by Gary Beach

How Has the Tech Sector Gone from Being the Driver of the New Economy to an Unwanted Drag on It?

Apr 01, 20013 mins

I am mad as hell, and I am not going to take it any longer!

Week after week, I keep waiting for a Wall Street guru to proclaim we have turned the corner. Instead, the fiscal roller-coaster ride continues. Some experts predict a steep rebound; others have written off 2001.

In retrospect, the year 2000 was not that bad: Corporate sales rose 17 percent. In comparison, profits for 1999 rose about 14 percent. So how has the tech sector gone from being the driver of the new economy to an unwanted drag on it?

According to the monthly CIO/Deutsche Bank Securities Technology Growth Index poll, planned 2001 spending increases for technology are still forecasted for double digits. But the Wall Street bears–spooked by a steep 11 percent decrease in fourth-quarter profits–are taking their toll on your CEO. And your budgets. In November 2000, corporations planned an 18 percent budget increase. By January 2001, that number had slid to 12 percent.

How did we get in this funk?

The current economic malaise has been caused by a combination of one-time events, vendor bickering, the court system, fiscal mismanagement by the Federal Reserve Board and the uncertainty created by the presidential election in the fourth quarter.

The PC hardware and software industry is well understood by the public and the media. The problem is that high-profile vendors such as Compaq, Dell, Gateway, Hewlett-Packard and Microsoft are suffering from Y2K indigestion. From mid-1998 through the fourth quarter of 1999, CIOs used Y2K as an excuse to upgrade millions of desktops, notebooks and servers. Replacement cycles for these machines, however, are only now starting to occur. Returning to normal sales cycles from hypergrowth cycles is never easy on year-to-year results.

The telecommunications industry deserves special mention for self-inflicted contributions to the market doldrums. A year ago, scores of recently capitalized companies focused on delivering cheap, application-enabling bandwidth to corporations and homes. Not so fast, said the remaining four regional Bell operating companies, which waged a run-out-the-clock strategy on delivery of high-speed bandwidth over the most coveted real estate in the telecommunications industry: the last mile. In an effort to conserve cash and wait out their larger rivals, these new companies stopped buying. Cisco, Lucent, Nortel, 3Com and others felt the immediate pain.

While the Microsoft versus Department of Justice case more than halved the market cap of Microsoft, the biggest casualty of this trial has been the ebbing of consumer confidence and uncertainty in the tech sector. If it can happen to Microsoft, it can happen to any tech company.

Uncertainty is the most abhorred word on Wall Street. The five-week presidential debacle fed the uncertainty monster as experts debated ad nauseam the fiscal policies of the two candidates. Meanwhile from early November to mid-December the Nasdaq lost one-third its market value.

So what should CIOs do? Forget the doomsayers and listen to Jack Welch, who recently went on record to say he would love to see his General Electric rivals take an ax to their IT budgets.

What are you doing to fight back? Are you increasing or cutting your IT investments?