Tech Industry

Will Y2K fixes make or break tech industry?

Businesses may as well consult a genie to get a straight answer about the impact of the Year 2000 bug on the future of the technology market.

Businesses may as well consult a genie to get a straight answer about the impact of the Year 2000 bug on the future of the technology market.

Some Wall Street analysts expect Year 2000 fix-related sales to boom during the first half of this year, followed by a weaker second half, as corporations and large institutions hurry to complete their plans to protect their computers and networks against the dreaded bug before the turn of the millennium.

But CEOs, business analysts, and corporate executives alike are also watching buying trends closely and differ sharply in their assessments of the bug's impact.

For example, top executives at large PC makers don't agree on how the glitch will impact sales this year.

In recent interviews, Intel CEO Craig Barrett said it's too early to judge the impact of Y2K on the industry, while Compaq's North American desktop marketing manager Michael Takemura said Y2K buying patterns could throw the entire buying cycle out of whack. Meanwhile, Michael Dell, CEO of Dell Computer, has said he expects a shift in demand to the first half of the year.

Wall Street analysts side with Dell. In a recent report, Piper Jaffray analyst Ashok Kumar warned of an overall slowdown in corporate PC sales, noting that many corporations quickly moved at the end of last year to upgrade IT hardware as part of their Year 2000 Back to Year 2000 Index Page compliance plans. As a result, Kumar said growth opportunities now lie in the small- to midsized business market.

Overall, analysts say major corporations are expected to complete shelling out big dollars on the Year 2000 by year's end, while smaller companies and stragglers will still be buying. The bug is expected to impact both server sales, as well as desktop upgrade cycles, as companies with older PCs push to quickly upgrade. On the other end of the industry, observers of consulting firms and systems integrators services are split on when the Y2K gravy train will stop.

On the one hand, Wall Street firm BT Alex Brown on Monday cut its rating on three companies that rely on the Year 2000 problem for between 20 and 30 percent of their business. Alex.Brown analysts expect a profit drop at firms such as Computer Horizons, Keane, and IMRglobal.

However, Warburg Dillon Read analyst Matthew Gershuny, in a research note, said concerns about a Year 2000 services slump are unfounded as corporations, to date, have spent less than half of their Y2K bug budgets. Gershuny reasons that the Y2K problem will drive sales right up to New Year's.

Overall revenue that services and consulting firms expect to collect from Y2K is expected to nosedive from $20 billion this year to $15.7 billion next year, to just $6 billion in 2002, according to Forrester Research, a Cambridge, Massachusetts-based consultancy.

"That's a pretty stiff drop so it makes sense that companies will be making the transition now," said Forrester analyst Tom Gormley. Millennium bug business

See special report: Date with disaster is expected to dry up by 2003, yet some of the 25 companies Forrester recently surveyed plan to get out of Y2K work long before then.

While Electronic Data Systems, MCI Systemhouse, Unisys, and Cap Gemini plan to make a Year 2K services exit next year, Ernst and Young, KPMG, PricewaterhouseCooper, and others plan to stick with it as a quick path to getting new business, Forrester estimates.

"A good chunk of Year 2000 business will roll off in the next couple of quarters," said Damian Rinaldi, analyst at First Albany in Boston. Businesses like Keane, which grew 108 percent between 1997 and 1998, "can't sustain that forever," he said.

Next year, Keane's overall growth is expected to drop to 33 percent as the company shifts its strategy further from Y2K.

Other analysts say Keane has moved away from its Y2K business to outsourcing application development faster than initially anticipated.

"They're just barely beginning," to gain the business strategy necessary to move away from Y2K, Gormley said.