Tech Downturn Sets Path for New Growth

With the economy stalled and the stock market falling, it’s become fashionable to declare that the technology-driven “new economy” of the 1990s brought little benefit beyond a stock market bubble that now has burst and left the nation poorer.

The gloom was pervasive last week. Stock market investors dismissed Hewlett-Packard Inc.’s proposed merger with Compaq Computer Corp. as a desperate act of losers and knocked many technology stocks back to multiyear lows. Nasdaq and the Dow Jones industrial average took major beatings again.

But the gloom is overdone and the revisionist bashing of technology a mistake, say investors and managers who are looking behind the headlines at the continuing expansion of Internet use by industrial companies here and abroad.

The Internet worldwide will add 123 million users this year, a 30% increase, according to International Data Corp., a Framingham, Mass., research organization.

Industrial demand for bandwidth--Internet communication capacity--is growing rapidly even during the downturn because companies need it to be efficient and competitive, says Anthony R. Muller, chief financial officer of JDS Uniphase Corp., a major supplier of laser semiconductors and other components to the telecommunications industry.

The technology boom has had a dramatic effect on U.S. industry. Internet-aided systems of inventory control and supply management have lowered costs, making U.S. companies far more efficient than their European and Japanese counterparts.

That’s why U.S. companies doubled their investment, to more than $600 billion a year, in information equipment and software in the last five years. The investments led to increased productivity--more output per unit of labor or investment--throughout the economy and laid a base for future growth.

Economists such as Lawrence Summers, former Treasury secretary and now president of Harvard, see productivity increasing at a healthy pace long term thanks to business’ continuing development and use of information technology.

But there’s no denying that technology investments surged too far too fast and are down sharply this year, contributing to a major stall of the national economy. Fiber-optic communications cables remain dark because traffic hasn’t yet emerged to light them up. Dot-coms have disappeared because customers didn’t flock to their offerings and many such firms didn’t have a clue about making a profit.

Lessons can be learned from such debacles. For example, the most successful company in reaching consumers through the Internet has been America Online, which charges a monthly subscription fee. AOL--now AOL Time Warner Inc.--has long understood that though information on the Internet can be free, building a business on it requires a profit.

Investors and businesspeople understand that the downturn will be followed by a new and more sustainable phase of development in communications and computing technology. The cycle will turn in 2002, and by 2003 a new high-tech advance will be in full swing, experts predict.

The buildup of fiber-optic connections to offices and homes will characterize this next phase, says Rick Gold, president of Genoa Corp., a 2-year-old company that has developed a lightwave semiconductor that can lower the cost of extending fiber cables to individual users.

The next phase will be driven by new services and applications of the Internet that users will be willing to pay for, says Kelly Pan, head of Pantheon Capital, an investment management firm that specializes in technology issues.

Cable companies, which already have high-speed lines into homes that can be converted to two-way fiber-optic links, will be in a good position to benefit, Pan believes.

Information storage also will be a growth field as the number of business Web sites increases. International Data projects that the number of companies with Web sites will rise from roughly 15 million worldwide today to more than 25 million in the next four years. Most of those companies will have their Web sites stored on other companies’ servers.

A major reason for Hewlett- Packard’s proposed merger with Compaq is that the combined company would be the market leader in servers and information storage.

But with the economy stalled, Pan is not committing fresh investments to futuristic ideas. Rather, she’s looking at products and services that industry is buying even in the downturn.

For example, “collaborative video conferencing is flourishing because travel budgets are cut back and convenient ways have been developed to work together remotely,” she says. WebEx Communications, a small San Jose-based company, is seeing its revenue shoot up this year--$33 million in the first six months compared with $25 million for all of 2000--thanks to demand for its videoconference system.

So far, business has used the Internet for some aspects of supplier and customer relations, but the next phase will see the medium used in more complex ways, says Ray Villareal, chief executive of HelloBrain, a fledgling Silicon Valley company. HelloBrain is launching an online platform that allows companies to collaborate on complex problems with other firms, universities, scientific institutes and government agencies in all parts of the world.

The long-envisioned promise of online education will be realized in the next phase of Internet development. So will movies and videos “on demand.”

But with technology companies struggling to survive, what will bring on the Internet’s next phase? The answer is the glut of fiber-optic infrastructure caused by the ‘90s overinvestment.

The glut makes bandwidth cheap, and that will encourage new users, such as audio and video entertainment developers, to think up ways to use the newly affordable resource. Audio and video presentations, especially movies and other full-motion videos, use up great gobs of fiber-optic capacity. Today’s glut could be absorbed within a year.

At this time it’s worth recalling the railroads, which went through repeated cycles of overbuilding in the 19th century. Rail companies went bust, fortunes were made and lost--and a base was laid for a continent’s development.

It may be too early to rush out and invest in the next phase of technology. But it’s not too early to start watching for fresh trends and opportunities on the Internet.

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James Flanigan can be reached at [email protected].