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If the economy is up, why is the tech industry in a slump?

August 12, 2013|By Chris O'Brien
  • Employees travel around campus via bicycles at Google headquarters in Mountain View, Calif.
Employees travel around campus via bicycles at Google headquarters in… (Ben Margot / Associated…)

The last six years have been remarkable for Silicon Valley.

The launch of the first iPhone in 2007 accelerated the pace of disruption and had the kind of impact on consumers and businesses the dot-com bubble once promised but failed to deliver.

Cloud. Mobile. Social. These three trends intertwined to make for heady times in Silicon Valley. 

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And yet, suddenly and quietly, the adrenaline rush is gone. During the first half of this year, the tech industry has lost considerable momentum.

It's not exactly a bust. There isn’t a cataclysmic crash like the dot-com era, which seemed to crumble in a blink. Instead, things have slowed way down. Growth is slipping away, and in some cases, sales are now shrinking.

Which makes me wonder: Has the tech industry lost its mojo? Or is it just pausing to catch its breath?

Those questions will take some time to answer. But in the meantime, the numbers make it clear just how dramatically the tech industry has deflated.

There are, of course, some big tech names that seem intent on choosing the path of self-immolation. BlackBerry and Nokia, for instance. And then there is the increasingly sad saga of Dell. 

But consider the string of recent earnings reports from the big tech firms. IBM announced disappointing earnings and reportedly is cutting up to 8,000 jobs. Oracle reported flat revenue.

Intel missed its earnings forecast and lowered its guidance. And NVIDIA, a leading supplier of graphics chips, reported that revenue in the most recent quarter was down 6.4% from the same period last year.

Even Google's earnings disappointed on the same day Microsoft's managed to do the same. The latter also reported an ugly writedown of $900 million due to poor sales of its Surface tablet. And Amazon is, well, Amazon, posting a loss, though one it largely says is due to massive investments in new businesses. 

Hewlett-Packard's drop of only 10% in revenue the last quarter was considered good news because it was better than expected.

And Apple’s recent earnings sent its stock soaring in part because they were not as bad as feared thanks to higher-than-expected sales of smartphones. Still, sales of iPads and Macs declined in the most recent quarter.

About the only positive surprise has been Facebook, which seems to be gaining traction with its mobile ads.

And what about the startup world? Things have turned soft there as well.

In the first half of 2013, venture capitalists have invested $12.7 billion. That's down from $13.6 billion for the same period last year. Money raised by venture funds also slacked off in the first half of 2013, dropping to $7.2 billion from $11.1 billion for the first six months of 2012.

Not surprising, since venture returns have been miserable for years and industry is consolidating. In part that’s because the IPO, once the brass ring, has increasingly come to resemble a relic of another age in Silicon Valley.

Mergers and acquisitions are also slipping. Though there were a handful of large deals in July, the number of tech deals overall fell sharply from the same month a year ago, from 341 to 240.

"The light activity in July actually accelerated the already pronounced decline that we’ve registered in tech M&A," wrote Brenon Daily of the 451 Group. "So far this year, tech buyers have done just shy of 1,800 transactions, a 20% falloff in activity compared with the roughly 2,200 deals announced during the comparable period in both 2012 and 2011."

It's important to note that these doldrums are happening even as the economy overall is showing signs of life. While tech at times seemed to defy gravity during the recent downturn, now it's running out of gas just as the rest of things are on the upswing.

So what's going on?

The big drivers of change the past few years have been sales of smartphones and tablets among consumers and the shift to the cloud among businesses.

Smartphones are still doing okay, though the focus increasingly is on price rather then higher-end, more profitable phones. However, tablets, after devastating the PC market in recent years, are now hitting a bit of a plateau.

"As expected, worldwide tablet shipment growth slowed in the second quarter of 2013," said an August study from IDC. "Worldwide tablet shipments finally experienced a sequential decline as total volumes fell -9.7% from 1Q13."

Now, it's not like everything has come to a standstill. Companies helping other companies move to the cloud are doing okay. Big Data, cybersecurity, some networking companies are still humming along. If you're target is primarily products for other businesses, you're probably doing fine.

And competition for talent remains as fierce as ever while housing prices have begun climbing in Silicon Valley. 

But the pace of this technology shift has become more about evolution than revolution. And that has everyone looking for a catalyst. Something amazing that will jump-start the industry. Wearable gadgets? Internet TV? Robot cars? Google Glass?

Exciting, maybe. But it's hard to believe any of those things are going to have a meaningful impact any time soon.

Of course, it's likely that the Next Big Thing is something no one sees coming. And it could be just around the corner, waiting to jump out and surprise us.

But if not, it appears that slow and steady may be the new normal for an industry that likes its change fast and furious.  


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