Speaking of a radical change, I've been building a working theory this weekend on how the fundamentals of techs might be affected by a sustained market downturn.
I think many of the bulls in this market are neglecting to realize the impact a falling equities market can have on tech companys' businesses. The last five years of Nasdaq's astonishing gains have created an immense amount of "meta" demand for the tech industry. By "meta" I mean demand not from companies producing end-chain goods and services as part of their continued acceptance and integration of IT, but instead demand created by the techs themselves, buying and selling to each other in a virtuous cycle that lifted expectations and created a demand spiral that reached into the stratosphere. I can't quantify the level of this meta demand, but you need only look at the thousands of tech companies in existence today that weren't around five years ago to get an idea of where I'm coming from. In a sense, tech has become an economy in of itself.
If recent events do portend the bursting of the bubble, we're about to see this demand spiral unwind into a plank - and it's demand that will be walking off the end, taking with it the fortunes, profits, and sometimes even survival of tech outfits held near and dear to the many disciples of the "new economy". At the very least, it will foster in a new age of combine-or-die consolidation hitherto unseen. Why consolidation? Because there are simply too many techs selling too-similar of technologies to survive an IT spending shakedown. A slowing economy can't support the noise and redundant overhead that factors into the price of the hyper-competitive products in today's tech marketplace. This is esp. true when one considers the increased labor costs that will result from employees demanding wage increases in lieu of option grants. The technologies may not seem so similar now, but in the face of a consolidating IT budget, companies become less concerned about one-upping their compeititor's IT dept with Product A's 1030 bells/whistles vs. Product B's 1025 bells/whistles. Instead, they become more price and brand sensitive in an attempt to reduce the perceived risks of their purchases.
Then again, if tech can continue to produce the productivity gains currently attributed to it, maybe the entire tech industry will become immune to business cycles. Perhaps tech will become even stronger in the face of a slowing economy as companies look toward technology as their sole savior of competitive advantage and profit margins. Does anyone know of precedents in past markets that support such a possibility? |
