AOL Pumps $800M Into Gateway Partnership

Number one online service AOL has announced a cross-promotional agreement with Gateway, Inc. that will pump $800 million (US$) in cash and stock into the number two computer reseller.

The deal will give America Online about 5 percent of Gateway, which will in turn receive a $180 million investment in AOL stock.

For its part, Gateway will pitch in $85 million to market its products and services over America Online’s different brands. The move is seen as a strategic boon for Gateway in an age where plummeting computer prices are forcing computer sellers to rely heavily one-commerce for generating revenue.

The announcement came on the same day that both companies reported better-than-expected quarterly earnings.

Powerful Match

“For the first time, AOL and Gateway are joining forces — bringing together the world leaders in consumer interactive services and PCs,” said Bob Pittman, America Online’s chief operating officer. “Because our strengths and vision are so complementary, we look forward to working with Gateway across a full range of initiatives, including the joint development of next-generation devices and other products and services — including broadband — that will make the medium more accessible and more valuable to consumers.”

AOL and Gateway will also take advantage of Gateway’s retail presence to create computer and Internet training programs for AOL subscribers and Gateway customers. The programs will be made available to consumers and businesses via the Internet or at one of Gateway’s 180 brick-and-mortar locations.

Ubiquitous Presence

Under the agreement, the Dulles, Virginia-based AOL’s software will be loaded on all Gateway computers, making its online service available to Gateway’s 5 million customers. AOL is currently estimated to have about 18 million subscribers.

The move comes only months after America Online implemented an ambitious rebate program to beef up the membership of its subsidiary CompuServe. Under that program, AOL is kicking back $400 to any consumer who buys a PC and agrees to sign up with CompuServe for three years.

Such brick-and-mortar giants as Circuit City, Office Max, and CompUSA, as well as PC manufacturers HP, Compaq, eMachines and IBM are participating in the promotion. According to AOL’s quarterly report, the effort has added 378,000 new CompuServe subscribers thus far.

Multi-Faceted Strategy

As part of its new partnership with Gateway, AOL will also take over the operation of Gateway.net, which has about 600,000 subscribers.

The companies said they will share revenue on Gateway.net and Gateway will collect a fee for every customer who signs up with AOL.

“AOL’s infrastructure, scale, expertise and access to millions of potential customers will only strengthen Gateway’s position as the leading PC player in Internet space,” said Jeff Weitzen, Gateway’s chief executive officer.

Industry observers believe that the new venture is consistent with AOL’s multifaceted “AOL Anywhere” strategy because it also exploits the fledgling home networking appliance market and continues to build a massive subscriber base as a hedge against losing business to cable broadband services.

Still Needs Broadband Assets

Meanwhile, according to analysts, if there is a chink in AOL’s marketing armor, it is the lack of broadband assets. For that reason, AOL has been talking to Bell Atlantic for several months about using its high-speed Internet Digital Subscriber Lines to deliver its service. Additionally, the shortcoming is also the motivation behind AOL’s interest in purchasing Excite@Home.

Nonetheless, experts feel that by building up its subscriber base, AOL is developing such a strong branding that it will be difficult for rivals to pry customers away.

Tying Customers In Early

It has been shown that even AOL subscribers who decide to switch to broadband often opt to remain connected to the service for a reduced membership fee because of its ease of use and familiarity. In fact, sales literature from cable giant Comcast@Home seems to confirm this trend.

In the sales piece, Comcast@Home assures its potential customers that they can still keep their AOL service — even after switching to its high-speed Internet connection.