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Tech Sector Brushes Up On The Basics
by Teri Rucker
Sobered by dismal market conditions, the technology industry has both literally and metaphorically shed its garage-office image, swapping Iron Maiden T-shirts for business suits and adopting a serious search for profits instead of pipe dreams.
"There is a maturing and with maturing hopefully come insight and wisdom, and that is actually playing itself out," said Brian Kelly, senior vice president for government relations and communications at the Electronic Industries Alliance.
Part of that maturity is a realization that technology for technology's sake is not necessarily a good business proposition and companies are seeking ways to make money. "It is time now to focus on delivering a profit," Nextel Communications CEO Tim Donahue said at the Progress and Freedom Foundation's August summit in Aspen, Colo., where the theme of executives seemed to be getting back to business basics.
The industry still will lobby the government on its pet issues, but the main focus will be on the corporate bottom line, officials said.
Whiz, Bang, Fizzle
"Their behavior is reflecting reality," Scott Cleland, CEO of the Precursor Group, said of tech executives' changed mindset. "In the '90s bubble, the only thing that mattered was stock price, and they were king of the stock price. In this marketplace, results rule. Real results."
During the technology boom of the 1990s, venture capitalists invested in almost any new gizmo or service as long as the suffix .com was attached to the company name. At the same time, financial analysts invented new ways to evaluate the financial health of companies that failed to produce revenue quarter after quarter, and the hype continued.
For example, the price of Amazon.com's initial public offering (IPO) of stock five years ago was $1.50 a share. It soared to a high of $113 before tanking at $6 and recently was trading at about $15. When comparing the recent value with the IPO price, the stock is up by a factor of 10 -- a "good performance," Amazon CEO Jeff Bezos said in Aspen. "The only problem was we went from $1.50 to $15 via $113."
Amazon is a success story, but the road was not without mistakes. The company was a money loser for years and only became profitable in the quarter ending Dec. 31, 2001. Bezos said the biggest mistake he made was adopting the strategy of investing "in every dot-com we could think of. ... I can't list them all because I repress it."
That kind of investment screeched to a halt in 2000, when the economy soured, venture capital disappeared for much of the industry and companies with previously sky-high stock prices started falling like dominos. The land rush for dot-com territory ended in the mid-1990s, but nobody noticed until 2000 and continued pumping money into the technology industry, Bezos said.
Now a battered but sobered industry is talking about profit margins over the latest technological innovation. No matter how "whiz bang" the technology is, its ability to make it to market "depends on its value to a critical mass of users at a good price," Donahue said.
Eddy Hartenstein, chairman and CEO of DirecTV, agreed, saying that companies "are not going to let the engineers call the shots" but will rely on what consumers want. "Until the customer wants [a technology] and is willing to pay for it," he said, "it is not going to move forward."
Brother, Can You Spare A Dime?
That kind of soul-searching and changed focus could help get the attention of venture capitalists. After losing a great deal of money, business executives "are starting to see a much more hardened" venture-capital community, which is "once again making sure the companies they invest in have a very strong potential for a very positive revenue stream in the near term," said Mark Heesen, president of the National Venture Capital Association (NVCA).
He is heartened by the more serious, business-like atmosphere he sees among the industry, but he said new investments will not necessarily flow because most venture capitalists have been unable to exit many of their investments because the IPOs and acquisitions have closed for now.
The telecommunications industry, among the hardest hit, has learned that lesson and is delaying major network upgrades that would spur the convergence of services until the outlook is brighter, according to a Telecommunications Industry Association white paper released in late August. The survey also showed that wireline and wireless providers are unwilling to make large financial bets on disruptive technologies and are returning to the basics of bandwidth and local support.
For example, the regional Bell telephone providers do not plan to converge existing networks until the technology for Internet telephony is improved to the point where voice revenue, which is currently profitable, can be transferred to converged packet networks and drive revenue for the business, the report said.
Less Is More
The industry still cannot afford to ignore the legislative and regulatory environment, observers said. There likely will be a "renewed push to tell the government to stay out of our lives: 'Don't do anything bad to us; we have to get out and make money," Kelly said.
In the telecommunications industry, he added, "there needs to be a realization that there has to be a level playing field. The last thing you want to do is regulate up. You want to regulate down." He did not offer specific suggestions, noting that "there are 100 ways to skin this cat, but over-regulation isn't it."
In three proceedings, the FCC is reviewing its rules governing high-speed Internet access, and the agency is widely expected to take some deregulatory action, although it is unclear just how far the agency can go within the confines of the 1996 Telecommunications Act.
Congress also is considering several bills that would attempt to resolve the fight over technology to manage digital rights -- a particularly nasty battle that the content and technology industries have been trying and failing to solve themselves. "The personalities have become more important than process or policy, and it appears everybody is trying to cannibalize each other as opposed to looking at how we can move forward," Kelly said. "To find a solution, everybody has to feel some pain and nobody wants to hurt."
The government needs to continue investing in research and development because many new ideas have come from government labs and found successful homes in the private sector, Heesen said. He also noted that favorable tax policy and lower taxes on capital gains would help spur investment but acknowledged that such steps are unlikely in the current economic environment.
Pushing for such policies is not the top priority, he added. "Keeping these companies alive at this stage is much more important."
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