Intel processors and motherboards cost the Gateway company up to $250 million when the chip giant failed to meet delivery schedules. (3).

That loss could have been a lot less if Gateway hadn't made a platform decision months earlier. It replaced an AMD processor based line-up with an Intel one, so it no longer had a second source that it could rely on. That short-sightedness ended up burning Gateway severely. You can guess what the PC vendor did after that episode - it introduced an AMD Athlon based desktop line-up.

There is a problem brewing that could also prove costly - platform perception. The technology leadership that AMD64 based systems have demonstrated in the server, workstation, and desktop PC environments makes the Intel Netburst architecture look a generation out of date. If the Gateway brand remains an Intel only shop, and demand for AMD64 based systems goes exponential, Gateway wouldn't have it in its line-up. So history would repeat itself, and the IT vendor's all Intel line-up could be costing it dear again.

Celeron doesn't deliver compelling customer value
Gateway can claim that having an Intel only Gateway brand saves it money. But the abysmal performance of the Intel P4 derived Celeron processor is not good news for the less informed consumer. Those who buy Celeron based Gateway PCs, especially desktops, get seriously short changed. What is more important to Gateway? Cheaper, poorer performing solutions, or products that deliver compelling value?

Gateway prides itself on its customer service, and surveys attest that it is one of the best in the industry. But where does the Celeron processor fit into the customer-centric equation when the AMD Athlon XP processor, and even the humble AMD Duron chip, outperforms and delivers better value? Gateway doesn't even offer the Celeron device on its IT components page, but it would gladly sell you Athlon XP chips instead. So why does it offload them onto unsuspecting consumers as Gateway branded PCs?

[Gateway is now selling Celeron processors.]

The knowledgeable PC buyer will well understand that a Gateway Celeron based PC purchase is certainly taking the less informed consumer for a very unseemly ride. Can a trustworthy Gateway sales associate truly look their customer in the eye and say that its Celeron offerings are the best deal going when Joe's Computers across the way is selling Duron and Athlon XP based solutions? Of course not.

Squaring the loss making circle
Even though eMachines has had its own financial woes, it's been making money for the last two years. Gateway has traded at a loss for its past three financial years. So one can see where Gateway could be headed.

The holing of the Titanic is a good example of where Gateway is today. The IT vendor has hit its own iceberg, but its ship can still be saved. But to avoid sinking, Gateway has to make decisions now that will bring about that outcome.

[The eMachines purchase will definitely help, but it's only the good half of the ship.]

Gateway has to arrest its own decline. Someone has to grab hold of the stick and yank it out of reverse and force it into first. When that is done, the company would be moving in a forward direction, albeit slowly at first. As it implements a 21st century strategy that puts its consumer and business customers first, and gives them the option to purchase AMD processor based Gateway systems, the company would surely shift up a gear at a time to prosperity.

[The eMachines buyout was that first gear change. The layoff of staff and the closure of its stores was the second. But it still has the rest of the gearbox to go through.]

Gateway's future could be very bright
Gateway can no longer afford to tread the path of mediocrity and failure. In its heyday, the company made money hand over fist. If it wants to repeat its glorious past, it will have to take the retail and enterprise selling models to the next stage. That means putting its consumer and business customers truly first. No ifs or buts. But what does that actually mean?

HP is already showing the way. In the same article about AMD gaining equality in HP's US Pavilion desktop line-up, the PC vendor used better marketing language, which happened to be accurate, for all the AMD processor based Pavilion offerings:

"Leading-edge" and "revolutionary" describes the top Athlon 64 based Pavilion offering (a550e); lesser language describes the P4 powered counterpart (a550y) - "superior" and "powerful". It's the same for the middle-tier offerings - "value and flexibility" for the model based on the Athlon XP processor (a530e), and "entry-level" for the P4 powered solution (a410y). The value offerings are singing the same tune - "great value" for the Athlon XP powered model (a510e) and "budget priced" for the Celeron based alternative (a500y).

If Gateway had AMD processor based PCs in its Gateway branded line-up, it could not only follow that marketing model, it could extend it as well. HP didn't seem to have the courage to configure its AMD and Intel processor based Pavilion offerings the same. So even though the Intel based models initially looked attractive from a price perspective, when configured the same (or as close as possible) as their AMD based counterparts, they cost up to $295 more. So if Gateway was bold, it could do what HP didn't and win its customers' hearts.

So if Gateway wanted to, it could take HP's Pavilion PC marketing model for a serious spin. If it drove down that road, the IT vendor could also steer it to its logical conclusion. That would mean that for every product tier, and for all advertising, Gateway would tell its consumer and business customers what IT solution - whether it be Intel or AMD processor based - offered the better value.

If the Intel P4 based Celeron and the AMD Athlon XP processor brands were cars, is anybody seriously saying that the Celeron line-up offers better value, or would be the greater seller? Intel probably sells at least twice as many Celeron chips as AMD's total processor output. So this clearly shows that PC vendors aren't being totally frank when it comes to informing their consumer and business customers of what is best value. So for Gateway, or for any PC vendor that is looking to grow sales exponentially, that has to be a golden opportunity.

But it is not just Athlon XP and Celeron that this applies to. When overall performance, technology leadership, and price are brought into the equation as well, there is broad daylight between Opteron and Xeon, and Athlon 64 and the P4, which puts Intel processor based solutions well and truly in the shade. So this sales opportunity is not only golden, it is diamond crusted as well.

But what about that 800lb gorilla? It isn't going be happy with those that think out of the box. If Gateway did as suggested, and the gorilla threw a tantrum, what should Gateway do? Well, it could drop Intel as a processor supplier and fully embrace AMD. From Sempron to Opteron, Gateway would certainly have a very compelling line-up.

By the end of the decade, the IT landscape is going to look very different from what it is today. The tectonic plates of the IT world are already flexing their muscles. Linux could be far more prominent, especially in the desktop space, and even Sun's Java Desktop System may surprise many by the impact that it could make. On the hardware front, AMD64 technology could make a very big revenue impact in tomorrow's world. So companies that implement a strategy today, which offered the technologies that could be the revenue drivers tomorrow, could be sowing very high yielding returns. So Gateway could prepare for that tomorrow by offering such solutions today.

Failure is no longer an option
Gateway certainly has a lot going for it - its brand name is recognized world-wide, it's renowned for its customer service, and those that buy its products are generally happy with their purchase. But Gateway is still losing money. It really has to do things fundamentally differently if it's going to survive as a viable business. My thoughts are clear about what Gateway needs to do, but the Gateway cow can only be led to water.

[The eMachines purchase shows that the Gateway cow was parched.]

If Gateway offered AMD and Intel processor based PCs and servers side-by-side, how could it effectively compete and grow against the Dells and HPs of this world, especially if it used marketing models that show more deference to Intel than to its customers who buy its products? HP's marketing of its US Pavilion desktop PCs is a good example of this. As already explained, HP customers don't immediately know the real value of the AMD processor based Pavilion offerings until they are configured the same as, or as close as, their Intel based counterparts. If Gateway went down that deferential road, then it won't be seen as being any better or worse, from a customer trust perspective, than the other IT vendors that it competes against. Gateway has a great opportunity to break that mold. But who is more important to Gateway? Those that supply it parts? Or those that buy its products?

Does anyone at Gateway have that vision? If not, let's hope someone somewhere is writing a business plan that will bring about that day.

Dell's success was mainly attributable to the direct selling model that it pioneered. Most IT vendors now use direct selling. If Gateway is to play an influential role in the marketplace, it too needs to be forward thinking like Dell. By putting its consumer and business customers truly first - by building a relationship of trust with them - would, I believe, give Gateway the differentiation that it needs that could propel it to prosperity and safety.

If Gateway went down that customer-centric road, it can't afford to have a strategy that is half baked; it has to go all the way. So if it offered Gateway branded Intel and AMD processor based systems side-by-side, its customers would have to be informed - without any ambiguity - which solutions offered the better value. So when looking at overall performance and value, it should be clear to Gateway that Athlon XP, Athlon 64, and Opteron are clearly ahead of their Celeron, P4, and Xeon processor based counterparts. (4, 5, and 6).

With about a billion in cash and marketable securities, Gateway's future is in its own hands. But as it travels down its own Damascus road, has it seen the vision? Or has incompetence and political expediency blinded it from seeing the light?

[Gateway's restructuring and its purchase of eMachines shows that the IT vendor has seen the light. But does it now have a vision that will reap a prosperous tomorrow?] µ

See Also
Slowest Athlon 64 humbles fastest P4 in gaming
Intel Celerons roasted on open fire for poor performance
HP's Pavilion family shows AMD gets equality

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