The last time technology investments took a hit, it was easy to look around at the scattered sock puppets and dark fiber, and blame the downturn on the rapid run-up in venture-backed funding for me-too companies and unproven business models. But this time around, what will haunt technology companies isn’t their wholehearted embrace of the web — it’s consumers’ wholehearted embrace of credit. That’s right, this tech downturn could be pinned in part on you and me.
Before you get all huffy about sub-prime lending and greedy bankers, consider this: In the last five years, consumers have taken on massive personal debt, in the form of home equity loans and credit financing, which they’ve used to buy fancier cars, appliances and gadgets. Tech companies have been the recipients of a lot of this spending, either directly — through the increase in sales of high-end gadgets such as cell phones — or indirectly, through the rise in things like luxury automobiles that contain more semiconductors and displays. As a result, when consumers stop spending, tech companies will start hurting.
According to data issed by the Federal Reserve, consumer debt not associated with home equity lending has increased by 23 percent since 2003, when people took $2.1 trillion in credit. As of August, Americans had $2.58 trillion in debt. But prior to last year, home equity lending fueled much of the extravagance. Federal Reserve Chairman Alan Greenspan and Fed economist James Kennedy have estimated that borrowing against home equity lines of credit freed up about $187 billion in cash per year between 2001 and 2005.
There are signs that the flow of credit is coming to an end. Plus, the index of consumer confidence, started in 1967, is at the lowest point in its 41-year history, meaning that even those who aren’t seeking credit aren’t hot to spend their hard-earned cash. Earlier this month, George Scalise, head of the Semiconductor Industry Association, called for federal intervention in the financial markets. “With consumer purchases now driving more than half of semiconductor sales, consumer confidence is essential to the entire supply chain of the global technology sector,” he said in a statement. As consumer spending — whether with cash or credit — slows dramatically over the coming quarters, technology companies that have seen their businesses become more dependent on consumers may have to do some of their own belt-tightening.
Hitwise, a research unit of the credit bureau Experian, released data Tuesday that shows U.S. visits to online retail Web sites have declined for the eighth consecutive week. U.S. visits to the 500 retail web sites declined 3 percent for the week ending Oct. 25, 2008, compared with the previous year. The largest drops in visits were in the online music and computer sectors. That trend’s going to cause problems that end up affecting the entire tech value chain.
Take, for example, a consumer’s decision to hold off on buying a new cell phone or to forgo one with a fancy data plan. It’s already happening. Cell phone makers are worried that consumers will hang onto their handsets longer, prompting firms such as Nokia and Ericsson to issue cautious sales forecasts for the coming year. And about that data plan? Wireless carriers including Verizon and AT&T are thinking about how a downturn could affect consumer spending on their products, with analysts predicting even deeper losses in landlines. So far, cable and broadband seem safe.
Consumer goods maker Sony lowered its earnings, and some analysts think its expectations going into 2009 are still too rosy. Because their chips are big components of many electronic goods, Texas Instruments and STMicroelectronics are also a bit nervous about the coming quarter. Even Intel is planning a mid-quarter update before the current quarter ends to comfort investors. This caution from chipmakers will cause a cut in sales for chip equipment suppliers, as well.
The worry over a drop in consumer spending helps explain why venture firms are looking at enterprise software deals and shutting down some of their Web 2.0 investments. For the tech industry as a whole, this downturn won’t be as bad as the last, but consumer-oriented startups and makers of high-end gadgets such as the Dash Express, Pleo from Ugobe, or Kindle could be headed for trouble. With a recession officially declared, 2009 will be a rough year for consumers. Since the tech industry has shifted more of its business toward serving consumer markets, that means it will be a rough year for technology as well.