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Lights out on Y2K

Let's face it--the fears surrounding the year 2000 computer problem are overblown. The only trepidation I have about saying this is that I'm adding to the hype over the year 2000 bug.

Let's face it--the fears surrounding the year 2000 computer problem are overblown.

The only trepidation I have about saying this is that I'm adding to the hype over the year 2000 bug. And while I'm certainly not qualified to assess the global economic impact of the glitch or the disruption it may cause after January 1, I do feel qualified to analyze the impact of the bug on spending for computer systems. And my assessment, now echoed by IT industry leaders, is that it just won't be that bad.

Fueling the paranoia is the simple fact that computers are everywhere--from production plant systems, telecommunications networks, and global banking systems, to embedded processors in automobiles and pacemakers.

But just because computers are ubiquitous, it doesn't mean they will be affected by the date change. Many programs aren't concerned with date or time functions. Many computers should be fixed by the New Year. And some PCs may still function correctly after January 1 with or without a rework.

Following a number of talks with technology providers, CIOs, and programmers over the past year, I have come to the conclusion that, with some exceptions, the Y2K issues that have been identified are easily fixed, and major systems at most large institutions are in good shape. Admittedly, my view is somewhat U.S.-centric, but given that the remediation process hasn't uncovered many difficult problems, my guess is that the international impact won't be any greater.

So on January 1, my view is that the gas pumps will flow, automobiles will start, PCs will boot, ATMs will dispense cash, and telephone calls will be connected.

But more importantly, what will be the impact on computer spending as companies that are far behind in their fixes rush to finish the job? Here my view has been bolstered by comments from players like IBM, Cisco, Dell, and Hewlett-Packard, whose executives have said they have seen little Y2K impact to their business so far. Additionally, their customers are not forecasting much disruption or change in spending plans for the remainder of the year.

How can this be? First, firms' customers have gradually been addressing the problem, spending for services and new computer systems on varying different timetables. Some have the bulk of spending behind them, while others will increase spending in the second half of the year.

Second, and perhaps more importantly, Y2K remediation is not the only problem on companies' collective plates--firms continue to buy systems for new applications like ERP systems or Internet infrastructure. A CIO of a major corporation recently told me, "Just because I'm fixing Y2K issues doesn't mean I can stop spending on other systems...my competitors aren't and we can't afford to get behind." Bottom line, IT infrastructure is too strategic for most companies to forgo, a fact made clear as Internet-based competition grows in virtually all industries.

So the reality of growing application backlogs has positive effects for computer system spending in 2000 and in the long-term. But what about the period right around the New Year when the fear of a "lock down" of Y2K-tested systems spreads?

Certainly the ramifications for some software and services spending are clear (I doubt many large-scale ERP applications will go "live" in December) but I believe the impact on computer spending could be much less of an issue.

First, any lock down is likely to affect new systems, but companies will no doubt continue to expand or replicate existing systems. If a company is expanding production, for example, adding storage capacity and replicating servers to support that new capacity is a requirement.

Second is the issue of production vs. development. While many lock-downs affect deployment of new systems into the mission-critical operating environment, they don't affect the development of new systems (and the associated spending behind them). This development could increase as companies pull scarce resources (IT staff and budget dollars) away from completed Y2K testing of production systems.

So, what if I'm wrong? Will the fortunes and stocks of the computer systems firms be materially affected? Again, I don't think so. The biggest fear earlier in the year was that spending would follow the course of a "nuclear winter" and essentially shut down for the second half of 1999 and carry well into 2000.

As we are already in June, and comments by the major vendors suggest that near-term visibility into spending remains high--the possibility of this "winter" scenario fades with each passing day. And if there is a temporary slow-down for a few months, it's my view that Wall Street will see this as a one-time event, and look to value companies on their prospects for the year 2000--which I forecast will be robust.

So how to invest? Go back to the themes driving demand and the companies poised to grow and execute clearly through any turmoil. I've written in the past that the explosion of storage demand and the server-centric nature of the Internet will fuel growth, as both elements will only become more influential in the new millennium.

Take advantage of weakness in stocks with good fundamental positions in these markets, especially if the weakness is generated by year 2000 fears. Summer is traditionally a time when computer stocks have underperformed, and with Y2K uncertainty still high, I believe many stocks will outperform as the year-end approaches and fears of Y2K subside.

The preceding comments should not be considered as a recommendation concerning the purchase or sale of any securities mentioned therein.