Gateway Buys Minority Stake in Online Accessories Retailer

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Computer direct marketer Gateway Inc., Sioux City, SD, has grabbed a bigger chunk of cyberspace with its acquisition of a minority stake in NECX, an online retailer of computers, software, accessories and other electronic merchandise.


Gateway said NECX, Peabody, MA, will run an Internet venue for Gateway called SpotShop.com, which will offer Gateway computers and systems in addition to the current NECX product selection. By establishing a venue for the sale of such auxiliary products, Gateway hopes to capture more of the software and accessories business that customers of its hardware currently conduct elsewhere.


"We have the most loyal base of customers in the industry and we are going to leverage that existing base," said Jeffrey Weitzen, president and chief operating officer of Gateway, in a conference call with reporters. "We are going to leverage the fact that in the next three-to-six-to-nine months [after buying a Gateway computer], consumers are going to spend a significant amount of money on peripherals, accessories and software. It gives us the opportunity to increase our revenues and profitability."


Gateway paid $21 million in cash for a 19.9-percent interest in NECX's Internet-sales subsidiary, the NECX Office and Personal Technology Center, and has warrants to purchase the rest of the wholly owned subsidiary of the privately owned company. In a conference call with reporters, Gateway chief executive Ted Waitts also said there were "other considerations" in the transaction that were not disclosed.


Keith Halloran, vice president of marketing at NECX, said the Internet business had revenues of $86 million in 1998, including $10.4 million in December. The company uses a "virtual inventory" model in which a network of about a dozen distributors supply products from 42 warehouses around the country. The company, founded in 1980, seeks to conduct as much business as possible on the Internet and tries to avoid phone orders, Halloran said.


NECX derives about 5 percent of its revenues from computer systems, some of which are made by Gateway rivals. The company already was an authorized Gateway distributor.


Its customer base is similar Gateway's. About 56 percent of its customers are individual consumers, about 30 percent are businesses, 10 percent educational institutions and the rest are government-related entities. The NECX Web site attracts about 50,000 hits a day.


Halloran said NECX has more than 150,000 discreet customer accounts for its products, and about 75 percent of its 1998 revenues came from repeat customers.


NECX also operates a division called Global Exchange, an online trading venue for a variety of computer-related products. The company makes customized e-commerce catalogs for other clients, including Infoseek, the University of Pittsburgh, the Massachusetts Institute of Technology and the Knight-Ridder newspaper group.


Gateway said it currently generates about $10 million a day in sales from its own Web site (www.gateway.com), but it offers a limited selection of accessories, peripherals and software. Through NECX, Gateway will offer about 30,000 items from about 1,000 different manufacturers.


"What we felt we needed was a broader product line," Waitts said. "We needed that and their e-commerce engine capabilities, the technology that they have to manage conversions, and [their knowledge of] how to build content with the products and how to manage that shopping experience for a huge array of products."


Gateway said it had no immediate plans to expand the offerings of SpotShop.com into other products, unlike rival Compaq Computer Corp., which recently agreed to acquire Shopping.com as a broad-based e-commerce vehicle. Waitts also said he has "heard rumors that [computer direct marketing rival] Dell is looking to do something similar" to Gateway's investment in NECX. A Dell spokeswoman would not comment.


In conjunction with the acquisition announcement, Gateway also said it would bundle a year's worth of free Internet access into all of its personal computers purchased for $1,000 or more. The move follows on the heels of Gateway's alliance with the Yahoo Web portal to offer the Gateway My Yahoo customized start page. It also follows Gateway's recent switch to UUNet as an Internet service provider.


In other news, Gateway has agreed to use microprocessors from Advanced Micro Devices Inc. Gateway is the first of the major computer direct marketers to incorporate AMD chips in some of its computers made for the North American market. Previously, Gateway had offered personal computers based on chips made by AMD rival Intel.


Direct sellers had been reluctant to offer computers made with AMD technology, analysts said, because AMD, Sunnyvale, CA, previously had production problems that prevented it from keeping up with the speedy supply demands of direct marketing manufacturers.


The move comes as PC prices continue to fall, and some analysts have predicted that prices could drop by another 15 percent this year.


"AMD is going to give them an opportunity to be more price competitive against the retail brands," said Steven Baker, hardware analyst at PC Data, Reston, VA.
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