The Recession's Effects on Tech Industries

Subject: The Recession's Effects on Tech Industries
From: "etymes -at- lts -dot- com" <etymes -at- lts -dot- com>
To: "TECHWR-L" <techwr-l -at- lists -dot- raycomm -dot- com>
Date: Mon, 15 Apr 2002 11:38:17 -0700


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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