Y2K Is Finally Here

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Y2K Is Finally Here

What ails the market? Would you believe the Y2K crisis?

Jun 08 2001 12:00 AM PDT

-------------------------------------------------------------------------------- Y2K, for those too young to remember, was a fright that first swept the world in late 1997. Aging computers, short on memory, had been programmed with two-digit dates. And as the end of the century loomed, a host of computers, chips, software programs and mainframes seemed unable to deal with the change from "99" to "00." So it was feared that failing streetlights, payroll systems, telecommunications equipment and microwave ovens would send the world into some sort of pre-industrial chaos. At the time, some of these claims seemed specious. There were stocks propped up by vaporous companies offering Y2K fixes, companies like Accelr8, Data Dimensions (DDIM), Viasoft, Zeitel - to many they looked and smelled like frauds. But in time, it became clear that Y2K was a very real and looming problem. As promised, we got a meltdown in the financial markets, obsolete product lines, a crippling of small dot-coms, an affliction to large firms like Hewlett-Packard (HWP) and Sun, massive layoffs and unemployment, a protracted global economic slowdown. Crisis? No. A major pain? Probably.

So rightly or wrongly, corporate IT managers began to address this growing concern. A 1998 Morgan Stanley study said one in eight Fortune 500 CIOs would spend more than a third of their budgets on Y2K projects.

But looking back, it seems that the money wasn't always spent where it was expected. Companies like Viasoft saw just $104.3 million in 1999 revenues; Accelr8 had barely $2.9 million. In the end, IBM probably made more money fixing Y2K code than all those startups combined. But the real money was spent on everything else.

Smart companies looked out over three to five years of technology projects and figured ways to squeeze whatever they could into a pre-Y2K time frame. "The Y2K phenomenon hastened a lot of spending," says Richard DeKaser, chief economist at National City Bank. "If you were, for example, going to upgrade your payroll system in 2001, it probably made sense to do it in 1998 instead."

As a result, firms like PeopleSoft (PSFT) and Oracle (ORCL) saw sales surge in 1998. Telecom equipment saw the biggest spike in spending. Figures from the Bureau of Economic Analysis show that the growth in communications spending rose 436 percent from December 1998 to December 1999.

And then, just as suddenly, there was a spending lull. Even late in 1999, some key components of corporate IT spending dipped. As D-Day drew near, IT managers were battening down the hatches. Oracle saw sales fall 15 percent in six months. PeopleSoft's revenues rose just 2 percent in 1999 after 61 percent growth in 1998.

There was a brief halt to the plunge in corporate IT spending in the first half of 2000, perhaps a last hurrah of pent-up demand. But that was it. Companies far and wide seemed to believe they'd bought far more technology than they needed. Spending ground to a halt, and companies like Cisco found themselves unprepared for more normalized growth rates.

"It was one moment of spectacular growth," says DeKaser, "not a new paradigm."

There may be, however, a lasting positive effect of Y2K. CEOs of all stripes were awakened by fear of Y2K. They got to know their IT directors. They now realize technology-driven change will shape their businesses for decades to come.

But that future ain't what it used to be.


-- Martin Thompson (mthom1927@aol.com), June 09, 2001


As promised, we got a meltdown in the financial markets, obsolete product lines, a crippling of small dot-coms, an affliction to large firms A rare perspective for the Stanard.

-- spider (spider0@usa.net), June 09, 2001.



By Frederic Ruffy, Optionetics.com

6/8/2001 11:30:00 AM

Given the gnarly headlines emerging from the personal computer industry these days, you would expect to see the share prices of major PC manufacturers suffer sharp declines. Yet, that has not been the case. For example, one measure of the group—the PHLX Box-Maker Index ($BMX)—has been vacillating between 120 and 140 for most of the past four months. Prior to that, in January, the index actually rose roughly 30%. Even more surprising is the fact that, for the year 2001, BMX is up 14%. But the headlines have been terrible! Given both the drop in PC purchases on the part of consumers and the fall in information technology spending on the part of US corporations, as well as fresh evidence of soft PC demand spreading to the European and Asian markets, how have PC stocks stayed so resilient? And, more importantly, can the strength last?

The woes within the PC sector were highlighted this week when Hewlett Packard (HWP) issued another profit warning—the third so far this year. In a meeting with analysts on Wednesday, Carly Fiorina, Hewlett Packard’s chairman and chief executive, said that unless the PC- making giant finds more ways to cut expenses, then revenues and earnings are likely to fall short of expectations for the third quarter. Hewlett Packard also guided down analyst expectations on January 11 and April 18.

The warning from Hewlett Packard on Wednesday dashed hopes of a quick turnaround in the technology sector. In fact, the company said that not only is the situation not improving, soft PC demand is spreading around the globe. Like the US, European demand was already falling. In May, however, Hewlett Packard became conscious of the extent of the rapidly deteriorating conditions in Asian markets. In South Korea, for example, consumer confidence has fallen to levels not seen since the global financial crisis of 1998.

Weaker global demand comes as PC makers continue to aggressively cut prices in order to gain market share. Also on Wednesday, Gateway (GTW) started to slash prices in an effort to compete in a price war started by Dell Computer (DELL) earlier this year. Gateway, which saw sales nosedive 15% from last year’s levels and recorded a $503 million loss in the first quarter, said that it would sell PCs for a dollar less than rivals such as Dell, Sony, Hewlett Packard, International Business Machines (IBM), and Compaq Computer (CPQ). The ongoing price war is causing profit margins to collapse within the PC industry and raising investor concern over earnings for the remainder of this year.

Meanwhile, the lower prices appear to be doing little to stir demand. One factor underlying the lackluster interest is the absence of any killer new application requiring PC upgrades. The much- anticipated release of Microsoft’s (MSFT) Windows XP has been delayed until October. Still, the launch of the latest version of Microsoft’s popular operating system is not expected to offer the types of new features that would require upgrades or drive PC sales meaningfully higher. In short, there are no hot new applications bringing PC costumers back to the stores so far in 2001.

While the individual user has little incentive to purchase a new personal computer, corporations have cut spending on information technology. During the heydays of the dot-com boom, companies aggressively invested in business-to-business hardware. Others upgraded systems out of fear of Y2K. Over the course of two years, then, corporations spent heavily on information technology. Given the deteriorating economic conditions today and the absence of any anomalies such as Y2K, the money is no longer pouring into technology departments throughout corporate America.

Yet, despite all the problems plaguing the PC sector, the PHLX Box- Maker Index is up 14% on the year and, like most areas of the technology sector, the volatility of the index has been falling precipitously. In fact, since mid-April, the index of nine major PC makers has been moving not up or down, but sideways. This trend (or non-trend, if you will) perhaps reflects investor expectations that the worst is over for the box-makers. Given the recent news from Hewlett Packard and other headlines, however, that may be assuming a lot. After hearing the comments from H-P on Wednesday, Jerry Dodson, president of Parnassus Investments, was quoted as saying, “Business is terrible in the technology sector. I think the [US] economy is in recession. Many investors just haven’t come to grips with that fact.”

What happens if they do?


-- (the@tech.slowdown), June 09, 2001.

Early signs are appearing that the worst of the "Y2K Flood" may possibly be "cresting", or at least will crest later this summer. However, it could also be the "lull before the storm", as the Y2K Flood has behaved in "Elliott Wave" fashion, like most markets do; taking two steps up and then one step back. Few long-term phenomena with random input spikes behave totally linearly, especially with the large iatrogenic augmenting component.

In short, although there is new hope, this is no time to let down the guard. Even if Y2K's effects are ebbing, the ominous perpetual threat of cyberterrorism remains. It is ironic that the near best- case outcome of Y2K has resulted in civilization becoming MORE dependent on Information Technology than ever. Thus, civilization is becoming exquisitely vulnerable to being "blindsided" by sudden and severe Y2K-like disruptions, possibly even from sources or causes now not even foreseen.

-- Robert Riggs (rxr999@yahoo.com), June 10, 2001.

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