The Recession's Effects on Tech Industries

["etymes -at- lts -dot- com" <etymes -at- lts -dot- com>]

Yesterday's San Jose Mercury News carried an article that at least 
explained why the greater Silicon Valley economy has been suffering so. 
It said "Silicon Valley's biggest companies reported a combined loss of 
$89.8 billion  - exceeding their profits for the previous eight years 
combined.  Sales plummeted by $5 billion, the first time revenues failed 
to grow since ... 1985."  The article also states that this was not a 
one-year phenomenon, but rather the result of a decade-long trend of 
narrowing profits, slowing sales, and costly acquisition mistakes. There 
was a bubble of higher sales and profitability in 2000, but it is the 
exception over the decade of 1991-2001.  Of the 150 largest Silicon 
Valley companies, profit margins hit their highest in 1995, at 9.5%, 
then declined over the remaining five years.  Meanwhile, non-technology 
companies like real estate companies, San Jose Water, and Knight Ridder 
(publisher of the Mercury News) had some of the highest profit margins.

While the article focused on Silicon Valley, it has important 
implications for technology companies in the rest of the country.  I 
should note that "technology companies" includes not just the computer 
industry, but industries like pharm and biotechnology, telecom and 
networking, and all those companies who provide components or services 
to the tech sector.

One of the major points in the article was that many of the losses 
suffered by these Silicon Valley companies were the write-downs they had 
to report after acquisition of smaller companies - or in some cases big 
companies - at inflated prices.  For example, JDS Uniphase had to write 
off $51.4 billion for its acquisition of smaller companies, VeriSign 
wrote off $13.6 billion,  and Cisco wrote off $2.2 billion.  While some 
of that can come off the balance sheet in terms of paper values, like 
depreciation and good will, ultimately some of those writeoffs have to 
be covered by real cuts in operating environments.

Another point in the article was that it had become increasingly 
difficult for smaller companies to effectively compete against the 
larger companies.  Think, for instance, of the Netscape/Microsoft court 
case: at its heart is the contention that Microsoft made it almost 
impossible for Netscape to compete in the browser market against 
Microsoft.  

The article specifically does not address areas outside Silicon Valley, 
nor does it make predictions.  However it should be noted that recent 
statistics have indicated that, contrary to assertions of local pride in 
other part of the country, Silicon Valley has been and continues to be 
the home of the largest concentration of technology companies in the 
world, the largest concentration of venture capital companies, and the 
resulting problems of traffic, outrageous real estate prices, and other 
repercussions.  (I believe the statistics I saw indicated that Silicon 
Valley had something like 55% of the technology companies in the US; 
other parts of the US had figures below 10%.)  I say this specifically 
to head off the usual Techwr-l spate of responses about how good life is 
in Peoria.

What was very real in Silicon Valley, however, was the sometimes 
white-hot job market. There were points where if you could fog a mirror, 
you could get a job in Silicon Valley.  There was real growth in 
salaries and contractor rates for engineers, programmers, tech writers, 
and support personnel, sometimes stunning growth.  There was real money 
being invested in startups, and that real money largely went for 
salaries.  That phenomenon has now largely dried up.  

I'm really puzzled by what this might mean.  I can't conceive of an 
economy that no longer needs high tech.  I can't imagine that business 
and consumers have bought almost all of the computers and devices using 
new technology that they're going to need for the next five years.  

Elna Tymes
Los Trancos Systems



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