The millennium is eight months away, but the dreaded Year 2000 computer bug is already biting--in an unexpected way. From telecom-equipment giant Lucent Technologies to software makers PeopleSoft and Network Associates, technology companies are seeing the first signs of a Y2K slowdown: Customers who are trying to bugproof their networks in time for Jan. 1, 2000, are scaling back orders for new equipment. Of 1,145 North American companies surveyed by International Data Corp. in March, 38% said they have already slowed tech spending, "and we don't know by how much," says IDC Research Director Tom Oleson.
Things could get worse. By yearend, overall tech spending may shrink, says a new report by Forrester Research Inc.--by 13% in the fourth quarter alone. Says Bill Burnham, analyst for Credit Suisse First Boston: "Not a lot of spending is going to be going on in the second half, especially after Labor Day." David Wyss, an economist at Standard & Poors DRI, recently shaved his estimate of U.S. gross domestic product growth in 2000 by 0.7% because of the tech slowdown and the effects of an inventory buildup by companies hoping to avoid Y2K shortages.
Lucent Technologies Inc., which reported a slight dip in business sales in the first quarter, is bracing for a bigger slowdown. "Many firms are putting off their buying decisions as they focus on potential computer problems related to 2000," says Chief Executive Richard A. McGinn. And at PeopleSoft, software licensing revenues are down 44% from a year ago, and growth has slowed to a 15% annual clip, vs. 50% in past years.
By fall, analysts warn, many customers will "lock down"--halting new additions to their networks until the millennium. Sometime between June and September, companies including Merrill Lynch, Sears, Levi Strauss, Prudential Insurance, and Consolidated Edison of New York will slow or freeze new tech spending. Their hope is to prevent any new bugs from getting into systems they've spent millions to get bug-free--or close--by Dec. 31. Says Charles Cherry, Y2K project manager for Parker Drilling Co. in Tulsa: "It would be pretty crazy to install new technology in the second half, given the potential for problems with Y2K."
Many companies are opting for lockdown because they have fallen behind their Y2K testing deadlines or are running into unexpected glitches. "The Year 2000 problem is like an onion," says Allan Graham, senior vice-president in charge of Y2K testing services for Rosemont (Ill.)-based Comdisco Inc., a company that tests Y2K repairs. "Every layer you peel off, the more you want to cry. You find there are deeper problems." In all, says Forrester, 69% of companies it surveyed plan to lock down existing tech installations and freeze portions of their spending. Lockdowns could last from two to five months, Forrester says--enough to "make it feel like the economy will go flat for the last quarter of 1999 and the first quarter of 2000," says Research Director Carl Howe.
GOOD NEWS. There's another reason for companies to think twice about tech spending: Vendors may be too busy helping customers untangle Y2K problems to help with "normal" tech support, says Linda S. Glick, chief information officer of Levi Strauss & Co. "As we approach yearend, our tech support from vendors will be very, very slim," she says. "They're all readying themselves to fix Y2K failures around the world. This is another reason to lock down for now."
The good news? Growth in Internet services, including E-commerce, will sustain demand for networking technology and storage. And companies that started fixing Y2K early may find the slowdown a great opportunity to push ahead of rivals in developing E-commerce systems. Federal Express Corp. and Visa International, for example, both have completed their Y2K repairs. Now, they can spend the rest of 1999 enhancing E-commerce systems, which could put them a year ahead of their rivals.
Still, there is likely to be more pain than gain. Companies such as Computer Associates International Inc. and IBM expect sales to soften. Sun Microsystems Inc. and Microsoft Corp. recently warned that sales of software and network servers could slow. Personal computer sales to businesses also could taper off in the second half, analysts predict. Says Bernard De Valence, general manager of Hewlett-Packard Co.'s Y2K program: "We're not sure about hardware sales. So far, we have ups and downs but haven't been able yet to clearly identify the impact of Y2K."
Most tech companies are approaching the last half of 1999 with extreme caution. "Anything could happen," says CSFB's Burnham. "Right now, most tech companies are just knocking on wood, looking at companies who took a little Y2K hit this past quarter, hoping they won't be next." Adds Douglas L. Maine, IBM's chief financial officer: "I wish I had a crystal ball." He's not alone.