Tom DeMarco preaches an unpopular gospel. A fellow at the info-tech consultants Cutter Consortium, he travels the country exhorting corporations to boost purchases of technology as a way to vault ahead of pinchpenny rivals. These days, he admits, "it's a tough sell." But DeMarco is fighting much more than a stagnant economy. The tech sector suffers from deep problems that will take real work and creative thinking to fix. Simply waiting for a recovery won't be enough.
Many startups can't get funding. Corporate and university research isn't getting to market fast enough. And innovative technologies that could recharge tech spending, such as online music sharing and wireless services, are getting stifled by media giants and outdated government policies. Says Richard G. Sherlund, an analyst at Goldman, Sachs & Co.: "There isn't any major new product cycle or major innovation that companies are saying we have to spend on."
What's needed is new thinking. That's true not just at tech companies but also at universities, in government, and at media and telecom companies. A series of steps, from slashing the size of venture funds and trying new ways to commercialize research to lessening reliance on litigation to solve disputes, could help clear the way for innovations to get to market.
These aren't quick fixes. That's not what tech needs anyway. Now that tech's deep freeze may be starting to thaw, it's all the more important to tackle the bigger problems--those that could prevent it from resuming its former 10% annual growth rate. Solving them would help tech suppliers--and the entire economy in the long run.
Here is what's wrong with tech today, and what's needed to get it back on track:
VENTURE CAPITALISTS ARE SHYING AWAY FROM EARLY-STAGE STARTUPS
-- Startups have a math problem. After bulking up in the boom, leading venture funds top $500 million. To invest all that money, they now generally plow $10 million or more apiece into later-stage companies. That leaves startups, which typically need less than that, in the lurch. Meanwhile, individual "angels" and corporate investors, who had stepped in at the early stage, are in hiding after losing big in the tech crash.
As a result, a lot of promising ideas are withering. VCs invested in only 198 startups in the third quarter, vs. 365 in early 1997--before the big boom. "I wonder how many good ideas aren't getting traction because they aren't getting funded," says David Watson, chief technology officer at Kaiser Permanente.
VCs need to downsize their funds. A few have, but not enough. Ending the need to invest huge sums would encourage them to focus on early-stage startups. Most of all, VCs need to suck it up and take risks again. Today, most won't consider startups without seasoned teams and obvious markets. Those are much tougher criteria than they applied even before the boom. Notes Guy T. Kawasaki, managing director of Garage Technology Ventures, a Palo Alto (Calif.) investment bank: "If you applied those tests to most of the large tech companies today, they would not have been funded."
THE GAP BETWEEN RESEARCH ADVANCES AND COMMERCIAL PRODUCTS IS GROWING
-- Profit pressures have forced Lucent Technologies (LU ), IBM (IBM ), Xerox (XRX ), and others to limit basic research, the fount of innovations like the chip, the disk drive, and the Internet. Universities are doing more research, but it's narrowly focused. So fewer breakthroughs get to market. Says Henry W. Chesbrough, a Harvard Business School assistant professor: "Stuff sits on the shelf because of that gap."
New developments could help close it. IBM is reaching out to VCs to forge partnerships with startups. Xerox Corp., too, has freed its Palo Alto Research Center to sell its research to other companies. And some academic researchers are busting out of their cubbyholes. Stanford University now has a bioengineering program that brings together engineering, medical, and other faculty to collaborate on projects such as artificial corneas. More researchers, corporate and academic, should open their arms.
MEDIA GIANTS ARE THWARTING INNOVATION BY STIFLING THREATENING TECHNOLOGIES
-- It's understandable that the record companies went ballistic over the online music-sharing service Napster. It helped people steal music. But with some 60 million users at its peak, the appeal went beyond the joy of theft. "Clearly, technology offered a new revenue stream to content owners and a better experience for consumers," says tech analyst and former VC Lise Buyer. But the implicit threats of lawsuits prompted her and other VCs to walk away from several music startups last year. The battle has moved to video, too, as broadcasters have sued makers of digital video recorders such as SONICblue Inc.
Media companies should rein in their lawyers. Their own limited music-sharing sites would become much more appealing--and spur more purchases of music, not to mention PCs, MP3 players, and broadband access--if they instead tapped new ideas for making downloads pay off. They could sell $50 digital download certificates for a certain number of songs, or charge users just for one song at a time. They could use cable TV's pay-per-view model. And instead of copy-proofing CDs so they don't play on PCs, they could instead include promotions on the CDs to help spur other sources of revenue, such as selling concert tickets online. Forrester Research Inc. reckons music downloads could net $2.1 billion, or 17% of record industry sales, by 2007.
GOVERNMENT SPECTRUM POLICIES ARE LIMITING NEW SERVICES SUCH AS THE WIRELESS INTERNET
-- Wireless networks, which let people surf the Internet at high speeds in airports and corporate offices, are growing by leaps and bounds. Even so, they will probably run short of spectrum soon, while television broadcasters hog large swaths of it for their dwindling audiences. "That could limit innovation," says Rick Rotondo, vice-president for technical marketing at wireless technology supplier Mesh Networks Inc. New technologies could allow various services to share the same spectrum without interfering with each other. But cellular carriers are fighting the calls to open up spectrum that they paid billions of dollars to obtain.
Resolving the fight won't be easy, but it is doable. The Federal Communications Commission, for instance, could reserve more airwaves for these emerging technologies and force carriers and broadcasters to share, where technology allows it. One positive sign: A Nov. 15 FCC report called for sweeping changes in spectrum policy, including use of these new technologies.
These are all tough steps. And they won't immediately pry open the tight corporate budgets that are keeping many tech suppliers in the dumps. Nevertheless, addressing these issues now will give tech a fighting chance of returning to its glory days.
By Robert D. Hof