High Tech: The Next Steel?

The industry's new eagerness to beg politicians for favors repeats an Old Economy blunder. Innovation, not access, is the key

By Howard Gleckman

Is high tech turning itself into the 21st century version of the steel industry? Given tech's growing wish list from Washington and the White House's recent decision to impose tariffs to protect steel from imports, the question seems worth asking. I fear that New Economy businesses are in danger of getting so hooked on government handouts that they risk losing their way in the real marketplace.

Through most of the '80s and '90s, tech was a hotbed of free enterprise. Its life-changing products not only made money but sparked an unparalleled economic and productivity boom. Sadly, that positive energy is waning as tech risks becoming just another hog at the government trough. Businesses that prided themselves on winning fierce competitions for ideas and markets in software, Net access, and wireless communications now elbow their way to the head of the subsidy line. Companies that once ridiculed lawmakers now wine and dine those they disdained.

Look at what's on the high-tech agenda these days: protecting special accounting deals for stock options, winning new subsidies for broadband, preserving tax-exempt sales on the Internet, and granting "bonus" tax deductions for companies that buy high-tech equipment.


  The tech execs who have gotten sucked into this game are missing something important. Sure, they can use political clout to get what they want. But with subsidies come strings -- political scrutiny, regulation, and more restrictions on how they do business. The tech industry may think it will avoid these traps. But it won't. No one ever has.

The industry is spending a bundle to guarantee its place at the trough. In the 2000 election cycle, telecommunications companies, computer and Internet outfits, and software concerns gave politicians a combined $88 million, according to the nonpartisan Center for Responsive Politics. These companies are misdirecting time and energy that could be better spent creating and marketing products. The effort a tech CEO spends lobbying Congress is time not spent building the business.

Worst of all, though, these subsidies can change the very mindset of businesses. Instead of hiring the smartest tech-heads and the best marketers, companies will start to look for financial engineers and lawyers to manipulate the regulatory and tax maze that they themselves are creating. Deals will be done, not because they make economic sense, but because they cut taxes or avoid some new regulation. Just look at what happened to U.S. auto makers in the 1970s.


  Subsidies will provide an artificial protective collar around the tech industry -- softening the punishment for mistakes, but also limiting the rewards for successes. What's wrong with that? Think steel.

The steel industry is in trouble largely for two reasons: It's producing more than its domestic customers need -- at a price that isn't competitive globally. Plus, it has a long history of paying its workers too much money based on its business model and revenues. For decades, the government propped up companies that made these errors. It protected businesses that should have been forced to retrench or allowed to die, which only added to the glut of steel. Soon, it became impossible for anybody in the industry, even efficient makers of niche specialty goods, to make money.

Look at three items on the techies' wish list -- subsidies for broadband, new tax breaks for companies that buy high-tech equipment, and special treatment for stock options. All are being pushed as a way to save the deeply troubled broadband business.


  These companies are in trouble because, just like steel, supply far outstrips demand. The industry solution: create an artificial market. Give consumers a tax break for buying broadband, then give manufacturers a tax break for meeting that fake demand. This sounds like the sort of Five-Year Plan the old Soviet Union or China under Mao Zedong made famous. And we all know how well that industrial policy worked out.

Why else is tech in trouble? Because it paid people too much -- largely in overvalued options. It did so because accounting rules allowed businesses to hide their full costs from shareholders. Now that Washington wants to shine some light on the expense, tech companies are horrified. Their fear: They may have to reform or reduce compensation.

Perhaps that's not such a bad thing. But companies still want to avoid the inevitable by getting the federal government to let them hide their financial realities behind an accounting footnote.

I'm stretching the analogy a bit. Of course, tech has a long way to go before it ends up like the steel industry. But tech is headed in the wrong direction. And for those who think the worst could never happen, remember this: One hundred years ago, steel was on the cutting edge of the world economy, too.

Gleckman is a senior correspondent in BusinessWeek's Washington bureau. Follow his views every Tuesday in Washington Watch, only on BusinessWeek Online

Edited by Douglas Harbrecht

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