(continued, page 3)

Many of these changes hurt more than just morale. They hurt business. For example, one policy put a time limit on customer-service calls; reps who spent more than 13 minutes talking to a customer didn't get their monthly bonuses. As a result, workers began doing just about anything to get customers off the phone: pretending the line wasn't working, hanging up, or often--at great expense--sending them new parts or computers. Not surprisingly, Gateway's customer satisfaction rates, once the best in the industry, fell below average. What's more, many customers stopped recommending Gateway to their friends and families; Gateway's referral business, once 50% of total sales, fell to about 30%.

At the same time, Weitzen was pushing the Beyond the Box strategy hard. On paper it made a lot of sense: Increase margins on PCs by selling add-on services with them. But beyond-the-box services became more important than the box itself. Under Weitzen, sales reps earned far higher commissions for add-on services than for PCs. So they became lax about selling no-frills computers. Reps would often hang up on customers who didn't want add-on services. Once, a rep told a customer who couldn't afford a pricier bundled PC: "You don't have the money? Call me when you get your tax return back." Concedes sales manager Lisa Echols: "We pretty much put all our values on the back burner. We just went around going after business the wrong way."

Meanwhile, Gateway's costs were skyrocketing. Taking over at a time when the economy was booming, Weitzen spent heavily as he extended the company's reach. He opened 100 new stores in the U.S. and six operations overseas. Meanwhile, such policies as the 13-minute limit were costing millions. SG&A expenses as a percentage of sales soared during 2000, climbing to 20% in the fourth quarter, up from 14% a year earlier. As costs rose, Gateway could no longer afford to match competitors' prices. By the end of the year some Gateway computers cost as much as 25% more than comparable Dell or Compaq machines.

As a result, sales suffered. Close rates (the percentage of customer calls that end in a sale) and store traffic tumbled. PC shipments--which historically had grown twice as fast as the industry average--grew just 9.6%, according to technology research firm IDC, nearly six percentage points behind the industry. In the fourth quarter, revenues sank 7%. Revenues for 2000, at $9.6 billion, inched up a mere 7%. That's dismal for a company that has grown, on average, over 20% a year for the past five years.

Ted Waitt watched all this from the sidelines. He was a hands-off chairman, renting office space for himself 15 minutes away from Gateway headquarters and rarely visiting the company. "I had to give Jeff his space, to let him be CEO," he says. Yet privately he was growing increasingly frustrated. "You could see he was upset about a lot of what was going on," says a high-level Gateway insider, who, citing friendships with both Waitt and Weitzen, asked not to be identified.

When asked about Weitzen's management changes, Waitt replies, "Was I upset about some of the longer-term Gateway people being pushed aside? It was something Jeff and I talked about." What's more, he strongly disagreed with Weitzen's plans to sell Gateway through outside distributors such as QVC and Office Max. "I thought it was damaging to the brand," he recalls. They clashed again when Weitzen rejected a TV ad featuring employee testimonials. Waitt had spent months working on the ad. "There was [a] philosophical difference: Jeff was executing differently than I would have executed as CEO," says Waitt.

Though both men continued to be cordial--and had lunch several times each month to talk business--by early fall their friendship had plainly cooled. The socializing and golf games stopped. When Waitt threw bashes for friends at his home in La Jolla, Calif., Weitzen was no longer invited.

Despite his frustrations, Waitt did not yet want to return to Gateway. "If the economy had kept flying along, I think they might have been able to fix some of the problems," he says. But of course the economy didn't keep flying along. For Gateway the crisis came during the long Thanksgiving weekend--normally the biggest sales weekend of the year--when the company notched sales that were a whopping 30% lower than those measured the previous Thanksgiving.

PAGES 1 | 2 | 3 | 4