The party's over: Technology

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After several red-hot years, the high-flying tech sector has come crashing down to earth. Tech stocks have plummeted, corporate and consumer spending is down, and earnings warnings have come in successive waves.

Remember when dot-coms threw lavish parties, IPOs were a dime a dozen and tech was the name of the game? What a difference a year makes.

Soothsayer Michael Fleisher, CEO of Gartner Dataquest, saw it coming more than a year ago when he predicted during an address at one of the research organization's symposia that 95 percent of all pure-play dot-coms, or those without a brick-and-mortar infrastructure, would be out of business in a year. Traditional technology companies such as Compaq Computer Corp., Dell Computer, Hewlett-Packard Co., IBM Corp. and Intel Corp. not only sell hardware, but consulting, Web integration and hosting services as well, and each moved aggressively to outfit startups. They, along with KPMG, PriceWaterhouseCoopers and integration experts like Scient and Viant, flagged their prowess as service suppliers to dot-com startups. In 2001, they'll look for other revenue streams to replace the dot-com business they chased so fiercely. Gartner Dataquest projects the total IT services market, which includes consulting, IT management or outsourcing and system integration, to reach $812 billion in 2001 and swell to $1.325 trillion by year-end 2004.

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 like KPMG and Price 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' dependence on dot-com revenue in the 10 percent to 12 percent range, though it was as high as 40 percent for smaller players.

Corporate spending on information technology has tightened considerably since the market began imploding in March 2000. 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 percent in 2001, a tiny increase compared with a 12 percent rise in 2000.

"Dot-com is not a cool thing to be anymore, or to promote," said Eric Rocco, VP-services research, Gartner. "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 and CEO Louis Gerstner has said the majority of Big Blue's ad spending in 2001 would 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 percent to 20 percent growth in 2001 - which isn't bad, according to Mr. Rocco, who estimates IBM's exposure to dot-coms is around 3 pecent. "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 warning of lower-than-expected earnings in recent weeks. Indeed, at retail, marketers have loaded up on rebates and other inducements to move inventory. The market is rapidly approaching 70 percent of all households owning at least one computer. PC marketers will look to diversify their product lines, marketing new digital convergence products and seeking to beef up revenue from services and subscription fees.

Retail desktop PC sales fell 12 percent 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 and audio/video equipment, show strong growth potential in 2001. In 2000, personal digital assistants and Web-enabled cellular phones grew 164 percent and 62 perccent respectively in unit sales, according to NPD Intelect.

Copyright January 2001, Crain Communications Inc.

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