The party's over

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After several red-hot years, the highflying tech sector has come crashing down to earth. Tech stocks have plummeted, corporate and consumer technology spending is down, and earnings warnings have come in successive waves. All this puts pressure on tech advertising in the new year, but some major marketers are vowing to stick with their ad plans.

Most analysts agree the softening economy, coupled with a stockpile of dot-com flameouts, is bound to slow ad spending in the category. Yet tech giants such as Hewlett-Packard Co., which recently reported it would miss fiscal fourth-quarter estimates by a dime, maintain that ad spending for 2001 will increase modestly (AA, Nov. 27). HP spent $1.2 billion globally on advertising in its fiscal year ended Oct. 1999.

Other big spenders in the category, including Compaq Computer Corp., IBM Corp., Intel Corp. and Microsoft Corp., contend there is no pull-back in ad spending, but already appear to be deploying media dollars carefully.

Microsoft last year hired a media director, a new post within its Central Marketing Organization, to help it gain greater efficiencies across media. The move signifies that tech marketers are getting smarter about how their dollars are spent.

Tech marketers are expected to spend more on print, radio and interactive advertising as well as direct marketing in 2001 to reach information-technology professionals and business decision-makers, an increasingly fragmented audience. Spending on high-profile TV ads is likely to be more conservative.

In any case, the volatile category means chronic headaches for agencies scrambling to keep up with constant change.

It was just a year ago that tech IPOs were a dime a dozen and technology was the name of the game. What a difference a year makes.

Soothsayer Michael Fleisher, CEO of Dataquest, saw it coming more than a year ago when he predicted during an address at one of the research organization's conferences that 95% of all pure-play dot-coms, or those without a brick-and-mortar infrastructure, would be out of business in a year.

The traditional tech players-Compaq, Dell Computer Corp., HP, IBM and Intel-not only sell hardware, but consulting, Web integration and hosting services as well, and each moved aggressively to outfit start-ups in 2000. They, along with KPMG, PricewaterhouseCoopers and In-ternet professional services outfits such as Scient and Viant, flagged their prowess as service suppliers to dot-com start-ups. In 2001, they'll look for other revenue streams to replace the dot-com business they chased so fiercely.

Integration experts like Scient, US Interactive and Viant, as well as Web design and content shops, "are feeling the pain of the supply-and-demand whiplash," said Lewis Clark, senior analyst, Gartner Dataquest.

Larger players such as KPMG and Pricewaterhouse and traditional tech companies will shift their emphasis to back-end implementation of technology and outsourcing businesses, since "they are not immune to the fluctuations of the market," Mr. Lewis said.

Tech companies already have turned their attention to Fortune 1000 companies as they see dot-com dollars and other revenue sources dry up. Mr. Lewis pegs system integration companies' current dependence on dot-com revenue in the 10% to 12% range, though in 2000 it was as high as 40% for smaller players.

Corporate spending on information technology has tightened considerably since tech stocks began imploding last March. Analysts say fiscally conservative spending policies will result in longer sales cycles and delayed purchasing. Gartner Dataquest projects that all IT spending-hardware, software and services-will increase 11.6% in 2001. That's a small decline in growth compared with the 12% rise in 2000.

"Dot-com is not a cool thing to be anymore, or to promote," said Eric Rocco, VP from Gartner's Research Organization. "You'll see a shift in marketing messages to already existing business." In addition, tech giants like IBM, which reinvented itself from hardware marketer to services provider and consultant, will shift to emphasizing infrastructure-software, storage and servers. IBM Chairman-CEO Louis Gerstner has said the majority of Big Blue's ad spending in 2001 will be used to tout e-business infrastructure.

In 1999, IBM's IT services revenue hit $31 billion, and the company's services business will experience 15% to 20% growth in 2001-which isn't too shabby, according to Mr. Rocco, who estimates IBM's exposure to dot-coms is around 3%. "IBM's biggest challenge is to sustain growth and to try to be as flexible as possible," he said.

In the consumer market, PC sales remain anemic. Apple Computer, Gateway and Compaq are among the group of marketers that warned of lower-than-expected earnings in recent weeks. Indeed, at retail, marketers have loaded up on rebates, freebies and other inducements to move inventory. With household PC penetration rapidly approaching 70%, marketers will look to diversify their lines with new digital convergence products and will seek to beef up revenue from add-on services, accessories and Internet subscription fees.

Retail desktop PC sales fell 12% in November, year-over-year, according to PC Data, a market research organization.

"Going forward, PC manufacturers have a tough road-they're going to have to be smarter than they ever were ... those year after year growth patterns are gone," said George Meier, marketing director, NPD Intelect Marketing Tracking. Mr. Meier said portable consumer electronics, including notebook PCs and home networks that link PCs with audio and/or video equipment, show strong growth potential in 2001.

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