The short shelf life of Gates means that he will lose out on the £750,000 advertising contract.
Pepsi is already looking ahead to the new series of Popstars: The Rivals, which will create a boy band and a girl band who will then go head to head in the run up to christmas.
A spokesman for Pepsi said Gates was always on a one-year contract and wished him "best of luck for the future".
The decision comes a week after television's first manufactured band, Hear'Say, announced they were breaking up. However, Liberty X the runner up band in Popstars are still going strong, well going at least.
Gates' last single, a Beatles cover duet with fellow Pop Idols winner Will Young, went to number one but did so with a fraction of the sales of Gates' debut single.
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