19 Comments

Summary:

Intel warned that its revenues will be lower than expected in Q3 2010. Add to it tepid forecast from Cisco and slower than expected sales at wireless hardware companies, one has to wonder if the large technology companies are facing a different reality than start-ups.

fallingstocks

t’s happy days in startup land, especially for those just getting started. Angel investors line up at industry gatherings to take flyers from young companies and their equally young founders. However, in stark contrast to the ebullience of early-stage ecosystem is the dreary reality facing some of the large technology companies.

Intel Takes a Dive

Many of the large tech companies, forced to confront the bleak reality of economy beyond blogs and Silicon Valley, are finding going very tough, much like rest of the planet. Today, Intel Corp., the world’s largest chip company, announced its sales for the third quarter — ending Sept. 30, 2010 — will come in shy of its previous forecasts of between $11.2 and $12 billion dollars. The new forecast is $11 billion, plus or minus $200 million.

Why? Because consumers aren’t buying as many machines! I’m betting many people are opting for cheaper netbooks instead of paying for more costly notebooks. This isn’t a single-quarter problem, and the malaise is going to extend to the fourth quarter of 2010 as well, according to Rodman & Renshaw analyst Ashok Kumar. He blamed “weak domestic back-to-school season” and “lackluster demand from Europe.”

In a note to his clients yesterday, Kumar said that shipments of laptops from big manufacturers in Taiwan and China had been decelerating.  He feels this trend is going to impact the entire ecosystem, from memory chip makers to disk drive makers to companies churning out displays and drives.  He’s also of the belief that the lower cost ARM-powered tablets are only going to cannibalize notebook sales. While we’re big believers in the smartphone boom, one can’t hide from the fact that PC ecosystem is still one of the biggest drivers of the tech economy.

Weak Wireless

The PC ecosystem isn’t the only one hurting. The wireless hardware manufacturers — folks who provide equipment for cellphone networks — are having a tough time as well. According to Stéphane Téral, Infonetics Research’s principal analyst for mobile, the spending freeze in India and China on mobile infrastructure is having an impact on large equipment makers such as Ericsson.

“It’s been a tough year so far for the mobile infrastructure market, mainly due to the absence of spending in China and India. Last year, China spent like mad on its massive 3G rollout. This year, India was supposed to pick up some of the slack, but due to a combination of bans on Chinese vendors and a delayed spectrum auction, the spending virtually stopped in 2010. In fact, our analysis of capital expenditures by the three Chinese service providers in the first half of 2010 indicates that they have spent only 12% of their planned 3G budgets! The postponements in GSM upgrades and modernization will need to be addressed soon, and we are likely to see some interesting pick-up in both 3G in China and 2G in India in the second half of 2010.”

According to Infonetics data, the overall mobile infrastructure market was down 0.9 percent in the second quarter of 2010 from the first quarter of 2010, from $8.8 billion to $8.7 billion. This lack of growth isn’t good for the likes of Alcatel-Lucent (a ALU), Nokia, Siemens Networks and Ericsson who are already competing with Huawei and ZTE, the two low-cost Chinese giants.

Cisco’s Mixed Signals

Another technology bellwether is Cisco Systems, and a few days ago, the San Jose, Calif.-based networking giant painted a less than optimistic view of the future. After reporting fiscal fourth quarter 2010 revenues below expectations, the company forecasted lower demand.

Cisco told Wall Street analysts that it was getting mixed signals from its customers on demand and was rethinking the future, taking a cue from the U.S. Federal Reserve’s comments about lower U.S. gross domestic product.

Recap

When I look at these early warnings, I’m often conflicted; on one hand, it seems that Silicon Valley isn’t facing up to the harsh reality of the economy at large. On the other hand, I wonder if we’re cycling out from the past to a whole new tech landscape, which is less dependent on these giants and more on these early stage companies.

Thoughts?

Related content from GigaOM Pro (sub req’d): Infrastructure Overview, Q2 2010

  1. Apps and devices are all less system-intensive than in the past. The formerly high-growth infrastructure large caps (INTC, CSCO, MSFT) have become mature industrial companies…not drivers of outsized growth. Just the natural cycle of every industry development and nothing to fret about. For now…

    Share
    1. Ahsan

      That is an interesting thought. I wouldn’t go as far as to equate them to mature industrial companies, but I do see that their future growth is definitely going to be more modest to their past hyper-growth. That said, I would says Cisco falls outside the norm because they look for new growth by buying more and more companies in new businesses.

      Share
      1. I think Cisco is going to face a fundamental threat to their business model due to the 3com acquisition by HP and the partnership between Juniper and IBM. How can one justify selling ethernet switches at 60% margin when your competitor can sell the same switch at 40% cheaper (yup, including the high end ones). 3Com and Huawei have successfully beaten Cisco to the plump in China – enterprise and service provider segments. With 3Com now HP, how long do you think it will take for other customers to switch.

        To add to Cisco’s problems, enterprise is more than 2/3rd of their revenue and a Cisco switch in the enterprise is probably as commodity a hardware as it can be.

        Any clues why such faith in Cisco, especially with the type of competition they now face from their past friend (HP, IBM, Oracle..) which wasn’t the case over the last 3-5 yrs.

        Share
    2. The reality of the situation is that until there is a new “killer app” that requires large client side computing we are going to see CPU sales stagnate. Virtual desktops are going to make this even worse, when 50 desktops off a single quad core computer with great performance. The cheap arm processors in the thin clients are the future of large scale purchasing. Companies are hitting refresh cycles and opting to buy one virtual server instead of 10 underutilized servers. Both corp. and home user’s needs are not growing at the rate of More’s law. Virtualization is eating Microsoft/intel’s lunch in the server realm, and will kill Intel further in the desktop realm as it accelerates.

      The most expensive thing in Enterprise IT purchasing and needs is IOPS, and storage companies delivering it for VDI solutions are where I see crazy growth coming from.

      As for Cisco, IOS is still more advanced in some regards, but the sheer amount of CCNA’s who know their gear in and out means that they will continue to command a price premium do to the ubiquity of staff who know their gear. Their growth though is tied to highly strategic acquisition’s, and they are one of the best companies in the world at doing M&A right (retention numbers, growth etc). Maybe I’m cynical because I’ve scooped up enough dead 3COMs and been burned by HP procurve bugs, but if your looking for growth in the networking world look at Riverbed.

      Share
  2. One cannot decouple tech from the broader economy. The US is likely to have a more or less stagnant economy with high unemployment for years to come. Europe is implementing austerity measures which will likely curtail spending for years as well.

    This will not just affect the big companies but will also affect the Web 2.0 upstarts that seem to be ‘doing well’ for now. As companies cut back their advertising budgets, due to the stagnant economy the upstarts may feel a bigger pinch than the Google and Bings of the world.

    On top of everything if the stock markets dip significantly, it will affect overall market sentiment hence detrimentally affecting large and small tech companies.

    Over the next couple of years, companies with large exposures to US markets will likely be the worse off. This includes Apple, Cisco, Facebook, Google etc. Companies with diversified revenues from Asia and Latin America will be protected much better on the downside.

    The sooner companies and their management realize this new economic reality from a macro perspective and start adjusting for it, the better they will perform over the next couple of years.

    Hoping for the macro-economic picture to improve is not the answer here. One needs to face the facts, realize that the US economy will not improve anytime soon and manage their business accordingly.

    Share
  3. I think the only cure to this problem is the rise of demand in India and China. Because, there is no positive reaction coming from western world. The two Asian superpowers might have to react fast or else it would become very difficult for global tech companies to move further.

    Share
  4. Nobody sees anything wrong with the fact that INTC gave strong positive guidance only one month ago to kick off quarterly earnings season, triggering a market rally that day? One month of data has caused such a shocking reversal?

    Share
    1. A very interesting observation. A few days after INTC announced their guidance, a number of analysts started downgrading the chip sector based on their channel checks which showed inventory buildup with lack of end-user demand. I wonder what INTC was looking at or were they hoping no-one would notice for the next few weeks? If so why?

      Share
    2. Dan

      I think the issue here is that when you start believing the quarterly data instead of long term trends, you see something is seriously wrong in the whole tech-economy. I have stopped paying attention to analysts on Wall Street mostly because they never do the job and ones who do, are often labeled as idiots and laughed off the ranch.

      That rant aside, i think this short term trading mentality is causing more harm than anything else and this is pervasive across society right now.

      Share
  5. Good analysis, I think the giants are facing hard times is also due to the fact they are hardware giants. My new ‘pc’ will be a cheap netbook. Why? Because I want a device to surf the net while sitting next to my wife who liked to watch tv with me (and I’m not interested in tv). Another reason is: most of my pc use is in the clouds! Writing texts, making spreadsheets, photo-editing, I do it all online.
    The new startups offer these hardware independent online services. The old giants have difficulty catching up.

    Share
  6. [...] What is weakness in Silicon Valley telling us about the state of technology and the economy?  (GigaOM) [...]

    Share
  7. I’m with Erik. While I’ve seen a lot of curtailed spending on hardware (my 2-year-old MacBook Pro is holding up fine, thanks), people are still spending money on Y Combinator-launched web services like Dropbox.

    While I’m grateful for Intel’s billions spent improving chip architecture, we’re now at the point of diminishing returns for the average consumer. Companies ignoring that are sticking their heads in the sand, not the wide-eyed startups that see revenue potential even in a tough economy.

    Share
  8. the changing nature of our desktop usage from client based apps to more cloud based apps might be the reason why people settle down for a high end smartphone or a low end laptop … if i am not a developer all i need is a browser or a mail client at max, the same can be achieved on a smartphone or a tablet … this a change in landscape. There will be a demand for high end processors but not for personal desktops but for cloud etc

    Share
  9. How about the large tech companies like HP & Dell (they are large, aren’t they) who are willing to shell out big bucks (read $2billion) on acquisitions. They must be seeing light at the end of the tunnel ( or is that a train?)

    Share
  10. [...] Intel Warns! Is Something Wrong in Techland? (GigaOm) [...]

    Share

Comments have been disabled for this post