(Editor’s note: This is the first appearance of “Today in Technology,” a daily column covering the corporate technology market. Comments are welcomed. Send E-Mails to [email protected])
In the new year’s first 72 hours, it appeared that we were heading for an encore of the 2000 train wreck. Then the Federal Reserve stepped in and cut interest rates 50 basis points.
That was welcome news to investors. Midway through Wednesday’s stock market session, the major market indexes were still stuck in the red. Within minutes of the Fed’s decision, the Dow Jones Industrial Average, the Nasdaq Composite and S&P 500 all recorded mind- boggling gains on heavy trading.
But before the Fed stepped in, the stock market’s troubles were only a symptom of a much more serious malady. So, the larger question is whether the Fed’s move will bring immediate relief to the tech sector. Eventually? Yes. But right away? Probably not.
Even central bankers and economists acknowledge that interest rate hikes or cuts rarely have an automatic impact on the economy. It usually takes six months or more, if not an entire year, before a Fed decision works its way from Wall Street to Main Street.
What the tech sector needs, and soon, is a recovery in the business prospects of its bellwether companies. That’s something the Fed can’t provide. What the Fed can do is restore confidence among investors and businesspeople that the Central Bank is fully aware of the malaise dragging on the business cycle. Wednesday’s rate cut demonstrated that awareness.
But considering how far the tech sector has fallen, it may take a lot more than just one rate cut to bring it back.
As an indication of how far the tech sector has to go before the benefits of the Fed’s actions are felt, consider this last–we promise–post mortem on 2000. Of the 100 stocks in USA Today’s E-commerce index, 94 were down for 2000.
Wait, it gets worse. All but two lost ground in the fourth quarter.
And, we’re not finished. Some 31 stocks, nearly a third of the total components in the index, lost more than 90% of their value in 2000, and 11 of the stocks closed the year trading under a buck. The 11 performed so poorly that they were expelled from the index.
That’s what happens to bad dot coms. We just act like they don’t exist. Unfortunately, a lot of them really don’t exist any more.
A report published by Reuter’s Wednesday morning says that 201 Internet companies went out of business in 2000, eating up $1.5 billion in investor funds. Some 60 percent of the closures occurred in the fourth quarter alone.
Some readers might remember that last year began with an extension of 1999’s blazing hot market for initial public offerings. An entrepreneur could have started a company, gone public and raised $100 million, and filed for bankruptcy — all in the course of 12 months.
A year ago, if you proposed a story like that to a Hollywood producer, you would have been laughed out of the office. Now, the guys crying into their beers on the barstools on each side of you had that exact scenario befall them.
Still, you would have thought the markets would have been so glad to see 2000 come to an end, that they would have rallied during the first week just to shut the door firmly on the past. Unfortunately, that didn’t happen until the Fed weighed in.
Part of the blame has to do with the steady stream of ugly headlines still emanating from the tech sector, and it appears no company is immune.
Consider Microsoft, which was hit on Wednesday with a racial discrimination lawsuit from seven current and former black employees, who are seeking $5 billion in damages. Obviously, this is only the first round in what promises to be a long, drawn-out legal battle, and as we wrote about in December, it could be part of a growing trend. The suit, which was filed in U.S. District Court in Washington, D.C., seeks class-action status on behalf of hundreds of current and former black employees of the Redmond, Wash., company.
Next, take a look at Intel, which was Microsoft’s close partner through much of the early technology innovation in the 1980s and 1990s. The chipmaker introduced a low-cost version of its Pentium 4.
It wasn’t that long ago that the introduction of a new chip from Intel would augur in a new round of sales and earnings growth for the company and technological innovation in the computer industry. Not any more. On Wednesday, a major Wall Street firm, Lehman Brothers, cut its earnings outlook on Intel based on weak fourth quarter demand and yet another scaling back of the brokerage’s growth forecast for the PC industry.
Another sign of Intel’s woes can be seen in two reports tracking the growth in semiconductor sales. One, from the Semiconductor Industry Association, says chip sales rose 28 percent in November. A second, released by the market research firm Dataquest, says chip sales rose 31 percent for all of 2000.
Again, there was a time that headlines like these would be welcome news for Intel. Unfortunately, both reports noted that the strongest segment of the chip market is in chipsets for the wireless communications markets, sectors where Intel is weak. The Dataquest report also noted that Intel’s share of the total semiconductor market slipped to 13.4 percent from 15.8 percent in 1999.
Intel is still the largest chipmaker in the world, but Dataquest also said it experienced the slowest growth among the top 10.
Intel is hardly down for the count, but the competition won’t get any easier for the company. Witness the news that Micron Technology, which is a key supplier of PCs to government agencies, will use the Athlon processor from Intel rival Advanced Micro Devices in its next line of ClientPro computers. Moreover, AMD and Transmeta have formed a partnership that makes use of Transmeta’s Crusoe processor to challenge Intel’s position in the corporate server market.
If there’s a silver lining to be gleaned from the tussle between AMD and Intel, it’s that the corporate technology market, weakened as it may be, is showing some signs of life. What’s lacking is a catalyst that will spark growth. In the meantime, the tech market is still an arena worth fighting over.
Consider Yahoo!’s announcement that it was charging a listing fee for its auction site, following the course already established by Amazon.com and eBay on their auction sites. Yahoo!’s step is, on the one hand, a means of offsetting the widespread drop of ad revenue in the dot-com sector, according to Wednesday’s Wall Street Journal. The company also said it wanted to assure the presence of higher quality items on the site.
The move could be viewed as another sign of maturity in the retail E-commerce sector.
If the Web is ever going to achieve its promise, major sites will have to be run less like flea markets and more like established retailers. Charging a fee for listing items is one way to separate the wheat from the chaff. Perhaps more will need to be done, but this is a solid first step.
Yahoo!’s decision to ban hate material from its site can be viewed the same way. Corporate users know better than anyone that the Web is serious business, although it is such a large and amorphous beast that it’s impossible to regulate it in its entirety. But anything that lessens the presence of the lunatic fringe can’t help but to assist corporate buyers and sellers in establishing the Web as a medium for important transactions.
As long as the market was slumping, it was hard to see the silver lining in the latest developments on the Web. But the companies that mapped out sound business plans while the dot-com sector suffered through its shakeout were going to recover with or without the Fed. The rate cut may just help them get some extra mileage out of the rebound.