News Blog

It was just a matter of time. Silicon Valley, which has remained largely impervious to the increasingly global economic downturn, is starting to feel the strain, according to The New York Times. It's not that housing prices are in freefall (they're not) or that people are being laid off en masse (they're not), but rather that the exit opportunities have largely dried up. According to the Times:

During the first three months of the year, only five companies backed by venture capital investors went public on Wall Street...That is down from 31 in the fourth quarter of last year, and is roughly the same level as at the nadir of the dot-com bust.

There was also a sharp falloff in the acquisition of start-up companies by bigger corporations...There were only 56 acquisitions in the first three months of the year, down from 83 in the fourth quarter.

... Read more

Earlier this week I talked about how a recession may be the best thing for SEO. Let's revisit that bold statement and also how to make the most out of a downturn in the economy using SEO.

There will be firms and people within the industry that will feel the same pains of a recession that everyone else will. I'm certainly not claiming that you can sit back and coast in to success. In fact, the statement is less about SEO firms and practitioners, and more about SEO as a tool.

If you are in-house and have been struggling to get the resources or attention you need to make SEO a priority, then this may help to increase the urgency of SEO. Or if your firm provides SEO services, then you may be able to use the concerns and challenges that will come with a recession to get the attention of the decision makers to illustrate how SEO may be a more cost-effective solution.

A recession or economic downturn will lead consumers and businesses to reduce their spending as their confidence in the economy, their business, jobs, investments and/or retirement weakens. While there may be a subset of the market that "quits buying," what we are really talking about is a reduction in spending. There will still be necessities and essentials that must be purchased. Beyond that, we may expect to see purchase adjustments or a scaling back.

For instance:

So here we are, one quarter down and recession to go. Recession has become an unfortunate but popular topic in 2008. Some people follow strict definitions of what qualifies technically as a recession while others speak purely from opinion--or maybe they are speaking from the pinch they are feeling in their wallets. For most, they could care less what you call it; labels don't make the impact they are feeling any better or any less painful.

In most industries, when things slow, something has to go. Will that be cutting back on seemingly frivolous expenses, going to fewer industry shows, reducing ad spending, or worse, cutting jobs? Like many industries, search marketing firms are considering these choices as well, and rather hoping that this slowing, downturn, recession, or whatever you want to call it, actually presents more opportunities than hard choices.

Only time will tell, but I like to think the feeling that search marketing firms may be able to find opportunities during these trying economic times are spot on. But don't think this will just be a slam dunk--every opportunity also presents challenges.

Both Red Hat and Oracle had excellent quarters, but Oracle's was apparently not "excellent" enough for Wall Street's tastes. Its shares and the market went south this week on fears that technology spending is in decline.

In addition, Wall Street apparently didn't notice that Red Hat actually raised its fiscal year 2009 guidance this week.

Consolidation is one way to improve earnings in a down market, but open source may well be a better way as The New York Times opined.

Oracle's total software revenue was up 21 percent, to $4.2 billion. Pretty good. Unfortunately, it was well under the 30 percent growth Wall Street was expecting.

More unfortunately, Oracle's third-quarter application license revenue only increased by 6.6 percent, to $451 million, which was well below the 30 percent growth ($553 million) that Wall Street expected.

As Sarah Friar explains in The Wall Street Journal,

...(C)ompanies typically buy such software when they are embarking on new projects and are likely to dial back such purchases in tough economic times.

But the same affliction isn't showing up in Red Hat's earnings. Red Hat's percentages were roughly the same. Red Hat's quarterly revenue rose by 27 percent over the fourth quarter and annual revenue in fiscal year 2008 was up more than 30 percent. Red Hat's numbers are much smaller compared with Oracle's, of course, but one thing that really stands out is its deferred revenue number, which was up 40 percent.

As I read that number, Red Hat is doing more longer-term deals. Basically, it's sitting on a growing mountain of cash that is just waiting for services to be performed before it can recognize that revenue. It means that Red Hat's future is demonstrably, tangibly bright.

Here are some salient facts from the Red Hat announcement:

Total revenue for the quarter was $141.5 million, an increase of 27 percent from the year-ago quarter and 5 percent from the prior quarter. Subscription revenue for the quarter was $121.9 million, up 27 percent year over year and 5 percent sequentially. For the full year, total revenue was $523 million, an increase of 31 percent over fiscal 2007 revenue, and subscription revenue was $449.8 million, up 32 percent from the prior year.

Oracle is projecting 10 percent to 20 percent sequential quarterly growth. Red Hat, too, needs to find ways to super-charge its growth. But for the moment, I think it's enough for the company to be demonstrating a flight to value in recessionary times. Investors may bemoan the fact that it's harder to mint money with an open-source company, but this may simply be a new reality for the software industry.

We had a few decades of anomalous growth when there was a mismatch between the economics of production and consumption (i.e., write once, manufacture an infinite number of my products for roughly zero cost, but charge customers steep prices as if the economics of digital production didn't exist). Open source and the Web are going to bring things back into alignment.

For now, Oracle is a good bet in the stock market. If any company is going to weather the recessionary storm, I'm betting it will. But for those with a longer-term view on the software industry, it would be wise to bet on open source.

IBM and others are driving growth outside the US. This will become even more critical as a US recession becomes a near certainty.

It's also why it suddenly makes a lot of sense to be based outside the US if you're a vendor.

Don't get me wrong: there are many difficulties inherent in starting a business outside of the US. The US is the primary market for just about all software vendors, and will be for the foreseeable future, China notwithstanding. If you want to be a serious software player, you have to compete in the US.

But consider the following:

Some believe that a recession won't hit IT hard, but IDC and Forrester are now projecting significant declines in the growth of IT spending in 2008. IDC is pegging global IT market growth of $1.38 trillion, or 5 percent (down from 6 percent growth in 2007), while Forrester sees the IT market growing by 6 percent instead of the 9 percent it had been projecting.

Andrew Bartels, Forrester Research vice president, said the firm's forecast is based on a "mild recession in the U.S. economy in the first two to three quarters of 2008," adding that there is no certainty that the U.S. economy will in fact experience a recession.

I don't see it. Everything feels like a harder recession than the analysts are projecting. The fact that the analysts keep revising downward their projections is an indication that they don't really have a clear idea of just how bad it could be.

(Credit: Morgan Stanley)

Reading through Morgan Stanley's January 6 report entitled "There Will Be Blood," it's hard to feel cheery about 2008. That is, unless you're an open-source company, in which case perhaps you're recession proof.

Perhaps.

But with Morgan Stanley projecting a pullback in IT spending in 2008, and especially for hardware, being open source, by itself, won't save a company. (Note: The "Blood" report is available only to clients, thus there's no link for it.)

Open-source companies should be hedging their bets by making sure they have money in the bank and lots of customers. In a downturn, it may well be easier for open-source companies to acquire new customers than their proprietary cousins, but this doesn't mean it will be easy. Having enough cash to weather the storm is critical.

As for tech, generally, the reasons for a bleak outlook are several, according to the Morgan Stanley report:

AT&T's stock took a hit Tuesday after the company's CEO told investors that a weak economy is hurting the company's landline and broadband business.

Randall Stephenson, AT&T's CEO, said Tuesday during a Citigroup investor conference that the company was forced to cut off some of its broadband and landline customers in the consumer segment in the fourth quarter because they were not able to pay their bills. The news shook investors, and the stock dipped $1.87, or 4.5 percent, to $39.16 per share at the closing bell.

Stephenson was responding to a question posed by an analyst who asked whether the weak economy had affected AT&T's business. And essentially Stephenson, said yes it had.

"We're really experiencing some softness on the consumer side of the house from the economy," Stephenson said, according to a transcript of the event.

While he acknowledged that all consumer services are being affected, Stephenson said that wireless hasn't been affected as much.

"As the economy gets soft, wireless starts to become the last thing" that consumers let go off, he said. "And traditional access lines become one of the first...."

This trend suggests a shift in how people view their cell phones. In the past during financial hard times, people would do all they could to keep their landline phone. But now it appears that people are more dependent on their wireless phones. As a result, they may cut their landline phone at home to save money.

Stephenson's news, which some fear is another sign that the U.S. economy is heading toward a recession, was enough to also hurt some of the other major phone companies too.

Verizon Communications, the second largest phone company after AT&T, fell 2.73 percent to close at $41.75. Qwest Communications International saw its shares dip 5.82 percent to $6.15. And shares in wireless operator Sprint Nextel fell 3.24 percent to $12.53.

Remember the good ol' days of enterprise software when a vendor could foist a multimillion-dollar software package on an IT buyer and get away with also charging downstream fees for support and maintenance?

In a sign that this bleak time for IT buyers is at an end (and a bleak period is ahead for proprietary software vendors), Goldman Sachs this week cut its 2008 estimates on a wide range of software companies, citing a softening in capital expenditures for the near term. According to a Barron's blog:

Goldman cut 2008 estimates on many software stocks, focusing on enterprise exposure, pure-plays that could be harmed as customers seeks to purchase good enough substitutes from larger vendors, and vendors who sell big ticket items that could be delayed in a slower spending environment. The firm cut estimates by 1 percent on average...