The Gateway Gaffe . . .


1) Beginning in early Feburary, the Gateway Accessory Store (previously known as NECX and bought by Gateway in 2000), offered at least somebody (I just don’t know if this were public or not) a code worth $50
off the purchase of items totalling more than a certain amount.

2) This promotion lasted for about three weeks, and was similiar to nature to promotions Gateway and its competitors had offered in the past.

3) The pricing found at the website for the items in question and in general were at or above those offered by other resellers.

4) The promotion code became generally available, and thousands used this code. The two items apparently most often ordered using the promotional discount were the Visiontek GF4 Ti video cards and the Intel PIV 1.6A processor.

5) I’ve not seen any evidence indicating that anyone received any of these items, though at least some who ordered other items did receive their merchandise at the discounted price without question.

6) The Visiontek video cards were not available for sale until early March, and the website never showed the Intel 1.6A processor in stock (though the 1.8A processor was listed in stock, and sold to those using the coupon).

7) At the end of February, Gateway issued short- and medium-term financial warnings, indicating that the company did not expect to resume profitablility until 2003. In their discussions with stock analysts at that time, Gateway apparently indicated that it was going to end sales promotions.

8) Though Gateway says it expects to have at least a billion dollars in cash available by the end of 2002, credit rating organizations like S&P and analysts are beginning to become skeptical Gateway can effectively compete against companies like Dell.

9) At the very end of February, cancellation notices for a few of these orders began to show up. A wave of cancellation orders were emailed the evening of March 5. It read as follows:

Dear __________,

Thank you for placing your recent order with the Gateway Accessory Store. We regret that our supply of the ________ has been depleted, and we are unable to replenish our stock at this time. Consequently, this item has been removed from our inventory list and cancelled from your order _________. This item is no longer available from the manufacturer and will not be listed on our site in the future.

We apologize for any inconvenience this may have caused and look forward to serving you again. . . .

10) The items in question were removed from the company’s website.

11) The Gateway Accessory Store’s Terms of Sale page can only be reached by first clicking the Help link, then the Terms & Conditions of Sale link. It makes no reference to pricing errors or cancellation of orders, but does state that in the case of dispute, all purchasers agree to submit to binding arbitration and waive the right to participate in a class-action suit.

12) The confirmation emails do contain language which indicates that Gateway reserved the right to cancel unfulfilled orders after 60 days and issue (if applicable) a full refund unless the buyer agreed to wait longer.

13) Those who initially contacted Gateway were given a number of plausible to downright dubious reasons for the cancellation. Later on in the day, a decision was apparently made to allow those who had ordered to manually reinstate the order (at this point, apparently just by phone).

How This Is Different Than Best Buy

1) This discount was a matter of general policy rather than for one item. You can make a clerical error in pricing a single item, but announcing $50 off all substantial purchases is hardly a clerical error.

2) The discount appeared reasonable in comparison to recent similar offers by similar vendors Dell, for just one example, has recently had a number of promotions about as good or even better than Gateway’s $50 off a purchase of $200. For instance, I bought a 19″ Dell monitor last week for someone with a 10% discount and free shipping which combined certainly exceeded a $50 discount. Under those conditions, a maximum 25% discount given as part of a promotional seems far more likely to be legitimate to the average reasonable man than a 70% discount on a brand-new product for which no promotion is being claimed.

3) There was no correction of the error within a reasonable period of time. This “error” lasted for several weeks. Actually, there is no direction indication anybody at Gateway considered this an error at all, and to this point, Gateway has not even claimed such.

4) The discount was regularly honored. The discount was regularly honored from items in stock. The only items that didn’t ship during most of the promotional period were items Gateway could not have had, or at least indicated they did not currently have, and that lack of inventory seemed at least somewhat reasonable for much of the period.

5) Gateway did not have firm policies, and cancellation appears to have violated whatever apparent policies they did have. Best Buy had a Terms of Service contract on its website which reserved the right to correct pricing errors. While the issue of whether or not a statement found somewhere on a website binds buyers to its terms is still legally unsettled, the Gateway website
doesn’t even bring up the matter. Its Terms of Service is even more out of the way than Best Buy’s and is only two clicks away from the sales page, so the validity of its arbitration clauses is weaker than Best Buy’s.

The only applicable conditions for cancellation stated by Gateway provided for automatic cancellation after 60 days. No such purchase met that criteria, and apparently Gateway did not even inform people of their intention to cancel ahead of time and give buyers the chance to tell Gateway to keep their order alive.

While in some instances, Gateway cancelled orders for discontinued products, this is almost certainly not the case for the Intel chip and absolutely not the case for the Visiontek card. Supply may be a different matter; it is possible that Gateway is unlikely to get sufficient supplies of these items anytime soon. However, their stated policies provide a mechanism for handling such situations which was not followed.

In short, if I were a lawyer, I would feel fairly comfortable defending Best Buy. I would not be comfortable at all trying to defend Gateway on the basis of error.

Why Did They Do It?

Here’s some speculations I’ve seen on this.

1) It was a mistake. A few have called this a simple pricing error. There is absolutely no evidence to the effect that this was some form of clerical, and no correction was made within anything resembling a reasonable period of time.

2) People weren’t entitled to use the discount code While this is potentially a stronger argument, Gateway has not used it, and again, the length of time during which the discount was (and for the reinstated orders is) accepted without question makes this a pretty weak argument.

3) Gateway can’t pay their suppliers While Gateway is not in the greatest financial position in the world, the day Gateway gets cut off from Intel processors is the day Gateway is doomed. Since many other products are still available, either this is not a factor, or we have a mini-Enron here. Given the nature of Gateway’s business as opposed to Enron’s, the latter is extremely unlikely at this point.

What might be more likely is that the Gateway Store may be stalling a bit on paying their bills, and their suppliers may be giving them lower priority on hot items, but I would doubt it.

4) The Gateway Store (as opposed to Gateway) got far more orders than the distributor is going to supply. Don’t assume the Gateway Store and Gateway itself use the same supply lines. Remember, this used to be an independent retailer, and not even the websites are fully integrated yet. These items are in relatively short supply throughout the retail chain, and could be well on allocation. For this, being on allocation means that if you normally sell 300 of X a week, you’ll get allocated 300 or less of X, and the distributor doesn’t care if you suddenly get 5,000 orders for X.

5) Gateway was losing money on this, and decided to welsh on the deal The likelihood of this happening really depends on what you mean by “Gateway.”

A lot of people seem to believe corporations are like the Borg. Any and all decisions are made (or at least instantly known about) at the top, and everybody in the company has perfect knowledge of what the company is doing at any given moment.

This is absurd. The numbers I’ve seen of the number of order ranges in the high thousands, maybe a bit over ten thousand. Ten thousand times fifty dollars equals a half-million dollars. If you think Gateway’s chief executives spend time worrying about an ongoing half-million dollar promotion, not. They don’t micromanage like that simply because they can’t, they don’t have the time.

What Likely Happened

What they apparently did do was decide to lower prices generally and stop future promotions because they didn’t need them with the lower pricing. In all likelihood, they probably sent a memo down telling people to save money wherever they can. That’s the kind of decision top executives make.

A few days later, the guy at least a few or maybe more than a few levels down who manages or at least helps manage the Gateway Store hears this. To him, running loss leaders like this $50 discount is like an anchor to the goals he’s probably expected to meet. His bosses are likely to tell him, “You didn’t make money, so we’re not going to give you any extra, either,” and they never want to hear, “I didn’t make money because of all those stupid promotions you made me do.”

This guy got told to run the promotion. He knows (or at least should after the server sale a while back) this is going to bring thousands out of the woodwork. He knows this isn’t going to make many if any longterm customers. In all likelihood, he knows (or shortly finds out) that he’s now got thousands of orders he can’t fill any time soon, so not only is he’s losing money, he’s pissing off customers in the process. Doesn’t matter, he’s told to do as told.

He sees these memos come on down from on-high saying “No more promotions” and “Save money wherever you can” and he goes “Ah, hah!” and creatively interprets those orders to mean cancelling all those headaches. Sure the customers will be mad, but they were going to be mad anyway. At least he’s saved his budget a bunch of money. Even if he gets overturned, the way these things are getting reinstated he’ll at least get rid of part of the problem.

I’m not saying this definitely happened, but something along these lines is a hell of a lot more likely than Ted Waitt deciding to screw you.

Not saying it’s right nor saying it gives Gateway an out or an excuse, either.

But this is how companies really work, especially at the middle levels. It’s corporate division-of-labor, your bosses take all the credit, you take all the blame.

Never assume evil to the preclusion of all else when ineptitude will do. Of course, to the average customer, ineptitude isn’t a whole lot better reason than evil.

I can’t swear it’s essentially a supply problem. The evidence points that way, but it’s not conclusive. Maybe the person who decided is a person who thinks this is all his money, and feels anybody who uses a discount is stealing from him. More likely, his bonuses are dependent on his store making money, and those coupon clippers effectively ARE stealing (from his perspective, if no one else’s) money straight out of his pocket.

So this is an issue certainly worth pursuing at the moment. However, if you do, don’t be too surprised if you ordered a Ti4600 or 1.6A and you get told not to see it for a couple months. Whether it’s due to sheer inablility to get the good or sheer evil, you’ll have a choice to make, and it pretty much boils down to going to court over $50 (and don’t expect class-action lawyers to go flocking to this one. They’ll have to be willing to challenge the validity of Gateway’s TOS (that’s quite possible) knowing that they’ll have to pay Gateway’s legal costs if they lose on that point (which is far less likely; the money they stand to make may well not be worth the risk of losing).

No matter what the reason, this is going to leave Gateway with another black eye when it doesn’t need one.

Email Ed

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