Mission Critical.... Barron's
A burst of replacement spending won't offset a weak market for
technology -- or the lost lives
By Bill Alpert and Mark Veverka
When terrorists crashed jets into the World Trade Center two weeks ago,
one of the first victims was a brilliant software engineer from Sun
Microsystems named Phil Rosenzweig. The 47-year-old father of two was
among the 90 people on the first plane to hit the towers. Another 346 Sun
employees worked in the computer firm's service offices in the Trade Center.
All were safely evacuated from the 25th and 26th floors of the South Tower
before it collapsed, says Sun's chief executive, Scott McNealy.
As a supplier of mission-critical computers, Sun spent the subsequent days
ministering not only to its victimized employees, but also to battered
customers. Replacement systems, some yanked from the computer firm's own
offices, went to emergency work sites. Volunteers came forward from among
Sun employees, resellers and even technically adept customers as far away as
the Slovak Republic.
Other technology vendors have shared Sun's awful
experience in the days since the September 11
catastrophy. Scarcely after tending to their own
casualties, firms such as Compaq Computer and
Reuters launched heroic efforts to rescue their
customers' livelihoods. Yet revenues from the repair
of shattered technology infrastructure -- in the
financial industry and the Pentagon -- won't be a
windfall for tech firms. For while some observers
foresee expenditures of $3 billion on products and
services by Wall Street firms alone, those direct
expenditures will likely be offset by a post-traumatic
drop in business activity. "It's just going to make the
short term even tougher," says Sun's McNealy.
Demand for technology wares had been slack well before the terrorists
struck. Stock-market trading resumed last Monday, in good part thanks to
the duplicate data storage allowed by the products of EMC. But even that
worthy firm warned Thursday night that it might lose money in the quarter
ending this month -- joining, in disappointment, dozens of other firms in
technology, media, insurance and, of course, travel. Since Monday, the
Nasdaq Composite Index has dropped 16%, to 1423 from 1695.
In the scramble to recover from the emergency,
technology executives say they've had no time to
consider whether technology may play key roles in
foiling future terror attacks. A few harbingers are
emerging, however. While phone circuits jammed
and snapped, the decentralized Internet continued
to carry vital messages to individuals and
businesses. That performance could give a needed
boost to Internet versions of telephony and private
data lines.
Government computing investments will also
surely jump, as the Bush Administration seeks to
improve intelligence collection on terrorists by
increased interception of electronic
communications, domestic and international. While military force will play a
role in the war against terrorism, said National Security Adviser Condoleezza
Rice in a speech Wednesday, "it is a war in which information may be the
most important asset that we have."
Technology investors willing to peer through the cloud that fell on September
11 might well conclude that the outlook can get only brighter. But for now,
tech CEOs are holding out no such promise.
One of the few companies to get a financial lift from
the terror attacks was SunGard Data Systems, the
Wayne, Pennsylvania-based disaster recovery firm.
As 31 of SunGard's customers sought to use its
backup data facilities, investors bid SunGard shares
up 20%, to 28. But there's no cheer in this for
SunGard: Three employees who were in the World
Trade Center on September 11 are missing.
Compaq Computer also lost one employee, while
three more remain missing. "The Compaq family
was directly affected by the terrorist crimes last
Tuesday," Chief Executive Michael D. Capellas told
Barron's in an e-mail. "And we had many customers
in the World Trade Center and neighboring facilities
-- as well as in the Pentagon -- who needed emergency help following the
terrorist attack. We have over 100 customers on our emergency-response
list."
Like its computing rivals Dell Computer and IBM, Compaq quickly
established a command center to handle customer calls for service and
replacement products. As of last Monday, the Houston-based firm had gotten
disaster-related orders for over 8,000 PCs, 10,000 flat-panel screens and
4,000 servers and storage subsystems. The Pentagon and some New York
financial firms have required high-end servers from Compaq's fault-tolerant
and Alpha-processor product lines.
Compaq has even tried to scare up some of the
VAX computers formerly sold by its Digital
Equipment unit, because some financial firms were
still running on discontinued VAX platforms when
the terrorists attacked.
While filling orders, computer vendors are making
charitable contributions, too. Dell, its employees
and the family foundation of Chief Executive
Michael Dell are contributing $3 million in cash and
equipment to such disaster relief organizations as
the American Red Cross. EMC and Compaq are
each contributing $1 million in cash or computers to
the Red Cross and various victims' funds.
"Coming to the aid of our communities is nothing new to Compaq," writes
CEO Capellas. "It is this resilience -- this unity of purpose and hope -- that
sends a most powerful message to the terrorists who committed this heinous
crime."
Most of the financial firms devastated in the New York attack, such as
Cantor Fitzgerald and its eSpeed unit, ran their businesses on computers from
Sun Microsystems. So that Palo Alto-based firm is shipping replacement
systems as fast as it can. But for a firm the size of Sun, says McNealy, the
sudden demand from New York and Washington won't offset the despondent
level of overall demand.
After the surge of Year 2000 upgrades and the bursting of the Internet
bubble, Sun has had to compete with a flood of second-hand gear of its own
making. This year, the global economy has been swamped by recessions in
the U.S., Europe and Asia that combined in what McNealy calls "The Perfect
Storm." "All three economies were sinking at the same time," McNealy told
Barron's last week. "And we were getting hammered."
Now, in the wake of the terrorist attacks, McNealy fears that the disruption
to overall economic activity will more than offset any replacement sales to
enterprises directly hit by the terrorists. Still more indirect damage will result,
he adds, from the tax-like economic effects of increased federal spending and
increased costs for insurance and oil.
"Even a SunGard can't feel good about this," mutters McNealy.
In the week after the attacks, many Sun customers were recovering data from
mirror copies they'd put on disk drives in offsite locations. This data
replication, for the most part, had been managed by software from Veritas
Software of Mountain View, California.
Although Veritas has grown to more than $1 billion in annual sales, Chief
Executive Gary Bloom says he's in the business of selling software that
everybody hopes they will never have to use. "Most CEOs don't enjoy paying
for it," he says. "This is our first real test."
While Bloom hopes that the data recovered in recent weeks with Veritas
products will prove their value, he expects no surge in new orders. On the
contrary, he fears that the terror disruption will make it hard for vendors like
Veritas to close deals in these final weeks of the September quarter.
"A blanket of hesitation"
If any technology product emerged the hero from the recent disasters, it was
an EMC product called SRDF (for Symmetrix Remote Data Facility). For
systems that can't afford to lose a single transaction record -- as at a trading
firm or stock exchange -- the EMC product maintains a continuously updated
copy on a disk array located far from harm's way. California firms put the
mirror copy somewhere on the other side of the San Andreas Fault. EMC
was spurred to develop SRDF, in part, by the 1993 terrorist attack on the
twin towers.
EMC had 25 customers in the World Trade Center, says chief technology
officer Jim Rothnie, with another dozen in the immediate vicinity. Most had
their critical data mirrored in uptown Manhattan, New Jersey or as far away
as Texas.
The morning of the 11th, technicians in EMC's Massachusetts support facility
got instantaneous trouble signals from Manhattan customers. The tech support
folks suspected a power blackout, but it was, in fact, the first jet crashing into
the North Tower.
Within moments of the impact, the SRDF systems automatically shifted
computers over to the backup data banks. For nervous customers who were
now down to a single store of critical data, EMC created a temporary backup
facility up in Massachusetts. Working through the weekend, EMC technicians
enabled financial firms and stock exchanges to reopen their facilities and to
pick up where they'd left off.
"Obviously, the human losses were uppermost in our minds," says EMC
technical chief Rothnie. "But the data these companies were handling is vital to
our financial system. So we're proud of the role we played in protecting these
companies' livelihoods."
EMC's executive chairman, Mike Ruettgers, says that the devastating attacks
will show the importance of the lost personnel, but also the importance the
information they created. "In order to stay in business," says Ruettgers, "you
need to have both. You have to have your people and you have to have their
information."
Although the affected customers will be acquiring new EMC disk arrays to
reestablish a mirrored setup, Ruettgers doubts those orders will prove
substantial to EMC, with its $9 billion in annual sales. The computing
recession, and price wars in storage with the likes of Compaq and Sun, have
pinched EMC's margins.
Thursday night, in fact, EMC warned investors not to expect the $1.8 billion
in September-quarter revenues that some analysts had forecast with a modest
profit. Instead, EMC expects to lose money, while announcing layoffs and the
disposal of real estate and inventory with a resulting writeoff. Joe Tucci, the
company's chief executive, lamented: "The business world is simply covered in
a blanket of hesitation."
No wonder, then, that Ruettgers told Barron's that a pickup in demand --
from the demonstration of EMC products performing in an emergency --
seemed far off. "This is all too 'real time' to be able to assess that," he said.
"Our primary focus is getting customers back up and running."
View from The Street
With tech firms pre-announcing their miseries left and right, most Wall Street
analysts were too busy taking down their estimates to look for any break in
the storm clouds. Some analysts, put out of their offices by the Trade Center
attack, struggled to publish anything.
Steve Milunovich, who heads up tech stock research at Merrill Lynch,
remembers running to a window when the first plane hit the tower across the
street from Merrill's offices in the World Financial Center. Then he returned to
his office. Only when the second jet hit, 15 minutes later, did he evacuate.
Before the disaster, Milunovich and his colleagues had thought they were
seeing signs of a bottom to the tech industry's decline. He had anticipated
slight gains in tech shares for the remainder of this year, then a pickup early in
2002.
Except for some short-term investor enthusiasm for networking and computer
security firms, however, Milunovich now expects the uncertainties of the war
with terrorists to overwhelm any market buoyancy. Only in the long term,
does the Merrill analyst hold out any optimism.
During the emergency, notes the analyst, Internet connections held up better
than did voice lines. They should have, given that the decentralized Internet
arose from networks that the Defense Department designed to withstand
military attack. Enterprises may now have more confidence in using the
Internet to spread their bets, by decentralizing their computing systems.
Demand may ultimately grow for high-bandwidth Internet services like
video-conferencing and remote data storage, thus soaking up some of the
enormous glut in telecommunications bandwidth. But it's not going to happen
overnight.
One firm whose customers were saved by the Internet last week is Reuters.
Chief executive Tom Glocer says that the jet attacks cut the private phone line
connections of thousands of Reuters' subscribers. Overnight, Reuters moved
experimental Internet versions of those services into production, making them
accessible to customers through encrypted Internet connections known as
Virtual Private Networks. From the safety of Geneva, Switzerland, a cluster
of Web servers delivered streaming financial data and news to customers --
wherever they were. "All people needed was a password," says Glocer, and
they could be up and running, even from their homes."
Tragically, however, six Reuters employees who were based in the World
Trade Center, remained missing as of Wednesday.
Financial firms may call upon Reuters to help rebuild trading rooms and
computer infrastructure. But Glocer's wary that overall revenues might suffer
in a shaky economy, or from downsizing by Reuters' financial services
customers.
Cyber fears
With America traumatized by last week's physical attack, some computer
users saw a related threat when a powerful computer virus infected many
large institutions, such as the Connecticut state government. The
"w32.nimda.A@mm" worm, coming on the heels of the past summer's
"CodeRed" worm, could be warmups for more damaging cyber attacks,
worries Roy Maxion, a senior systems scientist in the computer science
department of Carnegie Mellon University. In addition to running CMU's
dependable systems lab, Maxion advises government agencies on information
warfare as a member of the Defense Science Board.
"Those of us involved with information warfare are suspicious that these are
just test runs," says Maxion. "These worms had benign payloads. But they
needn't have benign payloads."
Observing those same computer virus attacks, some investors began talking
up computer security stocks last week, such as firewall vendor Check Point
Software and the hacker detection software firm, ISSX.
One buyer likely to break the bruited "buyer's strike" in technology products
is the federal government. As recently as this past summer, the Justice
Department was almost apologetic about the Federal Bureau of
Investigation's use of a system for wiretapping e-mails, originally called
"Carnivore" but now bearing the milder name DCS-1000. After the recent
mass destruction, FBI agents quickly showed up at Internet service providers
with Carnivore boxes. Last week the Bush Administration introduced
legislation to broaden the power of intelligence agencies and the FBI to collect
electronic information in terrorism investigations.
While civil liberties advocates are understandably nervous, any increased
investments in intelligence technology would undoubtedly throw more business
toward the likes of Compaq, EMC and Sun. Indeed Scott McNealy says,
"We're big in the defense department." None of the firms we spoke to would
discuss their sales to intelligence agencies, however, though all are listed as
approved vendors of secure products on a procurement site for the National
Security Agency.
The recent attacks will surely accelerate investments in intelligence technology,
says a former deputy director for Science and Technology of the Central
Intelligence Agency, Dr. Ruth A. David. She now runs a not-for-profit
defense think tank called ANSER, in Arlington, Virginia. Much of that
spending should go to research, she maintains, because commercial
data-crunching tools are designed for clean, structured data. Searching for
terrorists, by contrast, will require fusing disparate fragments of data, much of
it in foreign languages.
And that, in turn, could foster a whole new group of tech companies. |
