Gateway Moooves Beyond Yahoo! With AOL Deal - TheStreet

Gateway Moooves Beyond Yahoo! With AOL Deal

America Online's foray into the PC maker's world might leave Yahoo! out in the cold.
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Even on the Internet, three is a crowd. The

America Online

(AOL)

-

Gateway

(GTW)

lovefest leaves

Yahoo!

(YHOO)

out in the cold.

AOL's announced plan to invest $800 million in Gateway for a 5% stake and a prominent placement on all Gateway desktop computer screens leaves little room for Yahoo!.

It was only in February that Gateway struck a deal with Yahoo! to help drive traffic to its ISP service,

Gateway.net

. By the end of September, the service was growing at a rate of 200,000 subscribers per quarter. But that growth rate may not have been good enough for Gateway, which had been feeling disenchanted with the deal, sources at the company say.

Gateway is expected to make an announcement regarding its Yahoo! relationship this week, according to a source at the company. Officially, "We are exploring ways to personalize our portal experience, and there will be more news on that front in the coming days," says John Spelich, Gateway's director of corporate communications.

Yahoo! created a co-branded "Gateway My Yahoo!" service as one of several distribution deals that it has made this year with hardware and software companies, including

Hewlett-Packard

(HWP)

,

Phoenix Technologies

(PTEC)

,

Caere

(CAER)

and

Softbank

-funded start-up

PeoplePC

. (Softbank is an investor in

TheStreet.com Inc.

(TSCM:Nasdaq), publisher of this Web site.)

As part of the agreement, retail Gateway PCs had the Gateway My Yahoo! start page set as the default home page for Gateway.net subscribers.

"Gateway just didn't want to deal with a growing ISP service and infrastructure, and AOL pays a premium for the subscribers," says Paul Mansky, an analyst at

U.S. Bancorp Piper Jaffray

. Mansky has a buy rating on Gateway, and Piper Jaffray has no underwriting relationship with the company.

Yahoo! didn't respond to requests for comment, but earlier this week, in an interview with

TheStreet.com

, Yahoo! CEO Tim Koogle downplayed the importance of any single distribution deal at this stage of the company's development.

"Over time, if you get to the point where you build a critical mass brand, and if you have a distribution strategy, which we have, then you've got users broadly knowing about you, looking for you -- you've got them bumping into you," Koogle said. "Any one promotional presence deal that you work with ... on a relative basis, is less important."

Derek Brown, an Internet analyst who follows Yahoo! for

Volpe Brown Whelan

, says there will not be any material impact on Yahoo!. The Gateway deal is "just an incremental source of traffic for Yahoo!," he says. Brown has a buy rating on Yahoo! and a strong buy rating on AOL; his firm has no underwriting relationship with either company.

Gateway doesn't break out its financial relationship with Yahoo!, but it appears that it wasn't making that much money on the deal. And even though AOL may not offer the personalized, customized services that Yahoo! offers, it does have something Gateway finds even more valuable: cash.

On top of the $800 million in cash and stock over the next two years, AOL will be offering a "super bounty" for every subscriber it gets through Gateway.net, which AOL will now operate. Randy Hanley, an analyst at the money-management firm

Legg Mason Fund Adviser

, says Gateway could receive as much as $500 per subscriber. Gateway officials declined to break out the financial details of the AOL agreement.

Gateway will take a restructuring charge of 5 cents a share in its fourth quarter, but analysts said the deal should add 7 cents a share to next year's earnings.

Even on the Internet, you can't argue with cold cash.