Comparing Bubbles

The Economist has a good article today that talks about the current recession and financial industry bubble. Specifically, the article talks about how tech firms might fare over the next year or two and how the current bubble differs markedly from the previous tech bubble.

This time things are not yet that bad—and are unlikely to become so. In spite of the string of bad news, some forecasters still expect global IT spending to grow this year [emphasis mine], at least when you allow for currency fluctuations. According to Forrester Research, a market-research firm, technology purchases will decline by 3% in 2009 when counted in dollars (see chart). But the dollar’s relative strength weighs heavily on the results of American firms by devaluing their foreign revenues. When measured in a basket of local currencies, weighted for each region’s share of the global IT market, Andrew Bartels of Forrester expects an increase of 3%.

There are many reasons why spending is more robust than during the last downturn. For a start, the IT market has become more global. Between 2003 and 2008, developed countries’ share of IT spending fell from 85% to 76%, according to the OECD’s recently published Information Technology Outlook. Demand from China and India is expected to continue to grow despite the gloomy economic outlook.

More importantly, last time around the IT industry was not the victim of an economic crisis, but its cause, says Graham Vickery, author of the OECD report. For years companies had spent far too much on technology, buying more e-commerce software than they could ever hope to use, for example. When the bubble burst they abruptly cut spending. Today IT departments are much less prone to wasting money. In fact, says Mark Raskino of Gartner, another market-research firm, most are quite lean. Further cuts in technology budgets would be difficult, he argues, since they would require many firms to reorganise themselves first. “IT is certainly not sacrosanct, but fairly low on the list of things to cut,” he says.

This is an important point. While the financial industry is reeling from the current crisis, the tech industry is tightening its belt and moving on. Obviously, the current recession will affect everybody, worldwide, but there is much reason to believe that the devastating catastrophe of 2001 and 2002 that claimed many tech companies won't occur the same way again. Will there be casualties? Yes, you bet, but not like in 2001 and 2002 where whole market segments evaporated over night (everybody say "optical networking").

The article goes on to say:

In many ways the previous IT downturn marked the industry’s coming of age. In its wake, the industry was no longer mainly about “hot” new technologies that made maximal use of Moore’s law, which holds that roughly twice as much processing power is available at a given price every 18 months. Firms have since started to opt more for good-enough “cold” wares, which save them money and allow for more flexibility: commodity hardware, open-source software such as the Linux operating system and programs accessed over the internet, or “software as a service” (SaaS).

The crisis will only speed up this shift, not least because many of the cold technologies have themselves become more mature. SaaS and other computing services supplied online, and collectively called “cloud computing”, have become better and more widespread. In November Salesforce.com, the largest SaaS firm, beat analysts’ expectations, reporting sharply growing revenues and profits.

And open-source software has long since moved beyond Linux. All kinds of enterprise software is now available in this form, which in most cases means that firms pay for maintenance services, but that the programs are free. This business model already seems to be benefiting from the downturn. Revenues at Alfresco, which makes software that helps manage web content, for instance, have tripled in the last quarter, according to Mr Asay.

In short, this article lays out a great case for everything we have been saying at Vyatta. How can firms continue to justify overspending with Cisco, giving it 64% gross margins, when other options exist that deliver better performance for less? Increasingly, they aren't trying to justify it; they're simply adopting Vyatta.