Good news is the bad news

And as I hung up the phone it occurred to me
He'd grown up just like me.
--Harry Chapin, "Cats in the Cradle"

The breadth of high-technology companies that either missed fourth-quarter earnings, or have already pre-announced disappointing first-quarter results is quite alarming, and seemingly unprecedented.

Every sector--from Internet to enterprise software to semiconductors and networking and telecom equipment--has been hit. And perhaps even more troubling, the disappointments have not been limited to second-tier players. Market leaders like Intel, Cisco Systems and even optical giant JDS Uniphase, have all encountered softness in demand.

What could lead to such a dramatic and pervasive shift in demand? Certainly, the loss of enthusiasm in all things Internet has played a role. Many of the dollars pouring into technology purchases were coming either directly from Internet-related start-ups or from programs at large corporations aimed at Internet initiatives. However, this alone does not appear to be a plausible explanation for all that has occurred, especially when you consider that some of the companies that have warned are not Internet related at all.

Perhaps the bad news is driven by what has historically been good news. Over the past ten years, many a technology bull has pointed out the rising proportion of large company expenditures that are dedicated to technology. If you believe that we really are shifting to an information economy, then technology becomes the infrastructure on which companies are built. In other words, today's server or router is yesterday's machine tool or stamping press.

The data seems to bear this out.

According to Morgan Stanley, technology spending as a percentage of business equipment spending has risen from 15 percent in 1960 to 25 percent in 1980. This past year, this figure shot past the 50 percent barrier to 53 percent. According to a report from Gartner, technology spending as a percent of all capital expenditures has risen from 5 percent in 1975 to an estimated 30 percent in the year 2000. Gartner goes on to predict that this figure will hit an astonishing 70 percent in the year 2010.

Ordinarily, this data would be perceived as an extremely solid argument for why technology stocks should continue to rise. What may be missed, however, is that now that technology spending is such a large part of a company's overall budget, changes in the business cycle are likely to affect overall demand for information technology products.

Like it or not, our high-flying industry might now be considered "cyclical." We grew so large that we are now highly impacted by shifts in the economy.

Empirical data can be found in today's business headlines. Last week, Citigroup announced that it would seek to remove between one and two billion in expenditures in the current fiscal year. According to The Wall Street Journal, areas likely to be cut include "holding off planned investments in such areas as technology, advertising and personnel." The article went on to note that recent Internet ventures were also likely targets for cutbacks. More support for this theory can be found in recent announcements from market leaders such as Oracle and Intel.

In late February, Oracle announced that it would miss analysts' estimates for its most recent quarter because, "We have a lot of nervous senior executives looking at this economy and being very cautious." The company even implied that deals were receiving sign-off at the VP level, but were then being vetoed by the CFO and CEO who were troubled by the uncertain economy. Intel sounded similar alarms last week, noting, "We are now seeing weakness in the computer industry and the communications industry in all markets."

Too much pessimism about the future of technology companies is unfair and likely inaccurate. The fact remains that a systematic increase in technology's share of the corporate budget is still ongoing. Marginal competitive advantage is driven by the successful implementation of leading information technology systems that allow companies to more accurately serve their customer needs with the most efficient manufacturing processes possible. Companies that fail to lead when it comes to IT systems also fail to lead in the marketplace.

You could even argue that companies are caught in a technology "arms race." Companies are constantly playing catch-up to their competitors when it comes to IT systems. Ironically, the alternative--to fall behind with regards to cutting-edge systems--is more painful than the arms race. Non-evolutionary businesses, like non-evolved species, become extinct. Similar to the notion professed by the Red Queen in ?Alice in Wonderland?, you have to run faster and faster just to stay in place.

As a result of this global corporate dependency for technology products, you should expect to see above-average, long-term growth in technology for many years to come. We are fast becoming a knowledge worker society, and these are indeed the tools of that trade. That said, the industry is now so large that it is no longer immune to standard business contractions associated with recessionary economies. Perhaps economists will soon start peddling their wares in Silicon Valley.

J. William Gurley 2001. All rights reserved. Above the Crowd is a monthly publication focusing on the evolution and economics of high-technology business and strategy. This column can also be found on CNET online and in Fortune magazine. The information contained herein has been obtained from sources believed to be reliable but is not necessarily complete, and its accuracy cannot be guaranteed. Any opinions expressed herein are subject to change without notice. The author is a general partner of Benchmark Capital, a venture capital firm in Menlo Park, Calif. Benchmark Capital and its affiliated companies and/or individuals may, from time to time, have positions in the securities discussed herein. ABOVE THE CROWD is a service mark of J. William Gurley.