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Gateway: Searching for the Right Advertising Agency

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This case was written by Professors George E. Belch and Michael A. Belch. It is intended to be used as the basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. The case was compiled from published sources.

Company Background
The story of Gateway is an inspiring one. The company, originally called Gateway 2000, was founded in 1985 in an Iowa farmhouse by Ted Waitt, the son of a fourth-generation Iowa cattleman. Armed with a rented computer, a three page business plan, and a $10,000 loan guaranteed by his grandmother, Waitt dropped out of the University of Iowa to pursue his dream. Gateways early value proposition was similar to what it is today: offer products directly to the customer, build them to their specifications, provide them with the best value for the money, and offer unparalleled service and support. Waitts start-up company had $100,000 in sales in its first year and by 1993 it became a Fortune 500 company with sales of nearly $3 billion. The companys rapid growth continued throughout the 90s, reaching a peak of more than $9.6 billion in 2000. Over the past 18 years Gateway has been a technology and direct-marketing pioneer. It was the first company in the industry to sell computers online, the first to bundle its own branded internet service with a PC, and among the first direct retailers to sell its own branded consumer electronic products. In 1996 the company became one of the first brick and click retailers when it introduced a nationwide network of Gateway Country stores. Today, the company has nearly 200 stores where customers can try out Gateway products, get advice from technical experts, and learn more about technology in classes offered in high-tech classrooms. Underlying Gateway's growth has been Ted Waitts vision that technology should be fun, easy to use and should enhance and improve the user's quality of life. Gateway uses all of its sales and distribution channels including its call centers, Gateway.com Web site, and its nationwide network of retail stores to sell its products to consumers, businesses, government, and educational institutions. As its customers desire for innovative computer technology and other electronic products has grown, Gateway has been searching for the best way to communicate its product offerings and value proposition to an increasingly tech savvy and demanding marketplace. In a business as competitive and fast evolving as the PC industry, Gateway recognizes that differentiation and brand image are very important in developing and sustaining a competitive advantage. However, in recent years Gateway has struggled to find an advertising theme that resonates with consumers and clearly differentiates the company from competitors such as Dell, Hewlett Packard (HP)/Compaq, Sony, and Apple. In the process Gateway changed advertising agencies five times over the past six years and three times in a 14 month period from early 2002 to 2003.

Gateways Agency History 1993 to 1998

Until 1993, Gateway 2000 relied solely on print advertising that was produced in house. However, as the company grew rapidly, it decided to add television ads to the media mix and to retain the services of an outside agency to work with its in-house advertising department. The companys first outside agency was Carmichael Lynch, Minneapolis who was hired to handle its television advertising. The agency hired a New York commercial director and filmmaker, Henry Corra, to direct the first Gateway commercials. Ted Waitt liked the unscripted, folksy ads that Corra was shooting and his ability to capture the real people in Sioux City, South Dakota which was the home of Gateway at the time. The visionary entrepreneur and artist trusted one another

and developed a strong personal relationship. In addition to Carmichael Lynch, Gateway had retained the services of the London-based Finex agency to handle its European and Japanese creative as the companys sales in these markets were increasing. As Gateway 2000 grew rapidly and its international sales increased, the company decided it needed a global agency. In March 1997 the company moved its estimated $70 million worldwide account to DArcy Masius Benton & Bowles, a global agency that could help the company with its growing international business. DMB&B was selected over several other agencies which made finalist presentations including J. Walter Thompson and TBWA/Chiat Day. Gateways senior VP of global marketing cited DMB&Bs strategic thinking and chemistry as reasons for choosing the agency over the other finalists. The new agency began working with Gateways in-house advertising department, focusing on the consumer market and handling most of the media buying outside of PC publications. Gateways in-house group created ads and purchased media in PC enthusiast publications. DMB&B took over Gateways advertising in the U.S. market immediately and then transitioned into handling creative as well as media buying in Europe and Asia. The first ads from the new agency retained the Youve got a friend in the business tagline that Gateway had been using for several years. A few months later the agency introduced a campaign theme saying Gateway goes From South Dakota to the rescue. An agency executive explained the rationale behind the campaign by noting that South Dakota is a state of mind, a way of doing business, and dealing with people. However, Gateway and DMB& B got off to a rocky start as both sides grappled with the precise roles of the agency and the in-house group and how to collaborate. Also, the agencys creative approach was geared more toward traditional advertising that used actors and scripted TV spots, such as one showing a family in a computer store where piped-in music segues into advice that the family can get what it really needs from Gateway. These types of ads quickly fell short of the expectations of Ted Waitt, who was known for his dislike of traditional advertising. Waitt noted: "When you're just trying to capture reality, you don't need scripts, you don't need concepts, and you don't need agency overhead. You just shoot, pick the magic moments and put them on the air. Our customers and employees come up with better stuff than you could ever write. And better yet it's real." Waitt became dissatisfied with DMB&Bs traditional campaigns and in early 1998 Gateway 2000 took its television creative back in-house leaving the agency to handle media buying and newspaper advertising. On March 19, 1998 Gateway fired DMB&B, dropping the agency after less than a year. Waitt brought back Henry Corra to work on Gateways advertising along with another agency, DiMassimo Brand Advertising, a small creative boutique. Corra and the new agency produced a number of unscripted TV commercials for Gateway that were used for several months.

The McCann Erickson Era

As the personal computer market became more competitive Gateway 2000 made a number of changes to keep pace. In January of 1998 Jeff Weitzen, a former AT&T executive was brought in to run Gateway as Waitt decided to step back from the day-to-day operations of the company. The company also hired a number of high level executives in areas such as marketing, finance, human resources and engineering. A week after dismissing DMB&B, the new CEO announced the hiring of McCann-Erickson Worldwide , one of the largest agencies in the world, as it new agency of record.

Meanwhile the changes at Gateway continued. In April 1998, the company dropped 2000 from its name, shortening it to Gateway as it felt that the 2000 moniker would become dated in the new millennium. The company also introduced a new logo featuring a hand-drawn version of its signature cow-spot box. Over the next few months Gateway began moving its corporate headquarters from South Dakota to San Diego, a move that company officials said was prompted by difficulties in recruiting key executives to a small town in the Midwest. Gateway also began changing the process of transforming itself from a manufacturer of personal computers into a company that would derive its revenue from a variety of sources. The beyond the box strategy was designed to diversify Gateways offerings to include PC financing, Internet access, and various other computer-related accessories and services. McCann Ericksons first campaign for its new client broke in late April and used the tagline Lets talk about your Gateway. Over the next several years the agency developed a number of other campaigns for Gateway including one targeting consumers using the Yourware tagline and another targeting businesses using the Gateway@Work theme. Perhaps the most popular campaign McCann developed for Gateway was the People Rule campaign that began running in August 2000 and was based on the idea that technology is beneficial only if it helps people in their daily lives. One of the phases of this campaign featured actor Michael J. Fox as a spokesperson who was portrayed as the voice of empathy for consumers trying to understand technology issues such as how to choose the right PC, when and how to upgrade, and how to use their computers. Gateways revenue hit an all time high in 2000 reaching $9.6 billion while the companys market share was 8.2 percent, making it the number three PC maker in the U.S. behind Dell and Compaq. Gateway began running the ads featuring Fox in January 2001. However, in the month prior Gateway had held discussions with several other agencies about the future of its brand and the direction of its advertising. In late January, after a management shake-up, Jeff Weitzen resigned as CEO and Ted Waitt resumed control of the daily operations of the company once again. Upon his return as CEO, Waitt announced a net loss of $94.3 in the fourth quarter of 2000 as Gateway's core PC business was not profitable. A few days after Waitt resumed control of the company, Gateway dismissed McCann-Erickson as its agency. A Gateway spokesman described the parting as amicable while McCann executives viewed the dismissal as part of the wholesale changes and management shakeup that accompanied Ted Waitts return. Some industry observers speculated that Gateway had become increasingly dissatisfied with the level of service it was receiving from McCann since the agency had won the Microsoft account in 1999. One source also noted that Gateway felt that McCanns creative work was more corny than folksy and that the agency really did not understand the companys intensely Midwestern culture. Soon after Waitt took control once again, several agencies made presentations to Gateway including former agency DiMassimo Brand Advertising; Fallon, Minneapolis; and Los Angeles-based Siltanen/Keehn. Most observers speculated that Gateway would be awarding the account to Fallon which appeared to best understand the folksy, Midwestern culture of the company. However, negotiations with Fallon broke down over strategic differences and Gateway Brand decided to move its advertising back in-house. Once again, Ted Waitt turned to his friend Henry Corra to direct the companys commercials. Gateway also revived a favorite tagline from the past, the You've got a friend in business tagline, in a series of new TV spots promoting the companys close relationship with customers. The spots featured longtime

Gateway employees talking about meeting customer needs as well as testimonials from loyal customers. Meanwhile the sales decline continued as Gateways revenue for 2001 fell to $6.1 billion and its market share eroded to 7.2 percent while industry leader Dells share increased to 23.5 percent.

Siltanen/Keehns Brief Tenure

While Corra continued to direct and shoot the TV commercials for Gateway throughout 2001, the company also began working with yet another agency, Siltanen/Keehn whose founders worked on Apple Computers Think Different campaign at TBWA/Chiat/Day. After working with Gateway on a project basis for five months, S/K became the companys agency of record for print and broadcast advertising in early 2002 while direct and online advertising remained in-house. The new agency began focusing on brand building for Gateway with ads ranging from humorous spots featuring Ted Waitt with a talking cow, to stylish product-focused ads promoting a new line of lap top computers. The ads featuring interplay between Waitt and the loquacious Holstein cow who advised Waitt on offers and deals to entice customers to buy Gateway products were very popular. Both the client and agency felt that Gateway had a great deal of brand-building potential with the campaign as a cow had been a symbol of the company since it was founded. Rob Siltanen, the agencys chairman and chief creative officer noted that: "They have a lot of equity with the cow. It's at the stores. It's on their signage. And we want to leverage that to its fullest extent." Reactions to the ads developed by S/K were very positive from Gateways customers and employees and it appeared that Gateway had finally found the right agency. During the 2002 Winter Olympics Gateway was running frequent TV spots featuring Waitt and the advice dispensing cow. However, although the whimsical spots continued to run through the summer of 2002, the company had already decided to move its advertising in a new direction. The change was part of Gateways decision to move away from the folksy, rural image and brand itself as a more modern and hip company. The company was struggling with weak earnings and sales and Waitt realized that Gateway needed to modernize its product offerings and expand into new markets in order to shore up the company's slipping market share. Studies conducted gauging consumers' perceptions about Gateway revealed that its advertising was viewed as "entertaining," "friendly," and "Midwestern." However, the research also showed that the campaign featuring the bovine was not playing particularly well in the business space. The campaign raised consumer awareness but was not helping to build the Gateway brand. Additionally, customer tracking research showed some declines in perceptions of Gateway on key attributes such as technology leadership and reliability. While being perceived as "friendly" and "nice" was all well and good, this image was running counter to the identity Gateway now wished to portray. Gateway management decided that it was time to "farm out" the quirky and folksy aspects of its corporate image and create an identity for the company as a maker of sophisticated computer technology with the latest in advanced components. Gateway continued using advertising developed by Siltanen/Keehn into the Fall of 2002. However, S/Ks tenure as Gateways agency of record was short-lived as the company parted ways with the agency after 10 months and moved its advertising to the Arnell Group, New York in October 2002.

Evolving the Brand: From Folksy to Hip with the Arnell Group
The decision to move away from its folksy, rural image and brand itself as a more modern and hip company was not made lightly. However, Gateway had already begun the process of what

Ted Waitt called the "de-prairiefication" of Gateway even before dropping S/K as it agency. Several months earlier, the company had commissioned a new branding campaign from the Arnell Group which was known for its work on brands such as Banana Republic, Donna Karan, Reebok, Samsung, and Chrysler. Arnells branding work included the redesigning of the cow spot logo and Gateway Country stores and integrating a new creative tagline that had been developed by S/K - Gateway: A Better Way. The Arnell Group developed new ads featuring up and coming artists that were designed to project a fresh new image with a cool urban look and feel. In addition to the new ads, the image makeover was also reflected in the introduction of a new logo resembling a computer power button rotated on its side to form a stylized G while retaining a hint of a cow spot. The goal of Gateway's new advertising and branding effort was to show how Gateway provides a better way for people to experience cutting-edge digital electronics and PCs in Gateway Country stores and to purchase direct. As part of its new overall corporate strategy Gateways wanted to leverage its nationwide network of stores and its direct sales model to offer consumers a shopping experience previously unavailable. Gateway stores were becoming digital destinations offering consumers a one-stop shopping experience for computers as well as other electronic products. Gateway offered consumers a hands-on opportunity to try a variety of digital products in its stores and learn firsthand from highly trained sales people how these items could be integrated with a PC. As part of its new strategy Gateway began offering over 150 digital electronics products including a complete selection of digital cameras, digital video gear, MP3 players, printers, software as well as Gateway's own plasma TV with a 42-inch screen. According to Waitt: "Increasingly, consumer electronics are based on digital technology, yet most shoppers aren't able to try them out with a PC, which is the heart of their digital world. We've listened to customers' frustrations with how digital electronics are sold today, and we're introducing a better way to shop for them." With its "better way" advertising theme Gateway hoped to focus on its overall superior customer service in digital electronics retailing. Gateway promised that everything would be better relative to its competitors, both direct and at retail - better products, value, service, support and customer experience.

Leo Burnett Takes Over

Gateway used advertising from the Arnell Group for the remainder of 2002 including the important holiday season. However, the companys sales decline continued as 2002 revenue dropped to $4.2 billion and the company reported a loss of $309 million. Gateway, along with other PC manufacturers, faced intense competition from Dell which continued to cut prices in an effort to increase its market share over Hewlett Packard which had completed its acquisition of Compaq Computer in 2002. By early 2003, Dell had increased its share of the U.S. PC market to just over 30 percent followed by Hewlett Packard at 19 percent and Gateway at six percent. However, Gateway was showing some indications that its new strategy might be working as its plasma TV launch was very successful, capturing more than 10 percent of the U.S. consumer plasma TV market in less than 10 weeks. Gateways expanded line of digital solution products such as cameras, MP3 players and camcorders also produced increases in sales at the companys retail stores. However, Gateway was still getting nearly 75 percent of its revenue from sales of personal computers.

In early 2003 Gateway began an unpublicized review process for yet another agency and heard pitches from two new agencies, Leo Burnett USA and GSD&M in Austin, Texas. The stealth review lasted only three weeks and in March 2003, Gateway announced that it changing agencies for the third time in 14 months and moving the creative portion of its account to Chicago-based Leo Burnett. A Gateway spokesperson noted that the Arnell Group was hired only on a provisional basis to get the company through the critical Christmas shopping season. Some industry observers were surprised by the move to Leo Burnett as Ted Waitt had tended to favor smaller, independent agencies. However, Gateways new executive vice president of consumer marketing, T. Scott Edwards, was a former Leo Burnett executive who was very familiar with the outstanding work the agency did for clients such as the U.S Army, Kraft, General Foods and many other companies and brands. In addition to moving its creative work to Leo Burnett, Gateway also awarded the media buying on its $150 million account to Starlink, a unit of the Starcom MediaVest Group which, like Leo Burnett is a part of the Publicis Groupe. New advertising from Leo Burnett broke in May 2003 using yet another new tagline, The Comforts of Gateway. The goal of the new advertising is to underscore Gateways folksy charm while positioning the company as a solutions provider for an increasingly complex technological world. The first commercials from Leo Burnett depicted a small town Americanas main street coming to life as people use their computers and other personal electronic items. In September 2003, Gateway launched its first fully integrated business-to-business campaign since 2000 with print and TV ads based on the theme Humanology. The ads were designed to show the importance of the human touch behind hardware and software products and depict images of human anatomy merged with Gateway technology. The Acquisition of eMachines Gateway was hoping that the new campaigns from Leo Burnett could help reverse its declining sales in the stagnant personal computer industry while helping the company succeed in its efforts to sell a wide array of digital electronic products. The company recognized that personal computers, as well as other segments of the consumer electronics industry, had become extremely competitive and having a strong brand image was critical for companies competing in these markets. In early 2004 Gateway made a major strategic move by acquiring privately held eMachines, one of the fastest growing and most cost efficient personal computer companies in the United States. The merger of the two companies made Gateway the number three player in the U.S. personal computer market with nearly a seven percent overall market share, and 25 percent of the U.S. retail PC market. The companys new strategy was to sell Gateway-branded consumer and business desktop and notebook PCs, as well as servers and storage products for the professional market, through Gateways existing direct channels while selling eMachine-branded desktops and notebooks through retail channels in the U.S. and abroad. eMachines CEO Wayne Inouye was named Chief Executive Officer of Gateway succeeding Ted Waitt, who remained chairman and the companys largest stockholder. Inouye was a former vice president at Best Buy and it was expected that he would use his experience and eMachines relationships with them, as well as other retailers, to push Gateways lines of televisions, digital cameras and other consumer electronics into retail stores. One of the first moves Inouye made was to close all of Gateways 188 retail stores as he felt they were too costly to keep open. However, a few months later Inoyue made another major change in Gateways business strategy by deciding that Gateway would back away from

selling televisions and other consumer electronic products and instead focus more on its core business of personal computers. Several of its competitors including Dell, Hewlett-Packard and Apple had begun selling consumer electronics products directly to consumers and Inoyue recognized that Gateway would have to add more employees and infrastructure to operate a successful consumer electronics business. Gateway continued to offer some consumer electronic products such as digital cameras, MP3 players and televisions that were made by other companies. However, the new focus at Gateway was on personal computers and cost reduction. As part of his new strategy, Inouye also decided to sell Gateway-branded computers through retail channels such as Circuit City, Best Buy, CompUSA, Costco, Office Depot and Staples in addition to its direct channels. Gateway was positioned as a feature-packed premium brand while eMachines was more of a low-cost value brand. A New Strategy and New Agencies The changes in Gateways business strategy also resulted in a redirection of its marketing efforts. In January 2004 Gateway had hired another agency, Grey, San Francisco, to work on its businessto-business advertising while Leo Burnett continued to handle the consumer campaign. However, Grey won a shootout against Burnett to create back-to-school ads for Fall 2004 as well as work touting Gateways sponsorship of the U.S. Olympic team. In May 2004 Gateway brought in Cathy Stauffer from electronics retailer The Good Guys as its new Senior Vice President of Marketing to succeed T. Scott Edwards who had brought in Leo Burnett when he took over as marketing chief. Under her direction Gateway decided to adopt a promotional strategy similar to that used by eMachines, which relied heavily on advertising in Sunday circulars from consumer electronic retailers rather than focusing on brand building. In July 2004 Gateway once again began contacting agencies and the Leo Burnett and Grey found themselves having to compete for the business. Leo Burnett decided to pass its defense of the Gateway account to another Publicis Groupe unit, Arc North America, which focuses more on below-the-line promotional work, while Grey defended its part of the business. However, neither agency was successful in its defense and in September 2004 Gateway hired Crispin Porter Bogusky (CP+B) to handle its creative work and the Aegis Groups Carat to handle the media side of the $40 million account. CP+B had built a strong reputation for its excellent creative work on accounts such as the Mini Cooper automobile, Virgin Atlantic Airways, Burger King and the American Legacy Foundation truth anti-smoking campaign. Crispin Porter + Boguskys tenure as Gateways agency officially began in November 2004 but lasted less than 10 months as CP+B resigned the account in July 2005. The agency issued a statement that read: During the time that we worked with Gateway, we were unable to agree upon the strategic direction of the brand. We feel that they will do better with another partner. For that reason, we have resigned the account. We wish everyone at Gateway enormous success and remain big fans of the Gateway brand. CP+Bs resignation suggested that it was the agencys decision to essentially fire Gateway as a client although there was also speculation that the company was about to announce a mutual parting of the ways. Gateways director of corporate marketing communications noted that Gateway and CP+B have each decided not to renew a contractual working relationship after being unable to agree upon the strategic direction of the brand. We wish them the best in their future endeavors. We have strong and continuing relationships with other agencies, and we will continue to build upon the momentum weve created in the marketplace.

Following the resignation of CP+B, Gateway moved its creative work to the independent Woo Agency in Los Angels which had been doing online and direct response work for them and had crafted its back-to-school campaign for 2005. By the end of 2005 it appeared Inouyes turnaround strategy might be working as Gateway sales for the year were $3.85 billion, up from $3.65 billion in 2004. However, there was still concern as the year end financial report showed that Gateway was performing well at retail, but poorly in other areas. More lucrative sales to business and government customers as well as direct-to-consumer sales had declined and the company had become heavily reliant on low-profit retail sales. In early 2006 Wayne Inoyue decided to step away as CEO of Gateway and tendered his resignation after less than two years on the job. While Inoyue was successful at slashing Gateways costs and focusing the company back on its core computer business, he had still found it difficult to revive the company in the face of the stiff competition and slim profit margins in the personal computer industry. The Woo Agency continued to handle Gateways advertising as the new management team looked for ways to revive the struggling company amid speculation that it might be acquired by another firm.

Discussion Questions
1. Analyze Gateways decisions to change advertising agencies so many times over the past

nine years. Identify and discuss specific factors that may have led to each decision to change agencies. 2. Discuss how Gateways frequent agency switching has affected the companys branding and positioning efforts. What recommendations would you make to Gateway management regarding its agency switching and its impact on the company? 3. If you were an executive at an advertising agency and Gateways decided to switch agencies again, would you advise your account development team to pursue the companys business? Why or why not?

Sources
Aaron Baar, Gateway Defines Humanology, www.adweek.com, September 8, 2003. Aaron Baar, Same Old Story Has a Twist As Gateway Reviews Again, Adweek, August 2, 2004, p. 8. Bruce V. Bigelow, How now Gateway cow?, The San Diego Union Tribune, December 8, 2002, pp. H1,10. Bruce V. Bigelow, Gateway again swaps ad agencies. Chicago firm to create campaign, The San Diego Union Tribune, March 13, 2003, p. C3. Tobi Elkin, Troubled Gateway turns to new shop as earnings fall, www.adage.com, February 12, 2001 Tobi Elkin, $250 Million Gateway Account Moves in-House, www.adage.com, February 27, 2001. Tobi Elkin, Fox to be Gateway spokesman, www.adage.com, January 18, 2001. Tobi Elkin and Alice Z. Cuneo, Gateway Dumps Siltanen/Keehn After 10 Months, www.adage.com, October 3, 2002. Mike Freeman, Gateway, eMachines close deal for merger, The San Diego Union-Tribune, March 12, 2004, p. C1. Mike Freeman, Gateway CEO quits; interim boss named, The San Diego Union-Tribune, February 10, 2006, p. C1. Andrew Gordon, Gateway Gets Foxy, www.adweek.com, January 255, 2001. Bradley Johnson, Gateway debuts 1st major ads from DMB&B, www.adage.com, September 15, 1997. Bradley Johnson and Alice Z. Cuneo, Gateway 2000 taps DMB&B, www.adage.com, March 24, 1997. Michelle Kessler, Gateways struggle, USA TODAY, January 16, 2002, p. 3B. Richard Linnett, Regarding Henry, Advertising Age, March 26, 2001, pp. 1,37,41. Jim Love and Gregory Solman, Crispin, Gateway Part Ways, www.adweek.com, July 26, 2005. Kate McArthur, Burnett Wins Gateway In Stealth Review, www.adage.com, March 10, 2003. Gary McWilliams, Gateway Barks Right Up Apples Tree in New Ad Campaign, The Wall Street Journal, August 26, 2002, pp. B1,4. Todd Wasserman, Advertising: Gateway Reboots B2B Effort After 3-Year Layoff, www.adweek.com, September 8, 2003.