Technology

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By now, the story plays like a well-worn tale: The highflying tech sector helped fuel and ultimately overheat the economy of the 1990s. At the century's turn, the tech boom went bust, dragging the rest of the economy down with it.

Tech companies supplied hardware and services to dot-coms and benefited from the race to Y2K compliance, but the frenzied pace of growth was bound to crash. Most tech companies cut their marketing budgets and pared ad dollars. Spending at bellwethers such as IBM Corp. and Microsoft Corp. is expected to remain flat to slightly down in 2002. Tech marketers will redistribute marketing dollars, increasing their spending in digital media, marketing, promotion and direct marketing and events.

The industry hoped the ballyhooed Oct. 25 arrival of Microsoft's new Windows XP operating system for PCs, deployments of high-speed broadband Internet services and other new technologies would help lift the slumping sector. But Wall Street analysts and tech experts don't expect even a modest turnaround before the second half of 2002. Some believe a significant upswing isn't in the cards until 2003.

The jury is still out on Windows XP for the consumer PC market since the final tally of holiday PC sales hasn't come in yet. However, initial reports point to sluggish sales. Market researcher NPD Intelect reported that U.S. retailers sold 250,000 copies of Windows XP in November compared to 400,000 in October during a mere six days of sales. By comparison, Microsoft sold 580,000 copies of Windows 98 in its debut month, and 350,000 in the 30 days following initial sales. PCs loaded with the next-generation operating system aren't expected to make a big impact until this year, when consumers may be in the market for a major upgrade.

Console gaming, portable/handheld consumer electronics, wireless devices and electronic toys are a bright spot for 2002. Interactive entertainment is expected to burgeon into a more than $8 billion industry in 2002, compared to $7 billion in 2001. A return to home and hearth after Sept. 11 has boosted the appeal of gaming and all manner of consumer electronics and big-screen entertainment.

The business-market side of the equation is more complicated as companies look to make investments in data storage products, distributed computing applications and wireless upgrades such as gigabit ethernet services. Microsoft's Windows 2000 was introduced relatively recently, making immediate upgrades to Windows XP less compelling. "We're not looking for Windows XP to be a big driver of commercial [PC] demand," said Conan Laughlin, VP, Deutsche Banc Alex. Brown. "We're looking for a stronger corporate replacement cycle in the second half of 2002 and into 2003."

Deutsche Banc estimates that worldwide PC unit shipments fell 7% in 2001 and revenue 15%. In 2002, it projects global shipments to be down 3% year-over-year. Still, a Deutsche Banc research note issued late last year offers a ray of hope: "Despite a challenging outlook, we believe the PC remains a centerpiece in the technology ecosystem, even as applications and networks migrate increasingly to the Web."

Tech ad and marketing spending are likely to be affected by industry consolidation (like the proposed and roundly criticized merger of Hewlett-Packard Co. and Compaq Computer Corp); weak demand; and commoditized pricing. Existing dollars, meanwhile, are being sliced as never before, and in many cases reallocated into a diverse slate of direct marketing initiatives.

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