Can tech survive a downturn?
With fears of a recession growing, many firms feel they're better suited to weather one out than the dot-coms that lost it all when the last bubble popped
It's beginning to look like 2001 in the general economy, with consumers tightening their purse strings and businesses shedding jobs. But in the technology business, which suffered more than any other in the last meltdown, there are fewer signs of strain this time around.
"Last time it was the tech bubble," recalled Roger L. Kay, president of Wayland research firm Endpoint Technologies Associates, recalling the corpses of failed dot-com and telecom start-ups littering the office parks on Route 128 and Interstate 495. "Everyone out there with a goofy idea was taking venture capital, renting office space, and hiring masseuses for their employees. You had some huge crashes."
The current economic slowdown is driven by deepening disorder in the housing and sub-prime mortgage markets. Spooked by data suggesting the problems are spilling into other sectors, and fearing they could tip the economy into recession, the Federal Reserve last week cut two key interest rates by half a percentage point - twice as much as many analysts expected - in a bid to perk up business activity.
Yet business remains surprisingly brisk for many high-tech companies, a key cluster in Massachusetts -one of the reasons some economists think the state and the region are better positioned to weather a downturn than other parts of the country. Hiring continues here, and demand for such products as business software and data center gear continues to be strong, according to industry executives.
State employment figures released last week show the high-tech industry, including the information, scientific and technical services sectors, adding about 1,400 jobs in August, roughly half of the overall increase of 2,800 jobs in Massachusetts for the month, according to the Executive Office of Labor and Workforce Development. By contrast, the federal Bureau of Labor Statistics reported earlier this month that the United States as a whole lost 4,000 jobs in August.
Because most Massachusetts technology companies now sell to businesses and other organizations, rather than to consumers, they've been insulated from weakening retail spending.
Indeed, the infrastructure and enterprise products scorned by Internet highfliers early in the decade - from data storage equipment to accounting software - have become platforms of growth and stability in today's technology economy. And global sales of these products have climbed as the dollar has declined against foreign currencies, providing a cushion as the US economy slows.
"Most of the technology companies right now are hiring," said Jit Saxena, chief executive of Netezza Corp., a Framingham maker of data warehouse appliances. "We continue to look for engineers, sales people, and support people in all areas of our company. And it's not very easy to find these people. They generally have multiple offers."
Saxena, whose company went public in June, said most high-tech companies, fueled by venture capital and their own profits, haven't been affected by the credit crunch that has squeezed everything from consumer loans to corporate buyouts in recent months.
"We're not dependent on macroeconomic factors," he said. "We're more dependent on our competitive position and how we're serving our customers."
In the Internet boom, area companies such as CMGI Inc., an Andover incubator of dot-coms, built their business models around the hope that an explosion of computer users surfing the Internet - "eyeballs" was the term favored in that era - would inevitably drive their revenue growth. Among the start-ups that fizzled, shriveled, were sold, or changed their business: Foodline.com, Furniture.com, Mothernature.com, Refer.com, SixDegrees.com, and Voter.com.
Today's more sober landscape is typified by companies that have pioneered technologies obscure to ordinary people but highly valued in expanding technology niches. Netezza's warehousing gear, for instance, enables companies to manage increasingly complex digital infrastructures. Acme Packet Inc. of Burlington, which had the best-performing initial public offering in Massachusetts last year, markets devices that have revolutionized the rapidly growing business of sending voice signals over the Internet so companies can make phone calls more cheaply.
"If you're talking about stability and reduced risk, you're better off being in the commercial sector right now," said Kay of Endpoint Technologies. "The consumer market has more volatility."
That's not to say the region's business-to-business technology vendors aren't vulnerable to an economic downturn. For many, the biggest challenge will be commoditization, as corporate customers turn to cheaper technology, often from the Internet, for many business processes they once ran with proprietary applications.
"There's a lot of pressure on anyone selling premium products into the enterprise because enterprise customers are starting to behave more like consumers," said Patricia B. Seybold, chief executive of Patricia Seybold Group, a Boston research firm.
But the good news for sellers of high-tech products and services is that corporate buyers continue to budget for technology that can make their operations more efficient and boost their sales and profits. After loading up on new technology a decade ago, to protect themselves against the Y2K bug and the Internet disruption, many businesses froze technology spending when the dot-com bubble burst in 2001. Now they've resumed spending, albeit more conservatively.
"We haven't seen companies cut back dramatically on their spending," Seybold said. "They already have factored the economic slowdown into their budgets, and their information technology spending is baked in. What they're cutting is travel and outside consulting."
All of which suggests the technology sector might be less vulnerable to the storm clouds gathering over the US economy.
"I don't think we have irrational exuberance right now," said Joyce Plotkin, president of the Massachusetts Technology Leadership Council. "We have healthy growth and new market opportunities."
Robert Weisman can be reached at email@example.com.