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and loathing are alive and well in the tech sector, with tech stocks
reeling and wired-in companies ailing from a lack of capital and backlogged
inventory.
There is a
little going right in the sector. Monday’s announcement of the purchase
of Compaq by Hewlett-Packard sounded like the computer industry’s
version of the 1968 Penn Central merger between the Pennsylvania
and New York Central railroads. “You have two huge organizations
that are underperforming and now you're going to complicate this
by putting them together,” Craig Chodash of J. &. W. Seligman &
Co. told Reuters.
By all accounts,
technology is running a FILO (first in, last out) scenario —
it was the leader of the boom of the 1990s and will be the follower
in the anticipated general recovery due in 2002 (now apparently
pushed out of this year's fourth quarter). This means that it may
well be the third or fourth quarter of 2002 when the tech companies
get back into the game. Which is a big problem. As Larry Kudlow
points out in his argument
for a cap-gains tax cut, if the tech sector does not rebound
soon, the overall economy will continue to suffer.
Several tech
analysts have outlined the problems for NRO Financial:
Richard
Lane, Moody’s
The semiconductor sector is going to see its worst decline since
1985. This cycle is being significantly driven by a sudden stop
of demand. And that evaporation emanates from a variety of sectors,
but notably, the telecom and communications sectors, which were
significant drivers to the general boom in the late 1990s. When
you get rid of the telecom, the dot-com, and the other communication
start-ups, the demand for semiconductors no longer exists.
In the past
couple of months, people have been searching desperately for any
new data point. Cisco said they might be able to execute upon lowered
numbers, and people got all excited. Someone buys a few more chips
in the wireless space, and there’s a boom among an array of semiconductor
companies. Things have been so weak, that people have been looking
for any sign of an upturn.
You’ve got
to have an improvement in the macro environment, and not just the
U.S. The U.S. environment softened first, and then Europe caught
the cold. Latin America has its problems, Japan has its own woes,
and the Asian Pacific areas are soft, broadly speaking. Even China
has shown signs of softening. So improvement in the macro environment
will be the key driver. Improvement is going to help demand, and
demand is going to help absorb the excess inventories that remain
in some element of the electronic supply-chain channel. You’ve got
to get rid of the supply that currently exists. Some of that supply
will be obsoleted, and then you’re going to start building new inventory
to satisfy growing demand.
— Lane is Senior Vice President, Moody's, focusing on Investment
Grade Technology Bonds
Zeus
Kerravala, Yankee Group
Windows XP — now there’s an enigma. A lot of the product's
new end users are not sure what to do with it. Many have just gotten
through their Windows 2000 migrations, and boom, Microsoft’s hitting
them with another operating system. I think you’ll see something
similar with XP. It will have a quick impact on a lot of the workstations
around the industry. It might help Microsoft, but I don’t really
see how it will help the tech sector as a whole.
We've seen
the meteoric rise in processing speeds and the decrease in the price
of memory. Now, when you start going up to 800 MHz, a gigahertz,
and 1.4 gigs, it doesn’t seem like there are any applications that
need that kind of horsepower. Even most multimedia will run on an
800 MHz or gigahertz machine. So, the incremental processor speed
increases aren’t having as big an impact as they did at one time.
XP will certainly help some of its partners. Xdrive,
the online storage provider, will apparently have an icon on the
XP desktop. So companies like that will benefit. But I sincerely
doubt that companies like Lucent and Cisco will see much upside.
Dell and Hewlett-Packard feel that sales will be flat at best.
Businesses
are saying, “Look, we just upgraded our machines for Y2K. And we
probably did that with 800 MHz machines.” Most companies’ businesses
can still operate on what they have.
— Kerravala is Director of E-Networks & Broadband Access
for the Yankee Group
Howard
Sitzer, Moody’s Investor Services
Our outlook on the high-technology sector with regard to corporate
bond ratings and speculative grades is negative. We see rating-downgrades
beginning to accelerate, and if not downgrades, a very high likelihood
of outlooks being modified in a negative direction.
Many have
prognosticated that the downturn would be of limited duration, or
of somewhat longer duration, and so on, but it appears that we’re
now into the third quarter of still further deceleration of activity.
In terms of the rate of deceleration, that is slowing. But
it’s not exactly clear that we’re bouncing along a bottom, as some
others have categorized it.
In the third
quarter, for many companies, revenues will be down another 5% to
20%. A lot of this will correlate with the macro economy. I think
the corporate sector is currently adjusting to over-capacity levels,
and more particularly, is determining at what point it’s appropriate
to commit to additional information-technology investment.
Remarkably,
computer sales are down in the U.S. for the first time ever. And
I think that they’re more or less flat, worldwide. This looks to
be the first year in the relatively short history of personal computers
that personal computer sales will be down.
At the corporate
level, there had been a trend of refresh cycles, where corporations
overhaul all of the seats with new equipment on about a three-year
basis. It appears that corporations are now deferring that overhaul
towards four years. One of the issues allowing them that flexibility
is that there just doesn’t appear to be any killer apps — new
major applications that everybody has to have that are driving mass
upgrades of software and attendant equipment installations.
— Sitzer is Vice President and Senior Analyst of High Technology
Yield Bonds for Moody’s Investor Services
Adam
Thierer, Cato Institute
Things don’t look good from a Washington perspective, particularly
if you believe that what it is needed to jump-start the tech industry
is some form of deregulation, or at least some form of regulatory
certainty. The primary problem is not just related to the larger
macro problems we see in the economy. Those certainly are contributing
to it. But in many ways, the sector's lag is due to the fact that
there is a disastrously uncertain regulatory climate that the tech
carriers face, as they embark on a path of laying new networks and
deploying new services or offering consumers new technologies.
If you know
a little bit about telecom policy, it’s easy to understand why this
is a problem. For years, we’ve known that telephone companies have
been regulated one way, cable companies another, broadcasters yet
another, and satellite and wireless still another way. And yet,
all of these technologies are seeing some sort of convergence, and
they’re all trying to offer consumers a relatively undifferentiated
product: high-speed, broadband Internet access. But they’re all
regulated under very different regimes.
Moreover,
some of the telecom companies are regulated far more stringently
than others. So there’s this question about how to achieve a level
playing field in this area: Are we going to regulate or deregulate
down? But we can’t even engage in that debate. Competing sides appear
to be at an impasse. No one’s allowing anything to go anywhere.
So we’re stuck
with an incredible amount of uncertainty in this industry. And of
course, there’s probably no bigger curse in the investment community
than not knowing what the market is going to look like in the next
day, week, or month. If you have that sort of uncertainty, you are
far less likely to invest — and in this case, investment means
deployment, deployment of high-speed broadband. If companies are
not deploying, they’re not even buying the stuff that’s going to
be deployed. If carriers are not buying the underlying infrastructure
equipment, telecommunications equipment suppliers are hurt. Uncertainty
is the curse.
— Thierer is Director of Telecommunications Studies at Cato
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