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Optical/IP

Cash, Risk & Pain

Two months ago, I wrote a piece on the credit crisis and wireless, and wanted to update that piece from several perspectives. I’ve been in Tech for over 25 years, have been through downturns in both the personal computer and wireless industries, but I have never seen or experienced anything like this. As usual, I am bullish on the entrepreneurial spirit and innovation in general but feel that this downturn is something different – and may require some structural changes to the way innovation is driven and financed. The now famed Sequoia Capital Death Spiral presentation has one view of the picture. If you have not seen this presentation, do so now, as it is a must read for anybody in technology. Not a happy story, but a necessary one. Below, I’d like to add some additional perspectives.

Putting the brakes on
In the past, the downturns were relatively secular, limited to tech, or part of a short-lived, localized recession. We pulled out of these tough times relatively quickly, as there were always other segments of the market, other geographies, and other dynamics in play that got us out of the trough.

In the past two months, as I’ve traveled around the U.S., been to Asia, and spoken to folks in other parts of the globe, there are two things that stand out. One: Entrepreneurs in tech/wireless are by nature optimistic, and by nature not given to quitting, and nobody is giving up. In fact, folks are cranking more than ever. Two: What we are going through is deep and pervasive from a planetary perspective, and unless there is another planet out there that will create opportunities to help pull this one out of trouble, 2009 will be unique and ugly.

I had a 12-hour period a few weeks ago that was indicative. I attended a meeting in San Diego with a company, a growing company, which needed to do a 20 percent reduction in force (RIF), to stay healthy in the face of inventory contractions by their customers. After that meeting, I traveled to Orange County for a dinner. On the road, I got a call from my wife’s cousin, who works for a networking components company. His company was doing its third RIF in a month in San Diego, with partner factories in China doing their own set of large layoffs. I got to the dinner in Orange County, and the company that I was meeting with there had just decided to do a 30 percent RIF.

In the last month, this has been my life in Tech, as companies across the globe scale back staff and expenses. Companies have taken to heart the breadth and scale of the contraction and, on an immense scale, have cut back at a rate that I’ve never seen, and I’ve been at this since the early 80s.

Part of the dynamic is short term, as companies, justifiably, are doing everything possible to conserve cash, because getting more cash is difficult to doubtful right now. Part of this “cash conservation” is massive inventory contraction. In the case of cellphones, there is usually a relatively fixed amount of inventory, from the smallest capacitors, through the cellphone chips, through inventory held at factories in advance of builds, through factory WIP (work in progress), finished goods inventories, carrier or distributor warehouses, and then finally in the warehouses and stores of retailer and consumer channels. At every point in this process, things have pulled back, and this has affected every element of the wireless supply and channel structure.

There is good news and bad news to this. The bad news is that the cash conservation (for everybody, services and hardware folks), and inventory contraction (for hardware guys) have put the brakes on exceptionally fast.

The good news is that Tech and Wireless are still industries that will take a hit, but are resilient by nature, innovative by DNA, and frankly, as I discussed in my October piece, relatively income “inelastic” relative to demand. If somebody drops her phone in a puddle, she's getting a new one. If somebody’s old feature phone is getting creaky, he will buy the latest BlackBerry or iPhone. Which means at some point, once the channels finish compressing, on the hardware side, the factories will get moving again; and on the services side, if the operators wake up and get more aggressive on service pricing and drive data adoption/growth, they can still see data ARPU (average revenue per user) growth in 2009.

Tech and Wireless are painfully and pragmatically taking the steps that need to be taken, even as these are relatively healthy industries, especially when contrasted with the financial world, the auto industry, and huge swaths of the retail and service industries. Tech will not get a financial bailout from the government, nor are investor coffers going to suddenly open up. Tech needs to continue to hunker down, do what it is good at doing – innovation – and continue to be an engine for growth. This leads to another point of pain: the entrepreneurial business model.

To Page 2: Venture Models

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