Even tech industry not immune to latest economic downturn

SAN JOSE, Calif. — Lower prices on consumer electronics may help carry the tech industry through a difficult holiday-shopping season. But analysts believe corporate spending on computer servers, PCs and business software is entering a period of slower growth that will last well into next year.

Even with the financial-industry bailout, many economic forecasters believe the tech industry's magic shield — the one that keeps sales surging despite a growing global downturn — will soon wear thin.

With banks failing and the stock market in turmoil, holiday shoppers may be nervous about spending too much on laptops, mobile phones or video-game consoles, analysts say.

And businesses and government agencies — which spend three times more on technology in this country than individuals spend on consumer electronics — had delayed some purchases even before the chaos began on Wall Street.

In recent quarters, the tech industry has seemed immune to the larger economic downturn, as Apple, Hewlett-Packard, Oracle and other major companies reported soaring profits and double-digit revenue growth.

But industry analysts say the impact has only been delayed, not avoided.

"You may not see a decline in purchases, but you'll have slow growth or flat growth," said Andrew Bartels, an analyst at the Forrester market-research firm who wrote a recent report on the information-technology market.

It's not necessarily because of turmoil in the banking industry, Bartels said.

Many big tech companies have large cash reserves and are unlikely to be directly affected by the credit crunch, he noted, although they could suffer if the crisis forces other industries to lay off workers or make drastic spending cuts.

Feeling the pinch

There are signs that consumers are already feeling pinched. A mid-September survey by RBC Capital Markets and the ChangeWave research firm found 40 percent of respondents planned to reduce their spending on consumer electronics through the end of the year, despite the upcoming holidays.

The survey was among the factors prompting RBC to downgrade Apple stock recently, while other Wall Street analysts said they also expect consumers to choose lower-priced items in coming months.

Manufacturers and retailers may be forced to aggressively cut prices, which could allow them to sell more products but reap less revenue than last year, said Shawn DuBravac, an economist with the Consumer Electronics Association.

For most of this year, "the tech industry has held up remarkably well," DuBravac said. He cited the association's surveys that show consumer confidence is still healthy, and an independent study that concluded electronics may be the strongest segment in an otherwise weak holiday spending season.

Consumers have already spent the economic-stimulus checks the government issued earlier this year, which means they won't have that money to spend this fall, DuBravac acknowledged.

But aggressive discounting may persuade consumers to choose a new phone over another sweater for Christmas, he said, as "technology has moved from being a luxury to a necessity for many households."

Impact on business

Technology is also a necessity for business, but industry analysts say some companies have already put off buying servers and PCs this year.

Forrester is projecting that overall business information-technology sales will grow 5.4 percent this year and 6 percent in 2009, compared with 7.2 percent in 2007. Analysts at other research firms have made similar predictions for a slowdown hitting the tech sector in the second half of this year.

While hardware sales have already slowed, Bartels at Forrester said software and services "will start to feel some of the pain in 2009." He predicted hardware sales will pick up in 2009, as companies find they can no longer put off replacing old systems, while software may not resume growing at 2007 levels until late 2009 or 2010.

Wall Street's most recent developments have not changed those forecasts, Bartels added. Big banks and investment firms represent only about 6 percent of U.S. corporate technology purchases, he said.

But even those firms that have gone bankrupt or been absorbed will need to maintain their computer systems, "so even the most distressed companies are not going to stop buying technology."

Small companies

While IBM, Sun, HP, Dell and EMC all sell hardware to financial firms on Wall Street, Bartels said most of the software is sold by smaller companies that developed specialized programs.

Consolidation in the banking industry could mean fewer purchases of servers and other hardware in the future, but IDC analyst Stephen Minton said it also could mean more spending on new technologies such as virtualization software and Web-based applications, as newly merged companies integrate and upgrade their systems.

Still, Bartels warned there could be more consequences if the credit crunch continues or the economic downturn spreads. "As the market gets weaker," he said, "then everybody is going to be squeezing their IT budgets."