Economic Hurricanes
With Jamie Dimon auditioning for the weather channel, calling for hurricanes, it’s no wonder companies are looking for the keys to the bunker. Memories of the Nasdaq, circa 2000 or the entire market, circa 2008, might make you a bit more frenetic. Who can forget Sequoia’s “RIP Good Times” presentation? There’s no doubt that our current combination of inflation, rising interest rates, and a war in Ukraine are wreaking havoc on our economy, but these factors are also distinct from 2000 and 2008. It’s worth looking at 2000 – for starters.
Today’s landscape of tech companies faces a different crisis than that of 2000. The Nasdaq companies that had fueled the “irrational exuberance” to 2000 were over-represented by capital goods and the likes of pets.com, not services. Dell, Microsoft, Intel, Cisco, Ciena –to name a few– sold boxes, shrink-wrapped software, chips, and more boxes. The Internet wave that had driven more computing and connectivity was largely fueled by financing capital goods. If there was recurring revenue, it comprised a small percentage of the business.
As the telecom industry began to collapse in 2000, the vulnerability of capital goods driven growth became apparent. The industry was awash in network capacity. Tightening by the Fed had raised interest rates to a high of 6.5% in July of 2000, and CapEx budgets were declining across the board. PSINet filed for bankruptcy on June 1st and was quickly followed by 360 Networks. Later Worldcom would implode and would become the largest US bankruptcy case to date, at $107b.
The market stopped buying boxes, shrinkwrap and chips. But because the market had been based on capital goods, the customers could continue to use them. The networks stayed lit. Microsoft Office kept working. Office PCs continued to work. At the time, when I was at GLG, we were running surveys of CIOs on the expected life of laptops and desktops. The surveys reported a steady increase in the expected lifespan. Not only were enterprises not buying more PCs, for example, they were keeping them for longer.
While the high-flying optical equipment vendor Ciena struggled to stay afloat, their customers continued to use their multiplexers. Wrote one commenter on Lightreading, a trade journal, “The worse news is that when these companies go out of business, the equipment they bought will be sold for pennies on the dollar to the few remaining industry titans, putting a severe crimp in the plans of equipment manufacturers to sell boxes.” Even if the equipment needed to be replaced, there were spares in the gray market.
Today’s SAAS and cloud services were a whisper in our ears at that point. Some people talked about Application Service Providers (ASPs), but they were still thought of as just a toy. Today, software, more often than not, is a service and that service sits in the cloud with just about everything else your company might need to keep track of.
Unlike shrinkwrap, boxes and chips, a CIO can’t extend the life of a service or buy a replacement on the gray market. It’s either on, or it’s off. This is a much, much better position to be in than that of the capital goods oriented growth market leading into 2000. It doesn’t solve everything. Customers of SAAS and cloud businesses could go out of business entirely. But the revenue for enterprise software and cloud services is generally higher quality and more durable than the revenue that drove much of the capital goods driven growth going into 2000.
This isn’t to say that we can or should ignore inflation, the supply chain crisis, the Russian invasion of Ukraine, COVID, or the prospective steady rise of interest rates. These are all critical factors that will reorganize our economy in new and perhaps distressing ways. These uncertainties will no doubt put pressure on companies to demonstrate long-term solvency and even, perhaps, produce profits (!!). But there’s something comforting to knowing that tech and its contribution to growth is a little better situated than 2000.
