Economic downturn tests technology sector's resilience

Technology companies often boast that they can easily weather an economic downturn because their products can help people save money. But in the ongoing global crisis, some of them are getting hammered.

Nortel Networks on Monday posted a third-quarter loss of $3.41 billion, reporting a sharp drop in sales. That news follows a report last week from Cisco Systems that its orders in October had fallen 9 per cent over last year.

And with executives throughout the industry bracing for trouble, research firm IDC last week cut in half its previous global forecasts of spending on information technology.

Altered spending forecast

"Everyone is expecting the worst, and when they do, they stop spending, and it just becomes a self-fulfilling prophecy," said John Gantz, IDC's chief research officer and senior vice-president, echoing analysts' remarks about other sectors of the economy.

He said the forecast for technology spending had to be altered because of the changing forecast for the broader economy. "Until September, most forecasts were that 2009 would be better than 2008, and then ... boom," Gantz said.

"Now 2009 will be worse, and the only question is how much of a turnaround we get in 2010."

Even so, there is some disagreement over the magnitude of the impact that the weakening economy will have on technology firms.

Many tech firms argue that they are well-suited for economic downturns because they can help their clients save money by making them more efficient. For example, companies can use videoconferencing to cut down travel costs, or buy computer systems that have reduced energy consumption.

"We're engaging in conversations with customers every day about how they can use information technology to save money," said Microsoft spokeswoman Ginny Terzano.

Microsoft claim

In its most recent earnings call, the company reported that its revenue for the quarter ended September 30 jumped 9 per cent over last year.

Andrew H. Bartels, a research analyst at Forrester Research, agreed that in an economic downturn, some firms turn to technology solutions to become more efficient.

"We've got to remember, many companies run on technology," he said. "They can cut and delay [tech spending] for a while, but not for long.

"Our forecast has been that the tech sector as a whole will continue to at least hold its own or even grow through the recession," he said, referring to the US technology sector.

"We're not expecting to see the drop in purchases that we saw in the 2001 time frame," when the dot-com bubble burst, he said.

Last month, Google announced a 26 per cent increase in third-quarter profits, beating analysts' forecasts.

Advertising

Google was able to defy the falloff in advertising revenue that comes with a downturn. Analysts said that's because many Google customers view the search advertising method as more efficient than other advertising modes and have continued to spend there.