(Business 2.0) – Ted Waitt, the founder and chairman and CEO of Gateway, is sick and tired of the PC business. I can't say I blame him. Consolidation, commoditization, razor-thin margins, persistent price wars, reliance on two omnivorous monopoly suppliers for your product's core components--what sane person would want to be in a business where these are the dominant facts of life? Not me. But then, I'm not Ted Waitt, a man who's devoted his entire adult life to building and running a PC company. The PC business made him rich. The PC business made him famous. The PC business is in his veins. All of which may explain why, as recently as two years ago, Waitt still believed that the PC held the key to Gateway's future. But that was before the roof caved in--on Gateway in particular, but also on much of the PC industry.

So now Waitt is giving up. Not getting out--at least not yet--but kissing off the personal computer as the product that defines what his company is about. In the months ahead, Waitt tells me, "my No. 1 goal is to transform Gateway from a PC company into what we're calling a 'branded integrator.'" In comprehensible English, what he hopes to do is turn Gateway into a diversified consumer-electronics outfit, focusing on gear for the digital home. Before the end of the year, the company will introduce 50 new products in 15 new categories, from PDAs and DVD players to LCD televisions and home theater systems. After that will come game consoles, digital cameras, camcorders, and more.

When Waitt announced this strategic left turn, many observers saw it as an act of desperation, as the clearest sign yet that Gateway's days are numbered. I saw it differently--as a sign that the guy had come to his senses about what a hellhole the PC business is. And while there may be a hint of desperation in Waitt's gambit, desperation, like necessity, can be the mother of invention. In Gateway's case, it may also prove to be the mother of salvation.

"Desperation" and "salvation" didn't used to be terms employed in proximity to "Gateway." With $423 million in profits and a $23 billion market cap, the company was still riding high at the end of 1999, when Waitt stepped down as CEO and said he was retiring. Promptly, the place came apart at the seams. One year later Waitt came back, but instead of playing the role of a Steve Jobs-style savior, he scrambled to contain a situation that was rapidly deteriorating from bad to worse. Profit flipped to loss. The stock price cratered. Today, Gateway has only 4 percent of the total PC market, and its value on the Nasdaq is a paltry $1.2 billion--an amount roughly equal to the cash in its coffers. The company would be a takeover target, but nobody wants to buy it. Most analysts rate its odds of survival at 50-50 and falling fast.

But when I paid Waitt a visit at Gateway's headquarters just north of San Diego, he didn't seem like a dude who was staring down a death sentence (or like one who'd seen more than $7 billion lopped off his net worth by the precipitous slide in his company's shares). As we sat on the porch behind his office, smoking Camel Lights in the afternoon sun, Waitt was as confident and laid-back as ever. The ponytail was still in place; so were the tan and the faded pair of Diesels. The only thing missing was his sense of obligation to spout bogus optimism about the industry he grew up in.

"Everyone's looking for this big PC recovery, but we don't see it coming," Waitt said point-blank. "The glory days of the PC business are gone, over, done, finito." And though he insisted that Gateway plans to stay in the market--if, that is, it can find a way to do so profitably--he isn't counting on the PC for a dime of the company's future growth. "We think the PC is going to continue to be an important part of digital homes and businesses, so it's an important product to keep in our portfolio," he said. "But it has to be one product line for us, rather than the totality of what we do. People don't think of Sony as a stereo company or a TV company. They think of Sony as something broader. We want to be thought of the same way."

Waitt's aspirations may seem fanciful, but they're not built simply on air. Less than a year ago, his company launched an exploratory foray into consumer electronics when it introduced a Gateway-branded plasma TV. With startling speed, the unit--a 42-incher priced at $3,000--became the category's top seller. "Plasma TV told us there's really an opportunity to extend the Gateway brand to a variety of products in the digital space," Waitt explained. "Those products are growing faster than the PC, they have better margins, and, frankly, they're just better businesses to be in."

As Waitt waxed exuberant about the lure of the digital living room, I couldn't help thinking about the frying pan and the fire. The consumer-electronics industry is governed by a set of competitive dynamics that are nearly as brutal as--and strikingly similar to--those of the PC business. Commoditization. Cannibalization. Product cycles that are mercilessly short. Prices that are constantly falling through the floor. And while the industry is free of the rule of Microsoft and Intel (at least for the moment), it's replete with entrenched Japanese incumbents, as well as aggressive Korean upstarts.

In taking on the likes of Sony and Samsung, Gateway--a company known by consumers for only two things: personal computers and cow-patterned cartons--has chosen an uphill climb. But not, I think, an impossible one. The products Gateway is introducing this year are part of the new wave in consumer electronics. Instead of the stand-alone black boxes of old, they're intelligent, networked, and designed to be integrated with the PC. Take, for example, Gateway's new DVD player, which is tricked out with wireless connectivity and is able to retrieve music and photos from your PC hard drive for playback on your stereo or TV. When it comes to next-generation gear like this, no established company has the pole position in the market--and Gateway has some distinct advantages.

One is its experience in the computer business, which gives it the hardware, software, and networking know-how to help it smoothly knit together the various gadgets in the digital home. (That know-how is in short supply in the traditional electronics world; indeed, getting hold of it was one important reason Sony entered the PC business.) Another is its direct sales and distribution model, which should help the company keep prices low by cutting out the middlemen. (Certainly that was key to Gateway's success with its plasma TV.) To Waitt's way of thinking, these two attributes--high-end products at midrange prices--set Gateway apart from the Asian tigers. "Our brand stacks up as a better value than Sony, which is the leader but the high-price guy, and as a lot better quality than the cheaper guys like Samsung," he said. "Not a bad place for us to start from."

To my way of thinking, however, the thing that sets Gateway's new strategy apart--and what makes it so appealing--is the relative modesty of its architect's ambitions. Waitt isn't trying to conquer the world. He isn't even trying to conquer consumer electronics. At one point when I pressed him on how he intends to battle Sony, he started to answer but then shook his head. "Aw, man, I don't want to get into a whole thing of us vs. Sony," he said. "They're a great company. They'll do their thing; we'll do our thing. And we'll carve out a nice little niche for ourselves, where we're making some cool products, we're healthy and profitable, and we're just kinda happy with where we're at."

You could say that, given the circumstances, Waitt has no choice but to mute his ambitions. He no longer has the luxury of delusions of grandeur. But in the wake of an era of rampant high-tech hubris, with its mindless obsession with hypergrowth and its dumb-ass mantras like "Go big or stay home," Waitt's talk of being content with a niche is refreshing all the same. It also sets a goal for Gateway that's both attainable and worthy. One of the lessons of Steve Jobs's return to Apple is that a high-tech firm can be important (and not just important, but profitable, stable, and full of happy employees) without being a colossus, or even growing at a torrid pace. It's a lesson the industry has yet to absorb. Maybe, hopefully, Ted Waitt and Gateway will not just survive but hammer the lesson home.

John Heilemann's next book, "The Valley," will be published by HarperCollins in 2004.