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1/1/2004

Some signs pointing to revival of technology sector

Los Angeles Times

Even during the slump, the technology industry could count on Gwen Marker.

Over the years she bought a DVD player, a PlayStation 2, a laptop computer, a Palm Pilot and, recently, a new cell phone. And now she feels technologically maxed out.

“I have most things I think I need,” the 29-year-old University of Southern California graduate student said, though she added: “A digital camera would be nice.”

Consumers such as Marker just aren’t as reliable as they used to be. But the tech industry isn’t despairing: Just as individuals throttle back on spending, corporate America is starting to pick up the slack.

Last month, Santa Monica, Calif., fashion company Design Merchants Inc. tossed its cranky old PCs and leased a dozen new machines from Dell Inc.

“They’re way faster than the old computers,” said Maggie Lobl, director of design and merchandising, who added that a recent boost in orders convinced the company to replace its aging computers.

Market research company IDC expects worldwide spending on computers and software to rise 6 percent to 8 percent in 2004, much of it fueled by businesses. That contrasts with less than 1 percent growth expected this year and spending declines in 2001 and 2002.

Bellwether companies -- Dell, Intel Corp., Oracle Corp. and Microsoft Corp. -- expect sales and profits to climb in 2004.

In fact, next year “will be the first time in several years that the market will grow in a meaningful way,” said Nathan Brookwood, an independent semiconductor analyst in Saratoga, Calif.

“We’re starting to see more anecdotal data of companies replacing old equipment,” he said.

The re-emergence of spending couldn’t come at a better time. Consumers have nearly tapped out this year’s one-time federal tax rebates.

“The consumer is your risk factor,” said Fred Hickey, publisher of the newsletter High-Tech Strategist. “We had a mass of stimulus in 2003 with the tax breaks and refinancing. Consumers cannot keep spending beyond their means forever and not have any repercussions.”

The Consumer Electronics Association estimates sales of consumer electronics will grow a modest 2.4 percent in 2004. That would be thanks in large part to “buyers who are phasing out analog devices in favor of digital, particularly in television, where the price points have come down tremendously,” said Sean Wargo, an analyst at the trade group.

Shipments of computers to U.S. companies were up 7 percent in the third quarter to 8.8 million units, a three-year high, according to IDC. Next year, IDC expects companies to boost PC purchases in the United States by 15 percent, compared with 9 percent for American consumers.

Global sales of semiconductors that go into gadgets and computers also are starting to perk up. After dropping 33 percent in 2001 and stabilizing in 2002, chip sales are expected to increase 12 percent this year and 13 percent in 2004, according to technology research company Gartner Dataquest.

IDC predicts an 18 percent boost in global chip sales in 2004 to $189 billion. That would be the biggest jump since 2000, when chip sales increased 37 percent.

For all that, few expect tech companies to start any significant hiring.

“We’re clearly at the early stages of a technology recovery,” said Ross C. DeVol, director of regional economics at the Milken Institute in Santa Monica. “But it’s largely going to be a jobless recovery. It’s going to take a while before firms will feel comfortable hiring again.”

Silicon Valley shed 180,000 jobs from August 2000 through September 2003, an 18 percent decline.

“This is the largest employment decline in a metropolitan area since the Great Depression,” DeVol said. “It’s been a devastating drop.”

Many of those jobs are not coming back. DeVol estimates that 75,000 technology jobs in California have been shifted to less expensive, offshore locations over the last two years. Nationwide from 2000 to 2002, technology shed one-third of the 1.8 million jobs it had added since 1993, according to the Commerce Department.

At the same time, there are indications that venture capitalists are more willing to finance new companies.

“On an anecdotal basis, we’re seeing that VCs have gotten a lot more active in the fourth quarter,” said Lawrence Aragon, editor of Venture Capital Journal in San Francisco. “In particular, you’re seeing social networking companies such as Friendster get funded. Those are super-speculative deals with no profit and no clear business plans. It says volumes about the venture capital environment when they’re willing to take a flier on something like this. If I were an entrepreneur, I’d take that as a good sign.”

But no one should expect the kind of easy money that flowed in the 1990s.

“There’s a more hard-nosed approach,” said Mitchell Kertzman, a partner at Hummer Winblad Venture Partners in San Francisco. “We’re looking for companies with real revenue and real operating models, companies that use innovative technology to solve really hard problems.”