Blind Faith - Industry Trend or Event

Industry Standard, The, April 16, 2001 by Mark Boslet, Jason Krause

How soaring ambition, terminal optimism and false hopes brought down the high-tech industry.

IN NOVEMBER, AT AN UPBEAT MEETING with an analyst, the chief executive for Canadian telecom-equipment titan Nortel, John Roth, blithely projected that his company would grow at the same healthy clip it had the year before. "The demand from society and from corporations in particular is not going away," he reported.

That same month, Cisco Systems' John Chambers, a CEO who has produced 11 years of steady revenue growth for the network equipment maker, told 500 analysts that he had never been more optimistic. And Hewlett-Packard's Carly Fiorina came out days later with ambitious growth projections of her own.

All of them were dead wrong.

In the past four months, the tech industry has experienced the sharpest business downturn in its history, with the shattered forecasts of company after company in the sector provoking a $3 trillion loss in the total market value of the Nasdaq in just over a year.

The cratering has leveled the industry and slowed the deployment of new of chips, software and Internet gear that was to spur a leap in business productivity and global expansion.

The hubris has been replaced with a deep lack of confidence in earnings projections, with "limited visibility" the new industry buzzword. It means a firm's leaders can't say where their company is going.

Why it happened is a story of how blind ambition, terminal optimism and technology hype brought an overconfident industry crashing down to Earth.

TECHNOLOGY COMPANIES ARE NOT really that different from firms in other industries when it comes to developing products and generating sales projections: They talk to customers and gauge market expectations.

Indeed, as recently as five months ago, technology companies were thought to be better-positioned for even a sharp downturn; after all, they were using new software systems for forecasting demand and preventing dreaded inventories buildup. But nothing could protect them from the intense pressure to improve earnings quarter after quarter.

"Nobody wanted to flinch," says Edward Barnholt, chief executive of Agilent Technologies. "Everybody was building for 50 percent market growth. We didn't want to miss the opportunity on the upside if business was to go for another six months."

This shoot-for-the-stars attitude was evident at Palm. A determination to dominate the market for handheld devices caused the Silicon Valley company to pursue ambitious expansion plans, building inventory for the launch of two new products.

Unfortunately, the company missed warning signs that it would fall short of third-quarter earnings projections; Palm is now saddled with inventory that rose 200 percent to $102 million. Palm chief executive Carl Yankowski labored to explain the sales slowdown with words like "jarring" and "abrupt."

Palm wasn't alone in misreading the tea leaves. In the business-to-business software market alone, venture capitalists poured $25 billion into 1,000 companies in 2000. Old-economy companies, threatened by Internet-savvy upstarts, accelerated technology purchases. That helped lift IT spending to unprecedented levels: 20 percent growth each year from 1997 to 2000, an increase over the 10 percent growth during the previous seven years.

The spending orgy led to overcapacity in everything from the Internet to semiconductor production. The seeds of the downturn were sown. And the few who urged caution were largely ignored. "No one wanted to believe our numbers because our numbers didn't impress investors and didn't help their business plans," says Hilary Mine, telecom analyst with Probe Research, which forecast an aggressive 100 percent growth. "But everyone wanted to hear 800 to 1,000 percent."

Michael Crosno, chief executive of software company Epicentric, admits that by September he noticed sales were taking longer to close: 150 days instead of 115. "It was building up like a water balloon," Crosno now recognizes, yet he was one of many executives in high tech who ignored the inevitable and did nothing. "We all got a little fat and sassy," Crosno says. "You started believing your own hype."

If Crosno and his fellow execs had been really listening to customers, they might've foreseen the decline in spending. Staples spent aggressively in 2000 building out its fledgling online sales operations to handle sales that were rising twice as fast as expected. The company wrote check after check to vendors such as Digital River, IBM, Trigo Technologies and WebMethods. It invested heavily in software to manage inventory, track orders and link to its existing pricing database, and it added more networking capacity to handle heavy Web traffic.

But the company wasn't planning to continue that buying binge, because "a lot of the hard stuff has already been put into place," says Anne-Marie Keane, VP of b-to-b e-commerce.

Reality hit the industry hard by December as companies prepared pre-announcements that would bring the world's most dramatic rise of industry and wealth to an end.