For tech, a tale of two downturnsOctober 24, 2008: 8:22 AM ET
It would seem we've got all the makings of a tech shipwreck.
In the past few days, Xerox (XRX), Yahoo (YHOO) and eBay (EBAY) each announced plans to cut thousands of jobs. Esteemed Silicon Valley VC firm Sequoia Capital is warning entrepreneurs that it's time to batten down the hatches because the good times are over. Startups Adbrite, imeem, Seesmic and Zivity are each laying off at least a quarter of their employees. We've been here before, and it looks ugly.
Or does it? Listen to execs at some high-flying companies on the other hand, and you get a somewhat different outlook. Apple (AAPL) CEO Steve Jobs this week told investors he plans no job cuts, and he's "not tremendously worried" about Apple's outlook. Intel (INTC) CEO Paul Otellini said he expects technology "will probably do well" in this downturn. Software and services heavyweight IBM (IBM) went out of its way to reassure investors earlier this month, pre-announcing its third quarter earnings and promising to keep its financial promises for the fourth quarter.
So which is it? Is tech falling apart or not?
Depends on what kind of company you are. A global economic tempest continues to is gather force, as businesses struggle to get credit, consumers fret about the job market, and spending slows. Tech is already feeling the effects; the younger and weaker companies are laying off workers and selling off assets while the stronger ones are taking a wait-and-see approach and pleading for calm. To use a sailing metaphor: Those on less-than-sea-worthy vessels are tossing the heavy stuff overboard to stay afloat. Those on sturdier ships hope to ride it out.
Of course, if a deep global recession hits, no one will be totally immune; when customers spend less money, companies sell less stuff, and earnings and stock prices naturally suffer. "I think this downturn feels more like uncharted territory," said Sandy Carter, an IBM vice president who works on software that helps companies analyze their performance. "It seems more deep, more impactful and more global."
But she still expects to sell plenty of software, despite the changed environment. When Carter visited Dubai last year, waiters sprinkled powdered gold on her eggs and customers signed million-dollar deals without blinking. As she prepares to head back this month, the mood is decidedly more cautious even in that cash-flush part of the world, now that oil prices have sunk below $70 a barrel – but they still want to buy technology. "They're saying, talk to us about risk mitigation, talk to us about reducing costs."
Stephen Elop sounded a similar note. As president of the Microsoft (MSFT) Business Division, he's responsible both for mature products like Office software and for new ones like unified communications technology, which helps companies use the Internet to make phone calls and manage video conferences.
"It is hard, although everyone for weeks or months has been dealing with the reality that something's going in a different direction in the economy," Elop said. In recent conversations with chief information officers who make purchases for large companies, "there is very vigorous conversation about, what are the technologies that can help them with value in today's environment."
Elop said he's still confident that he can sell customers new communications software because it will save them money in the long haul. (Still, all is not rosy; Microsoft said Thursday that sales and profits for fiscal 2009 would be slightly lower than it had hoped because of the slumping global economy. Its stock rose about 2 percent after hours, a sign that investors had expected worse.)
Why are these tech executives so calm? Many probably feared something like this would happen all along, and mentally prepared for it. For them, the dot-com bust eight years ago was like Silicon Valley's own Great Depression, and they emerged thriftier and more cautious. Though tech has enjoyed good times lately, big companies haven't gone on the hiring binges and thrown the lavish parties that helped define dot-com excess. Instead, they focused on profits and stockpiled cash.
The result is that while last time big tech executives hired too fast and believed too much of their own hype, this time they're a more sober bunch. That's why some Silicon Valley watchers expect the cash-flush titans to go on a startup-buying spree in 2009, snapping up technology and talent that will give them an edge when times get better.
That seemed to be what Steve Jobs had in mind this week. In an unusual move, he joined Apple's fiscal fourth quarter earnings call to offer a pep talk and take analyst questions. "This economic downturn may present some extraordinary opportunities to companies that have cash," he said, referring to Apple's $25 billion stockpile. "Cash is already king, and it may get more so that way. So we are very comfortable with our cash position, and it's not burning a hole in our pocket."
And it's not just startups that are bargains. Among the troubled companies Jobs theoretically has enough cash to buy: eBay, Yahoo, Sony (SNE) or Dell (DELL). Not that he would want to. But he could. Which suggests that however bad this storm gets, some companies will be okay in the end.