Tue, Sep 25, 2001 page17

• US computer sector faces uncertain times

  DOWN AND OUT With all sorts of economic and fiscal indicators heading south, even some worst-case scenarios for the industry are starting to appear more likely

  • NY TIMES NEWS SERVICE
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  For the last two decades, spending on information technology in the US has grown at two to three times the rate of the economy and never declined, even in economic recessions.

  But even before the Sept. 11 attacks, information technology spending, which grew 11 percent last year, was slowing.

  Now projections are being trimmed further, down to 3 percent growth, according to estimates by International Data Corp in a revised "worst-case scenario" that the research firm says is increasingly likely.

  The US$450 billion information technology industry, which animates much of the modern economy, is struggling with the impact of the attacks, rethinking its priorities and spending plans, and searching for any lessons to be learned from the tragedy.

  The immediate impact is lost sales from the brake on travel, shopping and investment decisions. Yet there is already the beginning of a rise in the equipment replacement and recovery business because of the World Trade Center disaster. The information technology costs of recovery and relocation after the attacks will be US$15.8 billion over three years or more, predicts Computer Economics, a research firm.

  But those added sales of hardware, software and services for local recovery, industry analysts say, will be dwarfed by the decline in the fortunes of the industry as a whole as the economy slows further. "The business disruption and the hit to consumer confidence overshadow everything else," said John Gantz, director of research for International Data Corp.

  Sales of hardware, like mainframes and personal computers, will be hit hardest, Gantz said, while software and especially services should be more resilient.

  The current quarter, ending Sept. 30, will be a rough one. Typically, corporate customers wait until the last few weeks of a quarter to make decisions about large computer and software purchases -- decisions that in many cases have been reversed in the last two weeks.

  Revised outlook

  Technology companies have already begun warning that sales and earnings will probably slide. Oracle Corp, a leading supplier of corporate database software, cautioned securities analysts last Monday about the worsening outlook. Before the terrorist attacks, Oracle executives believed that the weakness in technology spending had probably bottomed out.

  "But now, everything is a wild card," said Jeff Henley, Oracle's chief financial officer. "We have no idea of how negative things will be in sectors like airlines and hotels."

  EMC Corp, a major supplier of data storage equipment, warned on Thursday that it would lay off 2,000 workers, or 10 percent of its payroll, and report a loss for the third quarter. "The business world is simply covered in a blanket of hesitation," said Joseph Tucci, EMC's president.

  Until the attack, the hopes of the ailing personal computer industry were pinned on the arrival of Microsoft's new Windows XP operating system in October. In the past, when Microsoft Corp. has introduced a major upgrade of its Windows operating system, the industry standard, the result has been a surge in demand for new personal computers, peripheral equipment and other software.

  But now, with consumer confidence shaken, any rebound in PC sales is in doubt, according to Rob Enderle, an analyst at Giga Information Group, who says that the PC industry may not recover until 2003.

  Microsoft, however, intends to spend heavily to prove the pessimists wrong. Windows XP will be introduced on Oct. 25, as scheduled, backed by a US$250 million marketing campaign. "Not only the PC industry but the whole country is looking forward to anything that can help jump-start the nation's economy," said James Cullinan, the lead product manager for Windows XP.

  With many people skittish about traveling, there are cancellations and delays for computer conferences, at least for those scheduled for the next few weeks. The Internet World conference at the Jacob Javits Convention Center in New York, for example, has been moved from early October to early December.

  The biggest American computer conference, Comdex in Las Vegas, is going ahead as planned in mid-November. In the last few days, Kim Myhre, Comdex's president, says his six keynote speakers -- including Bill Gates, the chairman of Microsoft, and Lawrence Ellison, the chief executive of Oracle -- all still planned to come.

  Tightened security

  Security will probably be tighter and the crowds may be somewhat smaller at Comdex, typically attended by 200,000 people, Myhre said. "Travel is a huge issue," he said, "and so much depends on what happens in the wider world in the next two months."

  Indeed, for the industry, as for the economy itself, so much depends on what political and military events lie ahead. What does seem certain, though, is that priorities will shift somewhat. A larger share of the information technology budgets will be spent on backup storage, recovery services and decentralized operations.

  "One lesson," said Howard Anderson, senior managing director of YankeeTek Ventures, a technology investment firm, "was that the more centralized you are, the more vulnerable you are."

  The same thinking lay behind the disaster preparation for the year 2000, or Y2K, software problem. The investments made to handle that problem helped explain why so many of the banks and brokerage firms housed in or near the World Trade Center were able to get up and running again within a few days from other locations.

  Yet recovery plans are likely to be redefined. Such plans have usually focused on computers and software. "But now it's going to be about people and getting the information and knowledge that's in their craniums onto the corporate network," said Gary Beach, publisher of CIO Magazine, a professional journal for information technology managers.

  In conversations over the last few days, Beach said, technology executives at companies have told him that they increasingly want to ensure that critical business information is housed not just in employees' heads, but also, as much as possible, in corporate databases. That sentiment will probably heighten interest in a field called knowledge management, which combines tools like e-mail search programs, collaboration software and data-mining technology.

  Spending seems certain to increase on computer security and encryption software. Some experts have long warned that the large computer networks that handle things like banking transactions and airline traffic are susceptible to attacks by terrorists.
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