(FORTUNE Magazine) – There's a funny thing happening in the personal computer business. The leading players are making all kinds of moves to improve profits--and the initiatives have surprisingly little to do with selling PCs. In fact, as lower prices undermine already crummy margins, anyone who wants to be a top dog in computers must master some new trick. Recent quarterly earnings reports showed that making PCs well is no guarantee of healthy profits. The PC numbers from Compaq, IBM, and Hewlett-Packard were terrible. And while Gateway's recent numbers were fine, only Dell is loping along like a big happy collie, with each quarter bringing nothing but upside surprises.

By now you know the explanation for Dell's success--the company sells directly to businesses, while Compaq, IBM, and HP sell PCs mostly through middlemen, a more inefficient arrangement. So it was something of a surprise when the second-largest direct seller, Gateway, made a major move to expand into marketing a whole lot more than just PCs to consumers. With the announcement in late May of its too-cutely-named Your:)Ware program, Gateway made a leap toward broadening its business. Says CEO Ted Waitt: "We're about customer relations a lot more than we're about PCs." Gateway now will bundle all kinds of things into the sale of a PC to a consumer, including a wide range of software, maintenance and troubleshooting services, peripheral devices like printers and scanners, and even its own Internet service. The resulting package may be paid for over time in a slick new credit arrangement that can segue neatly into a trade-in for the customer's next machine.

"The PC sale is the enabler of all the things that go around the box," explains Waitt. "If we get a 5% margin on a $1,500 PC, we make $75. But if we can make $3 a month on Internet access, that's another $100 over three years." Waitt says PCs just aren't as profitable as they used to be. "Our margin dollars per unit are decreasing," he says. "Three years from now, I don't think just selling PC hardware will allow anybody to have a great business, even Dell."

Some analysts are calling the strategy brilliant. Gateway is the only major PC maker that has a direct relationship with millions of American consumers. (Dell sells most of its PCs to businesses.) Now Waitt and his new chief operating officer, Jeff Weitzen, a veteran of AT&T's phone business, want to give each user a custom experience as a way of developing a continuing relationship. For instance, when you order your Gateway PC, you may be asked to identify your major interests. If your answer is gardening, say, or boxing, Gateway will try to sell you software packages that might appeal. In the future it will even preconfigure your browser for Websites that match your interests and keep you informed of new sites and software.

Compaq's just-completed acquisition of Digital Equipment Corp. is another move beyond simple PC manufacturing. Compaq CFO Earl Mason says that while its gross profits generally run in the 25% range, Compaq needed Digital's $6-billion-a-year, 20,000-person services business, which has a 34% gross margin. Mason agrees that it's getting tougher to make money on PCs and adds that corporate customers have been asking Compaq to provide more service for years: "They told us, 'If you continue to be just a PC business, we may buy a small amount of product from you, but you'll never have the lion's share of the account.' " He says that growing volumes of hardware sales will ensure that Compaq's PC business remains profitable, albeit with lower margins. "It becomes like a grocery store with low margins but lots of turnover," he says.

So should we start thinking of the PC business as mostly an entree to other businesses? Are PCs a loss leader? The razors that set up the sales of the blades? None of the companies will admit they look at it that way, but even big dog Dell says that selling the PC is the bone to which a lot of meaty business is attached. Dell has a panoply of ways to make money when it sells a machine, says vice chairman Kevin Rollins: "We intend to capture all the value that a customer would be willing to spend on a PC at the point of sale." For instance, customizing software for Dell's corporate customers is already a profitable business, Rollins says. So is its growing leasing program. Even shipping is a profit center at Dell, since it gets heavy discounts from shipping companies. Then there are warranties. At Micron Electronics, the No. 3 direct marketer of PCs, President Joel Kocher says gross margins on warranties range between 60% and 80%.

The biggest computer producers, IBM and Hewlett-Packard, have always viewed the PC business as merely part of a portfolio of products and services they offer customers. Says Jim McDonnell, a top HP sales executive: "We once tried being in the computer business without being in the PC business, and it didn't work very well." Though McDonnell says HP is fanatical about ensuring that each line of business is independently profitable, he concedes that it's very good for the mother company when a PC sale helps sell a high-margin printer, for instance. McDonnell adds that HP works hard to sell its most profitable PCs: "A lot of our profits come from servers. If all we sold was corporate desktops, we'd have a very difficult time going forward. Competing in just that business alone is not something any of us would like to contemplate." While HP may not go as far as Gateway's Ted Waitt, don't be shocked if some manufacturer soon bundles a Beanie Baby with its PC in hopes of earning an extra buck.

INSIDE: AMD's latest effort to matter, page 187... Above the Crowd: Cutting in on the Internet money flow, page 188... Alsop on Sprint's bold new "network," page 193