2001 and the Future of Tech

What came to pass this year -- passé B2B, humbled Napster, intact Microsoft, and more -- shows where the industry is going

By Alex Salkever

After the heady nothing-but-Net '90s and the bubble-bursting 2000, 2001 may well be remembered as the year that the technology sector saw its future -- its real future -- for the first time. You wouldn't know it just by tracking the Nasdaq Composite index. It started the year at 2,400, drifted south for nine months, then plummeted to the 1,400 range after the September 11 attacks before bouncing back robustly to around 2,000 by late December.

Nor would you know it by looking at tech's mounting unemployment troubles. It was a horrible year for the pocket-protector crowd. Nearly every major technology company, from Sun Microsystems (SUNW ) to Motorola (MOT ) to Dell (DELL ) to Intel (INTC ) announced layoffs and major cutbacks. Phrases that once made investors' hearts beat faster, like "optical networking" and "business-to-business software," now leave them cold. Hundreds of thousands of highly skilled -- and highly paid -- tech workers have lost their jobs.

Yet a raft of signature events this year point the way toward the tech economy's 2002 and beyond. Indeed, business historians will likely look back at 2001 as a watershed year. To some extent, the natural order of things returned -- right down to Microsoft trumping all comers. The end of the tech bubble restored expectations to manageable levels. At the same time, many things changed as new oligopolies emerged, old sectors grew grayer still, and the Internet's true impact on business began to become clear.

Here's a chronological look back at a few key events, and what they mean going forward:

Jan. 30 -- Software Giant Ariba's Last Big Acquisition

Ariba announced the $2.4 billion acquisition of fellow B2B software maker Agile Systems. Yet after that, the fortunes of Ariba (ARBA ) -- and the rest of the New Economy's business-software set -- headed south fast, shattering the mythology of B2B's promise. It turns out that the software that was supposed to make businesses vastly more efficient by bringing processes to the Web were difficult to install and maintain. And it pinpointed how a tangible return on investment was harder still, making B2B software a tough sell in a bad economy.

On the day of the merger announcement, Ariba's stock closed at $38.50 a share. In late December, it floated in the $5 range. The precipitous decline foreshadowed the fortune of the entire sector, and the Agile Systems deal marked the last major acquisition executed by a New Economy software company. These outfits -- including Ariba, I2 (ITWO ), and BEA Systems (BEAS ) -- were once once touted (by BusinessWeek as well as others) as the new powerhouses of the software business.

Today, B2B software is still alive and kicking, but mostly in the form of incremental improvements on existing legacy systems. And no one is eager anymore to rip out the plumbing to get the New New Thing in business software. Ariba was the king of the sector, but now it's looking to survive or get bought up by someone else. This acquisition was the beginning of the end.

Feb. 16 -- Dell Computing Announces Its First-Ever Layoffs

The Round Rock (Tex.) computer maker had piled up year after year of growth, thanks to the savvy leadership of Michael Dell and his zero-inventory, make-it-to-order business model. So when the company stumbled and announced it would hack 1,700 people from the payroll in its first-ever cuts, the whole industry swooned. And with good reason. Major tech consultancies IDC and Gartner reported declines in sales of total PC units on a quarterly basis during 2001 for the first time in the sector's 20-year history.

In the coming year, growth in PC unit sales is expected to climb into the low double digits. But no one expects the go-go growth of yore. Witness the foundering Hewlett-Packard­Compaq merger, which has faced resistance from the Hewlett family and shareholders who question why HP CEO Carly Fiorina wants to throw her lot in with a company whose fortunes rest on the PC business. Indeed, the PC life cycle continues to lengthen, and no new killer applications that justify buying a new one are on the horizon. Add it all up, and Dell's announcement underscored the reality of diminished growth potential in PCs -- and even the best in the business isn't immune.

Mar. 7 -- Napster Forced to Take Down Copyrighted Songs

What seemed too good to be true turned out to be just that when federal Judge Marilyn Patel put the kibosh on Napster. The rebel file-swapping service had unleashed a flood of pirated MP3s onto the Internet and fueled a debate about online copyrights. At its peak -- with millions of files being swapped daily ­- Napster represented the zenith of the free-content Internet. Alas, when Napster complied with federal demands, it quickly lost its once-loyal adherents. Other online file-swapping services are trying to fill the void, but they, too, now face lawsuits.

More important, in December the major music labels took their first steps toward subscription services that will offer superior-sounding music files at palatable prices -- at least for some. Indeed, Napster forced the labels to acknowledge the public's demand for downloadable music -- and their response may yet validate cable-TV's monthly billing model for selling content on the Net. This augurs a rise in paying for content on the Web as more entities band with subscription services that will be cheap and convenient enough to entice users.

July 9 -- Webvan Files for Bankruptcy

The online grocer had all the right stuff -- a stellar initial public offering that raised $375 million, deep-pocketed backers, a high-powered CEO, former Andersen Consulting head George Shaheen, and a concept that seemed bulletproof. Consumers would purchase groceries on the Internet, and Webvan would bundle them from a state-of-the-art warehouse and deliver them to your door -- ideal for overworked people who couldn't find the time to get to the store.

Even though Webvan managed to break even in a couple of markets, it never convinced enough people to order their fruits and vegetables online to make it a going concern. The company finally threw in the towel in July, 2001, making it perhaps the best-capitalized, best-planned e-commerce venture to go bust.

In retrospect, Webvan's demise was taken as proof that pure-play e-tailing on a national scale simply doesn't work yet, even with the best backing, the best planning, and the best intentions. Going forward, brick-and-mortar companies will further dominate e-tailing as it continues to grow into one of the Internet's most important economic functions.

September 11 -- Terrorists Attacks on America

The terrible destruction of that day brought many tragic lessons home to Americans and to Corporate America. Beyond the awful human vulnerability felt by employers and workers alike, companies everywhere realized they lacked sufficient systems for data and network backup and recovery. Some decided to add another layer of redundancy to their networks, hosting their Web sites in multiple locations. Still others decided to beef up computer security and create secure home-office environments for the majority of employees in case of another attack.

Companies are no longer thinking about exotic e-business solutions when they think software and information technology spending. They're thinking about protecting what they have, which is why anyone selling complex IT services, such as Accenture and IBM, have thrived despite the downturn in tech spending. Into 2002 and possibly after, companies will continue to dedicate major IT resources to protective measures. Before September 11, such safeguards were considered a luxury. Now they're a basic cost of doing business and will mean less money will get spent in other areas of IT.

Sept. 26 -- Exodus Communications Files for Bankruptcy

The Web-hosting giant was once considered a surefire winner. Companies -- traditional outfits and e-businesses alike -- would need to build and service Web sites. The former would have to do so to get into the game, while the latter had to avoid getting "Amazoned" by a brand-new online rival. That reality started to crack in 2000, when Exodus first felt the heat of dot-com flameouts in its customer base. And this year, competition from IBM, Intel, and a bevy of big telecom companies brought fierce pricing pressure to a market growing far more slowly than originally predicted.

The moral of this story? What looks like the Next Big Thing at the beginning of a bubble usually looks more like a commodity at the end of one. In fact, expect even more contraction in the year ahead. Companies offering specialized Web services won't be so hot in a more down-to-earth economy.

Nov. 2 -- Microsoft and Uncle Sam Settle

The end of the nasty antitrust battle was hailed as a clear victory for Bill Gates & Co., capping a surprisingly strong year for the software giant. While PC sales slumped in 2001, Microsoft's stock has risen about 60%. The company's Windows XP operating system has been well-received by both geeks and the general public, and should boost sales in 2002.

Further, Microsoft's nascent strategy to dominate Net services and software looks more promising than it did at the beginning of the year. The stampede of top executives leaving to head startups has ceased for now, and Microsoft once again is considered a plum employer for hot-shot programmers out of college.

What a difference from a grim 2000, when speculation ran rampant that the bellicose Judge Thomas Jackson would slice the company into three pieces, and Microsoft was facing the specter of poor PC sales in 2001. The settlement also seemed like a green light for Gates to extend his reach beyond the desktop, as he ratchets up his moves into video gaming, financial services, travel, wireless phones, and other consumer services on the Internet.

Dec. 19 -- AT&T Sells Its Cable Unit to Comcast

If approved, the $42 billion deal will create the largest cable-TV company in the country, with 22 million subscribers. It will also create the largest pool of potential broadband users and reduce the field in cable down to two serious players: AOL Time Warner and AT&T Comcast. These entities, as much as anyone else, will control America's broadband future. As sagging revenues from traditional services have forced telecoms to forget about expansion plans, high-speed Net access via cable continues to pull ahead of digital-subscriber-line technology in the race to plug in new broadband users.

With AOL Time Warner clearly hoping to push its plethora of content out through its own cable pipes, AT&T Comcast may be the only company with enough heft to take it on. The future will likely hold even more consolidation among cable players, especially if cable modems become the most popular method for meeting America's data and video needs.

So after the excitement of the last couple of years, was 2001 boring? Far from it. True, most techies will be glad to ring in a new year. But look again, and you see plenty of the future in the rear-view mirror. A safe and happy 2002.

Salkever is Technology editor of BusinessWeek Online

Edited by Beth Belton

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