Industry experts suggest that the initial impact on consumers of the sale of Gateway to Taiwan PC giant Acer will be small. But one of the biggest issues raised by the acquisition is how Acer will now present its three product brands to consumers (the Gateway purchase includes the eMachines budget PC line), especially considering that some of those brands already duplicate each other.

Acer acquires Gateway for $710m

The deal to purchase Gateway propels Acer into the spot of third-largest PC maker in the world. In a further complication, Gateway announced it will exercise its option to buy out European PC maker Packard Bell - a move that stymies Chinese PC-maker Lenovo's growth-by-acquisition plans. Lenovo is the maker of the popular ThinkPad line of laptops.

How the brands will be segmented in the future will likely depend upon a number of factors. As of now, says IDC research analyst Doug Bell, "they're going to keep all three brands separately in the marketplace - Gateway, eMachines, and Acer".

Name that PC

In a news conference, Gianfranco Lanci, president of Acer, indicated that the company plans to keep, and perhaps even expand, the Gateway brand going forward.

"But I think what we'll see is going to depend upon the region; Acer will see which brands work best where," Bell says. For example, Acer currently is stronger in Asia and Europe than it is in the US.

Combining the product lines produced by the new Acer-Gateway entity, though, will present a challenge on two very different fronts - desktops and notebooks. While the industry has had precedent for a single company maintaining two distinct brands in the marketplace, doing so has proven to be a delicate balancing act.

For example, Gateway has successfully maintained the eMachines brand at retail 3.5 years after it acquired eMachines. However, Gateway has done so by allowing eMachines to continue playing to its established niche, that of a low-cost retail brand.

Five years after HP bought Compaq, the company continues to keep the Compaq Presario brand alive. Although HP similarly tries to create distinctions between its HP Pavilion-branded products and its Compaq Presario-branded products, both lines are available at as well as in tech retail stores. (HP says its Pavilion line is more high-end, while its Compaq line is more no-frills and budget friendly.)

Sometimes, though, the distinctions among the brands can get a bit messy. "Even HP has had lots of challenges managing two brands," says NPD Group vice president of industry analysis Stephen Baker. Baker notes that HP had to learn how to handle positioning and pricing, to find a way to explain what makes a Presario different than a Pavilion, and why.

Which Acer brand will prevail will depend on which market you're talking about - and how successful the brand may already be there. For example, says Baker, "I don't think it's viable to manage three brands like that. It would be costly to do so. And there's probably too much overlap between Acer and eMachines."

The likely result on the desktop side of the equation is that you'll see Acer desktops disappear from retail stores.

The notebook side of the equation presents a different story. There, says Baker, "it's easy to see an Acer-Gateway going up against HP-Compaq. With notebooks, I think the branding is more solid, even though Gateway has struggled a lot lately. Gateway hasn't picked up any market share, while companies like Toshiba have grown market share because they've been aggressive on pricing."

Increased competition for space on store shelves could provide an unexpected test for Acer.

"Right now, Dell would like to pick up shelf space," says Baker of Dell's push to gain retail presence. "So it comes down to: how will Acer manage the differential among their brands [to remain appealing to retailers], when there's another company looking to get their brand into the stores?"

Beyond store shelves: impact on sales, consumers

With regard to direct sales via manufacturer websites, NPD's Baker doesn't see this merger as having much impact. As a direct business, Gateway has been fairly small, and Acer has had virtually no direct business.

"Acer has said they're committed to selling through retail and VARs [value-added resellers], and not being hybrid direct sales and retail sales, as HP and Toshiba are."

Although Acer gains Gateway's direct sales business, that business has not been as successful as one might think. In the second quarter of 2007, Gateway's own financial report says it sold 1.1 million units - 938,000 at retail, 119,000 in its professional division, and a mere 30,000 PCs direct.

That direct sales number is down 35 percent from the first quarter of 2007, and down 15 percent from the prior year. Now, 30,000 in direct sales is an immediate improvement over the Acer's current nonexistent online direct sales presence, but it isn't as if the Gateway deal catapults Acer to the head of the field.

Beyond the brand jockeying, the impact on consumers should be minor. "PC pricing is not likely to be affected, as brand competition tends not to impact pricing as much as configuration trends and supply costs," says Baker.

"Everybody thought that would happen when HP bought Compaq. But we haven't seen anything that would make prices go up from a vendor competition standpoint."

Similarly, Baker doesn't expect PC feature-innovation to take a serious hit. If anything, the merger could help stimulate the combination of features on notebooks and desktops.

"Feature innovation is more likely to come from a desire to differentiate products, and that is as much about competing with what consumers already own versus what other brands are providing."

As for how consumers who've just purchased Gateway products will be affected - or how the acquisition will impact future Gateway product launches - remains to be seen. Details are few regarding the minutiae of melding these two companies. Gateway can say only that its immediate operations will not be affected.

Overlapping market shares

One thing that might change in the future: which brands you see where. Traditionally, manufacturers could distinguish brands by choosing which retail stores carried specific brands and configurations. Those lines are already blurred given the overlap in offerings between the pre-merger Acer and Gateway.

"Just yesterday I saw Acer notebooks sitting next to Gateway notebooks at a wholesale club," recalls IDC's Bell. "So it will be interesting to see how this merger plays out."

Bell's initial impressions are that Gateway, which has significant market share in the US, will remain the combined company's retail brand; meanwhile, Acer will target its eponymous brand at the commercial market, where Acer already sees volume sales.

The whole merger screams of Acer wanting to increase its retail presence in the US by gaining a company whose strengths complement Acer's weaknesses - and the merger with Gateway accomplishes exactly that.

"You're talking about two companies going in two different directions," says Bell.

"Acer's growth has been triple digit in the past three quarters, whereas Gateway has been in negative growth. This is Acer's way of establishing the company in the US market. Acer has been doing well in the small-medium business space, in particular, and lately, they have entered the retail space; but with the acquisition of Gateway, it will solidify a large market share for them in the US."

In the second quarter of 2007, IDC says that Gateway commanded 14 percent of the market share for consumer desktops, about double Acer's 7 percent. Those market positions flip-flop when you're talking about commercial desktops. There, Gateway has just 1 percent, while Acer has 4 percent.

Bell notes that Acer has had some recent success growing its market share in the US, in part by adding retail partners and resellers for both desktops and notebooks. Acer's push into the desktop space has been a relatively recent development, and one that NPD's Baker calls "opportunistic" where the company goes into it "for promotional products or when shelf space was available, as an alternative to a low-cost desktop from HP".

What deal means for Acer

IDC's Bell says that Acer currently remains focused on notebooks here in the US, but desktops have grown to between 20 and 25 percent of Acer's overall US business (by comparison, Gateway's desktop business represents about 55 percent of its total sales).

"In the last year, Acer's domestic desktop growth has tripled, but volume sales have not been high. In the second quarter of 2007, Acer's desktop sales put them in sixth, with 225,000 units sold, behind Apple and Lenovo," says Bell. By comparison, the top gun during this period was Dell (with over 2.8 million desktops sold), followed by HP and Gateway (which sold about 529,000 desktops).

It's possible that the merger will help jump-start sales for both brands. But it's more likely that Acer will use the merger to think about scales of economy for producing products.

"It will take time for them to figure out how to optimally use both brands," says Baker. "But for now both have specific segments they cover, and that isn't likely to change [with the merger]."