Summertime Blues

Jul 23 2001

One year ago, as we headed to Southern California for our second Internet Summit conference, there was a profound sense of uncertainty in the air. The Nasdaq had crashed, the Internet bubble had burst and companies of all types were busy revamping their financial plans. At the same time, though, optimists took the view that the worst was over: The markets seemed to be rebounding, sectors such as telecom infrastructure were continuing to attract capital and there were few indications that the economy as a whole was about to take a tumble. Maybe, just maybe, there would be a soft landing.

Today, as we open our third Internet Summit, there is a lot less ambiguity. Last summer's optimists were wrong. The end of tech-stock mania and an abrupt drop in corporate capital spending have devastated not only the Internet industry but the information economy as a whole. In computers, telecommunications, financial services and media, just about everybody is feeling a lot of pain. Even Alan Greenspan, so recently the master economic helmsman, seems flummoxed as his continuing series of interest-rate cuts fails to turn things around.

The bad news is that the hoped-for second-half recovery now seems almost out of the question. Surveys of corporate technology buyers show that few plan to increase spending soon. Overcapacity in telecom services and equipment means continued pricing pressure and continued capital flight from the sector. The advertising market, both online and off, is the worst it has been in a decade and shows few signs of improvement. The cutbacks at Wall Street brokerages and investment banks may have just begun.

The good news is that many economists - including Greenspan - believe the cycle is nearing its bottom. While few expect a quick return to the go-go days, it seems almost inconceivable that investment in technology, which has been growing by 10 percent to 15 percent per year for decades, will stall out below historic levels for long. My best guess is that a real recovery won't kick in until the second half of next year, but at least there is hope.

In the meantime, the biggest and best-established information-economy firms have the edge. AOL Time Warner may have announced disappointing quarterly results last week, but it's a bastion of stability compared with many of its smaller rivals. IBM, similarly, showed revenue weakness, but profits remain strong and there don't seem to be major problems on the horizon. In telecom, it's the Baby Bells that are looking powerful. On Wall Street, it's the Goldmans and Morgans and Merrills that are leading the pack. It's not by chance that the speaker lineup at our event this year is much heavier on "old" information-economy leaders like Michael Dell and Steve Ballmer and Gerry Levin.

Startup companies and their backers, by contrast, are reeling. Venture capital funds lost 6.7 percent of their value in the year ending March 31, according to data released last week by Venture Economics - the first such annual loss ever recorded. Even young companies with good business models and near-term profit prospects are having a tough time raising cash. Vulture funds of various kinds are having a field day.

For the truly gutsy, of course, what all this means is that it's a great time to start a company. The big players, relieved of competitive pressure from upstarts, can afford to be conservative - and that will eventually make them vulnerable. Skilled, experienced people are available at salaries much lower than they commanded a year ago. VCs, for better and worse, will be paying a lot more attention to the companies they fund.

This is small comfort to the many who have been bruised and battered in the downturn. But this year's severe slump is the inevitable mirror image of the extraordinary boom that ended last year, so the cycle will turn again - at least for those who can make it to next summer.