Tech Will Be Back, Past Slumps Suggest, as Innovators Revive It
By SCOTT THURM and KEN BROWN / WSJ / Oct 18, 2002
Will the battered technology industry -- an engine of growth in the U.S. economy and the stock market -- ever regain its strength?
History offers a convincing answer: Yes, but it could take years. Look at a decade ago, when the U.S. technology industry was left for dead. Asian chip-makers had grabbed roughly half of the global semiconductor market. Personal computers were helpful at work but seemed of limited utility elsewhere. Investors didn't see much future: Tech companies shrank to their smallest share of stock-market value in 15 years.
But around that same time, a group of engineers at a federal lab in Illinois were writing a small program to make it easier for computer users to navigate the infant World Wide Web through graphical "links" instead of text-based menus. Their Mosaic program later became Netscape. It changed communications and commerce, and it ignited one of the greatest investment frenzies in history.
Now, the technology industry is again in eclipse. The 100 largest tech companies have lost money in the aggregate for five straight quarters, according to Merrill Lynch & Co., and their revenues in the second quarter stood 29% below their peak. The Nasdaq Composite is down 75% from its high 2 1/2 years ago.
And this time, tech's troubles have a wider impact than ever, on both the stock market and the broader economy. Some 47% of business capital spending goes into tech equipment and software now, compared with 20% in 1990. On Wall Street, even after the steep plunge in tech shares, they still account for about 14.5% of the value of the Standard & Poor's 500-stock index -- nearly twice their share at the bottom of the previous slump. (Prices of many tech stocks reflect investors' skepticism; see article.)
TECH MOMENTUM
Innovations have repeatedly driven tech out of the doldrums.
1975 First PCs on sale
1978 Apple II introduced
1981 IBM unveils its first PC
1986 Microsoft IPO
1991 World Wide Web created
1993 Mosaic browser released
1995 Netscape IPO
1997 Amazon.com goes public (see article)
2000 Nasdaq tops 5000 (see article)
But three times in the past quarter-century, tech has faced downturns and an uncertain future. Each time, new ideas, along with relentless improvements of existing products, brought the industry back to life in unforeseen ways, though some innovations took years to bear fruit.
In the late 1970s, the first personal computers, created by hobbyists and renegades, ignited a young tech industry that had been stifled by the dominance of International Business Machines Corp.
In the mid-1980s, a collection of more-mundane advances, including faster chips, simpler word-processing software and laser printers, joined with lower prices to boost demand after a slump.
The 1990s boom fed on both types of innovation. Incremental advances in operating systems, such as Microsoft Corp.'s Windows, and the linking of PCs into office networks jump-started demand. Then, the Internet propelled the industry to unforeseen heights.
Wireless Access
What will be the next big thing? One intriguing innovation is Wi-Fi technology, a set of standards created to provide wireless office computer networks. Now it's spreading for an unintended purpose: to deliver Internet access to coffee shops, airports and homes.
Another breakthrough could emerge from the resolution of the thorny legal issues around computerized movies and music, now consigned to a modest and largely unprofitable market. A new generation of cheap sensor chips, all linked to the Internet, could create a boom in technologies that track commerce, machines and even health.
In addition, hard-core videogamers are pushing the limits of computer performance. The resulting improvements could spread to broader applications. Many other embryonic technologies are drawing a robust stream of funding from venture capitalists, who are on pace to invest roughly $25 billion in startups this year, more than in any other year except 1999, 2000 or 2001.
A closer look at how innovations large and small reversed previous tech downturns provides hints as to how the current tech recession might eventually end.
In the late 1970s, the new high-tech industry appeared in danger of being stillborn. Computing meant big computers, nearly all made by IBM for large companies and research centers. Like auto makers that once owned their own steel mills, IBM manufactured the main components for its computers, and it supplied the software that allowed users to manipulate and extract information. That tight integration and IBM's quasimonopoly status were a recipe for little innovation.
Annalee Saxenian interviewed Silicon Valley executives for a master's thesis in regional planning during that period. "They were all talking about the end of Silicon Valley," she says. "Everything was consolidating and would be like Detroit." She predicted the region's demise.
What she and most others missed was a font of innovation around the notion that computers didn't need to be big, shared and professionally programmed. Intel in 1971 had created the first microprocessor, which performed calculations as well as stored data. The chip was intended for watches and portable calculators. But hobbyists began experimenting with it as the basis of a "personal" computer.
In 1975, MITS Corp. in Albuquerque, N.M., introduced the Altair computer, a shoebox-sized machine with rows of switches and blinking lights, but no keyboard. A Harvard sophomore named Bill Gates briefly moved to New Mexico to write programs for the Altair. A year later, two Silicon Valley tinkerers, Steve Jobs and Steve Wozniak, formed Apple Computer Inc.
The early PCs rewrote the rules of the computing industry. Unlike IBM's mainframes or Digital Equipment Corp.'s smaller but still-hefty "minicomputers," PCs included key parts made by others. Moreover, outsiders could write software programs to make them more useful.
New Rules
Those two differences sparked a wave of innovation, as dozens of new and old companies made disk drives or wrote word-processing and spreadsheet programs. By 1981, even IBM grasped the new rules of the game. The king of mainframes said it, too, would make a PC, with a microprocessor from Intel and an operating system from Microsoft, the company formed by Mr. Gates.
PCs fired up investors, too. Shares of Apple's December 1980 initial public offering were so eagerly sought, and considered so outrageously priced, that Massachusetts officials briefly barred state residents from buying the stock. More than 400 tech firms went public between 1980 and 1983, Thomson Financial says.
While the innovators became some of the most successful companies in stock-market history, shares of IBM, which had been the industry benchmark, lagged far behind. They ended the subsequent decade about where they began. After a rough start, Apple shares soared, as did those of other young tech companies.
That brought venture-capital firms to the party. Vinod Khosla and three colleagues started Sun Microsystems Inc. in 1983 to build a more powerful desktop computer that they called a workstation. "We called a few people, got a $100 million valuation, and got a check in two weeks," Mr. Khosla says.
Timothy Bresnahan, a Stanford economist writing a history of the PC industry, says those early years hold two lessons for today. First, innovation often arises when and where it's least expected -- in PCs' case, "scruffy outsiders out of nowhere." Second, technologies invented for one purpose can be adapted by entrepreneurs for more significant uses.
More than 15 million PCs were sold in 1984, up twentyfold from 1980. A great many companies sprang up to supply the new market. By 1985, overcapacity by chip makers led to price cuts and a 17% fall in these suppliers' revenue. World-wide, unit sales of PCs eased 2% in 1985, according to Gartner Inc.
Technologists worried that the industry had "matured." But the 1985 downturn had a silver lining. Prices for a common memory chip tumbled 80% in a year. That made other innovations, such as desktop laser printers, more affordable. Access to the printers then hastened the use of computers to replace typewriters in most offices.
Cheaper memory chips also meant that more could be stuffed inside each PC, freeing software programmers to write more elaborate programs. Technical users flocked to specialized programs for computer-aided design and desktop publishing, for example. In turn, bulkier software programs created demand for faster chips that would make the programs run more efficiently.
In the end, tech recovered quickly and strongly. By 1988, global sales of chips had doubled. Tech stocks recovered too. The Nasdaq composite doubled between July 1984 and the days just before the 1987 market crash. After the fall, it regained its precrash level by mid-1989.
Tech had enough momentum that recovery didn't require a revolutionary invention such as the PC or the Internet. Instead, the industry had evolved into a community of hundreds of narrowly focused companies, each pursuing its own, often small innovations.
That was the story Ms. Saxenian heard when she returned to Silicon Valley in 1989 to interview executives for her doctoral dissertation. It was very different from her pessimistic master's thesis a decade earlier. Instead of forecasting the region's demise, Ms. Saxenian, now a regional-planning professor at the University of California, Berkeley, wrote a book explaining why Silicon Valley flourished in the 1980s while many old-line East Coast companies, such as Digital, fell on hard times.
In 1990, however, pessimism returned. The tech industry had grown so large it was no longer immune to broad economic cycles, and growth in PC sales slowed when the national economy did. The slowdown also showed a weariness with the limitations of PCs. The revolution seemed to be "petering out," says Hal Varian, dean of the school of information management at UC Berkeley.
Investors' enthusiasm ebbed too. Venture-capital firms raised just $1.9 billion in 1991, the least in a decade, says the National Venture Capital Association.
Then, two long-simmering innovations made it to prime time. Scientists at Xerox Corp.'s Silicon Valley research lab had devised the idea of using graphical icons on a screen, rather than text commands, to control a computer in the 1970s. The Xerox project also featured a novel way to move things around a screen: a mouse. Apple used these features as early as 1984. But PCs based on IBM designs and Microsoft's operating system became dominant during the 1980s. It took the introduction of Microsoft's Windows operating system in 1992 to reignite interest in the PC. Between 1992 and 1995, PC sales nearly doubled.
Demand for Networks
Around the same time, corporations that had deployed fleets of PCs wanted to link them, in order to share files and printers. That drove demand for computer networks based on Ethernet, which also had been partly developed at the Xerox lab back in the 1970s.
Once those computers were connected, with hardware from companies such as 3Com Corp. and software from Novell Inc., users discovered the "killer application" of the early 1990s: e-mail.
Office networks then set the stage for the World Wide Web and mass use of the Internet. Tim Berners-Lee, a researcher at a European physics lab in Geneva, in 1991 developed a method for "linking" documents on the global communications network known as the Internet. Mr. Berners-Lee wanted to make it easier for researchers to exchange technical papers.
As with the creators of the microprocessor, Mr. Bresnahan says, Mr. Berners-Lee didn't fully appreciate what he had set in motion. Two years later, Marc Andreessen and colleagues at the National Center for Supercomputing Applications at the University of Illinois released the Mosaic browser for navigating the Web. The renamed Netscape Communications Corp. went public in August 1995. Its shares, priced at $28, closed their first day of trading at $71, giving the company a value of $2.7 billion. The Internet bubble was on. Between 1995 and 2000, more than 1,100 tech companies went public.
But these innovations would have had far less impact had it not been for decades of steady progress in chips, hard drives, software and communications technology. By the mid-1990s, consumers could tap the Internet with PCs costing only $2,000, including modems that would display at least text and simple graphics at reasonable speeds. "You have to build up a whole ecology to support innovation," says James H. Morris, dean of computer science at Carnegie-Mellon University.
That ecology could be a source of strength during the current slump, which is unusually severe because it combines both a broad economic slowdown and a sharp cutback in tech purchases following the late-1990s binge years.
Many analysts expect at least a moderate recovery in tech spending once the national economy improves. Mr. Bresnahan says businesses have barely begun applying much of the potential innovation stemming from the Internet. Automated computer links between a company and its suppliers, for example, could streamline supply chains and reduce inventories.
The bigger test will be the nature and ultimate impact of innovation. Pessimists say they don't see a "killer app" on the horizon. Mr. Bresnahan worries that today's tech giants will move quickly to co-opt or squelch innovation that threatens them.
Optimists answer that the next big thing is rarely visible from the depths of a downturn. Products and companies may die, but "innovation is a process more than a series of products," says Doug Henton, a Palo Alto, Calif., economist. "With a resilient environment and the right people, [innovators] are going to find markets." |
