When will the technology recession end?
Published: 24 Jul 2002 14:09 BST
People now realise that the very market itself was a bubble -- that its analyst-driven buy/sell recommendations were flawed, with the former Merrill Lynch analyst, Henry Blodgett, famously issuing public buy recommendations while telling colleagues not to touch certain stocks. The problems in Wall Street run deeper than unethical relationships between investment bankers and analysts, dubious accounting, failure to expense stock options schemes against profits, and lunatic CEO pay deals that have seen many walk away from the firms they have wrecked with 'lottery win' pay-offs.
More serious than all of this is the short-termism inherent in quarterly reporting. This is distracting management from building their businesses, keeping them locked onto Wall Street's agenda, at the expense of all other stakeholders.
Chief executives have become so concerned with stock values and ingratiating themselves with analysts that they now speak a different language to most of their employees, a language so peppered with Wall Street-speak and the latest management buzz words that it has become part of middle managements' role to translate and interpret it.
You may take the view, as The Economist does, that the damage to the Wall Street model of capitalism has been overstated, and that the US economy is still fundamentally sound and will ride out the bumps. Maybe, but even if The Economist is right, the Wall Street approach to business is at minimum now seen as needing major reform, and the unquestioning export of Wall Street's way of doing things to the rest of the world will now need serious qualification. Will Hutton's book, The World We're In, highlights some of the alternative strains of capitalism, citing world-beating European companies such as Nokia, Volkswagen, and AirBus as organisations that have rejected what he calls Wall Street's "increasingly feral form of capitalism."
Of Volkswagen he says, "There is scarcely a canon in the conservative free-market rulebook that Volkswagen does not offend. Yet VW remains Europe's largest car maker and has increased its market share from 16 percent to 19 percent since 1993 -- largely at the expense of General Motors and Ford. Even in the US its market share has jumped by 2 percent in the same period". He also points out that, "Nokia's success is legendary; it has 35 percent of the world market -- twice that of Motorola" yet "for the conservative theorists, companies like this have no right to such success."
The point is this. Something is rotten in the state of Wall Street -- and that rottenness has been so closely entwined with the Internet and technology sectors for so long that most people don't see where one ends and the other begins. More importantly, it has been demonstrated from China to Europe that the game is up and the Wall Street method of business finance is not the only show in town.
This is not to blame Wall Street for all of the ills of the tech sector. Some of the blame belongs squarely on America's other coast, in Silicon Valley, where the over-promising, under-delivering, and the general get-rich-quick madness started in the first place.
But there is an important difference between the tech industry and the street. Throughout the market madness of the late 90s and the crash that followed it -- the tech industry produced things of value: Pentium 4 chips, Bluetooth, LCD screens, iMacs, iPods, Windows XP, search engines, Wi-Fi, 3G and interactive television. These technologies of themselves deliver value to their users every day of the week. Fundamentally the technology sector did its job. It made tech products that have signigicantly boosted the efficiency of businesses and the quality of leisure time for consumers. Wall Street's job in this period was to look after the money. Well guess what, your pension fund now has a massive hole in it.
The other important difference between Wall Street and the tech industry is that tech is facing up to its mistakes, and has begun the painful process of rebuilding its value proposition around offering customers real value and guaranteed payback on technology spending.
Will Wall Street take the same medicine? Will it fundamentally review the value proposition that it offers to its customers? Will it do something about pushing its own buy/sell mergers and acquisitions agenda over and above the best long-term interests of shareholders, employees and customers? Has it learned lessons -- or will it simply walk away from IT and do the same thing all over again in the fledgling nanotech and biotech industries?
Because of the intertwining of Wall Street's fortunes with the tech sector, and because technology companies are themselves some of the world's major corporations, a general recovery in the markets will be required before confidence levels will allow IT spending to increase. Put simply, a recession precipitated in the tech sector requires a general recovery in the world economy before the tech sector itself can come back from the brink.
Although the balance of good to bad news coming out of the technology sector has been negative in the last month (with SAP, IBM and Intel adding to the gloom) -- the longer term trend since the beginning of the year has been more positive. The Financial Times today reported that business confidence levels are slightly up on the beginning of the year amongst 34 leading executives of multi-national corporations -- even if they remain, for the most part, unwilling to increase IT or capital spending just yet.
Fundamentally businesses still desire an IT infrastructure, and consumers are still buying PCs and software -- albeit at a slowing rate, and a longer upgrade cycle. Internet adoption continues to rise with many homes and businesses upgrading to broadband. There is no real evidence that businesses are opting out of IT -- giving up their LANS, notebooks, HR software, or intranets.
Even more encouragingly, we are starting to see the technology sector come up with an answer to the key question that has stood in its way since the crash -- what is the Internet for in a post-dot-com-bubble world? The answer could possibly be for Web services -- in a broadband, wireless eco-system where online services and data are seamlessly available on a range of devices.
So when will the technology recession end? When companies start spending money on IT again -- that's the best guide. The share prices of technology firms have too much baggage, even now -- to be a reliable guide. That said, there is a new focus on talking straight about the state of the market -- so the guidance issued by chief executives is now worth paying close attention to.
As for the markets; some say the darkest hour is just before the dawn and that's where we are now. Others that the market will fall further and bump along at the bottom of a trough until 2004. The important thing for the technology sector is to learn lessons about its relationship with Wall Street.
If that can be improved and better understood by both sides then some good will come of this crash. If we get better regulation and more ethical business practices then that will be welcome. If businesses can be allowed to build more for the long term, and if start-ups are less starry-eyed about the rush to IPO -- and concentrate more on building their businesses than thinking about exit strategies then that too will be welcome.
Ultimately, the responsibility for fixing Wall Street and picking up the tab for its failures rests with you and me. We get the market we deserve. If we treat Wall Street and the city like a casino, expecting it to deliver annual double-digit growth in our pension funds, then the market will behave like a casino. If you want higher standards of behaviour -- and if you want financial institutions to show true commitment to technology and other crucial market sectors, then be prepared to put your money where your mouth is, and speak up when the market, or the people who work in the market, behave in a way that you don't approve of or make investments that you don't approve of.
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