The dotcom boom and bust is nothing new - look back to the 1980s,
when a familiar pattern appears. So which suppliers will survive
the latest downturn? Jane Dudman reports.
Does the following scenario sound familiar? "A thriving market
takes a rapid and precipitous downturn; valuations collapse, access
to investment capital dries up and company failures are
commonplace. Manufacturers and distributors strain under the weight
of declining sales and excessive inventory. Stocks tumble after
parades of reports reveal missed corporate earnings; earnings are
lowered and there are widespread layoffs as consumer confidence
deteriorates. It is a cataclysmic convergence that brings a
technology-driven boom to a grinding halt."
Is this the new economy of the new millennium? Actually, it is a
description of the technology business circa 1985 - and an
illustration of how little things change in the IT industry.
"In an industry that expends so much effort to define the future,
there is more than a little irony in the fact that many of us
ignore one of the oldest truisms: history repeats itself," comments
James Bennet, managing director of the European Technology Forum,
which is running a two-day conference in London this week, looking
at the present state of the IT market. "The parallels we are
drawing is that 1985 was one of those technology blips, where there
was a big bubble."
The bubbles of 1985 were chips and PCs, rather than dotcom
suppliers, and although both those industries subsequently went
through major consolidation, the real lesson Bennet draws from
looking back 17 years is the fate of the then dominant mainframe
and minicomputer manufacturers. "Our point is that in difficult
times, companies have to get stronger, and the heavyweights of 1985
- companies such as Wang, Sperry, Burroughs and DEC - came out much
weaker," he says. "They were replaced by more nimble
companies."
Victor Basta, co-founder of advisory and investment firm Arma
Partners, who at the conference keynote session will be
interviewing BT chief executive Ben Verwaayen and Fujitsu Services
chief executive Richard Christou, says another lesson from history
is that the state of the present market is close to normal in many
respects, and we had all better start getting used to it. "There
are some abnormal things about the present market, such as the fact
that the whole climate for exits - that is, mergers and
acquisitions and [initial public offerings] - barely exists today,"
he comments. "But in most respects, these times are closer to
normal than people think."
This idea has several consequences for both suppliers and users in
today's IT market. It means the emphasis on return on investment
from any IT spending will remain. It will also make it harder for
start-ups to muscle into certain market sectors, according to
Basta. "If you look back over the past 20 years, most of the value
has been created by a handful of companies, such as Cisco and
Microsoft," he says. "That polarisation has returned, which means
the ability for someone like Amazon to come from nowhere and
achieve market leadership will be much more difficult."
Basta believes the present market favours more specialist
application and service companies, with good knowledge of an
important market, such as insurance. "Companies with a clear domain
knowledge have a reason to be around," he says.
Bennet says it will be at least a couple more years before the real
winners and losers emerge, but his tip is to watch out for
companies that began to struggle before the present downturn.
"Companies that had problems because of their own internal
challenges, rather than anything to do with the economy have had to
get rid of their fat early and may now be well-placed to perform
well," he comments. "History shows us that large companies have
harder times in hard times, and this time around a lot of suppliers
have not reacted quickly enough and will ultimately pay the
price."
Further insight into the state of the present market comes from Cap
Gemini Ernst & Young, which has commissioned a report that will
be presented at the conference by Nick Powell, the consultancy's
technology partner. "One of the most interesting findings to have
come back from IT users and buyers is that, whereas before doing
nothing was not an option, it is now a very positive option,"
points out Powell. "Users are saying they have enough IT and they
are unwilling to make any further major buying decisions."
Another factor is the feeling among users that they want better
ways to use the technology they already have, with the emphasis on
small-ticket projects, he says. "In the past, IT suppliers have
sold the future, but now everyone just wants to catch up to the
present."
Nonetheless, Powell draws an upbeat conclusion: "We sense there is
still a market for suppliers that can demonstrate a real economic
advantage from investing in IT. We are at the beginning of a boom,
not the end. A lot of what we were all promised by IT has yet to
materialise, and in many ways we are in the early years of what
could be a 30-year boom."
Look back at 1985 for pointers to the future
In 1985,
the dominant players in the UK IT industry were mainframe and
minicomputer manufacturers: IBM, ICL, Sperry, Burroughs, Honeywell,
NCR, DEC, Tandem, McDonnell Douglas, Hewlett-Packard, Wang and
Nixdorf.
But the writing was on the wall: in 1985 IBM's software income grew
by 31%; the following year, that growth dropped to 24%.
New companies were emerging to change the shape of the IT industry.
One, in particular, was to have a huge impact. In 1985, Microsoft
was 10 years old, with 900 employees. In November, Microsoft
shipped Windows 1.0. The following year, it went public, at $21 a
share.
In the mid-1980s, the boom industries were chips and PCs. PC
manufacturers such as Apricot, Amstrad, Amiga and Commodore were
doing well in 1985. By the end of the decade, however, non-IBM
compatible manufacturers - apart from Apple - were fading while PC
makers Compaq and Dell were booming.
As for the chip market, in 1985, US chip-maker AMD celebrated its
15th year with one of the best sales years in company history. But
by 1986, Japanese semiconductor makers had muscled in on the
US-dominated memory market and a world slump in demand for chips
meant AMD and other chip-makers had to look for new ways to
compete. In the first quarter of 1986, AMD's sales were down by
24%, Intel's sales dropped by 25% and National Semiconductor's
sales fell by 17%.
The two-day UK Technology Summit began yesterday (Wednesday) in
London.
www.euro-techforum.com