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Tech Industry

Dot-com and tech fallout hits Old Economy

As their clients cut back on spending or simply disappear, Old Economy companies are feeling the effects of the dot-com implosion and the technology slowdown.

As a professional party planner whose business is not Web-based, Heather Keenan may seem like the last person to get stung by the dot-com implosion and the sagging technology market.

But like many people in San Francisco, the president of San Francisco-based Key Events felt the effect of the slowdown. One dot-com client on the verge of bankruptcy has yet to pay her for a party she planned, and other companies have scaled back on the lavish events like the ones they threw a year ago.

"There's no question that last year and the year before we enjoyed some really juicy business that added to our bottom line nicely," said Keenan, who has been in business for 11 years. "That's just not there anymore."

Keenan's company is one of several offline businesses that have been hit by the plunging dot-com sector over the last year or so. Old Economy companies have seen their business slow down or shift as customers from the technology market cut back on spending or disappear entirely.

Boston-based law firm Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC has seen its staff double in the past two years due in large part to business from high-tech companies. Clients have included America Online and Akamai Technologies.

But now with the troubles in the tech market, the firm has had to make revisions. For instance, lawyers handling initial public offerings have shifted some of their practice to private equity, and venture-capital lawyers are doing more merger and acquisition work, said Irwin Heller, managing partner.

"And we've seen our bankruptcy (division) go to full utility," he said.

Reverberations in the media
Within the last two weeks, The San Jose Mercury News, The New York Times, and Dow Jones, publisher of The Wall Street Journal have trimmed expectations or announced layoffs. All cited the sluggish economy.

Located in the heart of Silicon Valley, the Mercury News was hit hard. The newspaper's recruitment-advertising sales dropped significantly as technology companies in the area cut back on employment or stopped hiring.

see Special Report: Assessing the carnage At The Wall Street Journal, the volume of advertising sales has shrunk to 32.1 percent on a per-issue basis in February, compared with a 42.1 percent increase a year earlier, Dow Jones said. The publisher expects its advertising volume to be down by a similar percentage in March. Technology companies and financial institutions accounted for about half of the publication's advertising sales. Spending by dot-coms is "virtually nonexistent" compared with a year ago, Dow Jones said.

Other Old Economy media companies feeling the pinch of dot-com cutbacks are radio and billboard companies.

Viacom CEO Mel Karmazin recently told analysts that his company's radio and billboard divisions would face tough revenue comparisons this year against the numbers posted a year ago when dot-coms were spending freely.

Down in Silicon Valley
The new thriftiness is probably most evident in Silicon Valley, where businesses prospered during the boom days.

"I would say the super excessiveness that was noted in the last couple of years has been cut back," said Laura Lyons, managing partner at San Francisco-based Global Gourmet Catering, which does business with many businesses in the Valley. "It's not necessarily because clients don't have money or budgets, but they don't want to appear to be excessive."

Companies put up a lot of cash a year ago to hire big-name performers like the B-52s and Elvis Costello, she said. Those same companies are still planning events, Lyons said, but "they just don't bring in $100,000 to $550,000 headline talent anymore."

Silicon Valley's real-estate market, which has been one of the most expensive in the country, is also feeling the slowdown.

San Mateo recently approved a moratorium on new office space in its Downtown district. In San Francisco, artists and city planners last year were so concerned about dot-coms taking over San Francisco's historic districts that they proposed slow-growth initiatives in the city.

More room ahead?
While the real-estate market still isn't cheap, there are some signs that things are easing up.

Up to about 8 million square feet of office space in San Francisco, the San Francisco peninsula and Silicon Valley has gone back on the market either through sub-leases from tenants or directly from landlords, said Hernan Santos, a director of Cushman & Wakefield in the San Jose office.

He said companies like Ariba and Excite@Home are either not occupying space they're leasing or they are subleasing their extra space. A spokeswoman for Excite confirmed that the company is subleasing one of its offices in Redwood City; it was "just smart business" to fill up the buildings they have and lease out the extra space, she said.

"Today I spoke to a company that has 100 employees and they're looking for space. Last year they would have been lucky to find maybe a handful of alternatives. Today they can get 20," Santos said. "Today if space comes up, there's a chance there are not going to be any bids."

Santos pointed out, however, that even with new space on the market, vacancy rates will remain in the single digits in most areas in the Valley and the San Francisco area.