At Davos the big question was: "When are we going to get out of this economic mess?" So I decided to take an informal poll of attendees. The question I asked was: "When will world GDP start to increase again?" Strangely, the early poll results were quite negative -- the average was hovering in the mid-2011 range. But as the World Economic Forum wore on, there was creeping optimism -- I started to get more 2010s (and an occasional 2009) than 2011s. My sample cut across a wide swath, from CEOs to journalists to academics to political leaders -- 55 votes in total.
According to my unscientific Davos poll, world GDP will turn and begin to grow again in April of 2010.
Depressing? Not necessarily. Davos rarely gets it right. Remember, this was the group that was highly bullish only 12 short months ago.
I'll be attending the World Economic Forum in Davos next week -- look for posts here as I gather up blasts of insight from the gathering.
I'm running a session on January 29th at Davos that will analyze how social computing will transform corporations and markets. Discussion leaders will be: Michael Arrington, TechCrunch, Jimmy Wales of Wikipedia, Robert Scoble of Fast Company TV, Reid Hoffman of LinkedIn, Matt Cohler of Benchmark Capital (late of Facebook), and others.
We're going to be working to answer the questions listed below.
1) Get the general economy back on its feet. Tech spending correlates closely with GDP growth.
2) Take government action that increases competition in tech markets. Nixon charged IBM with anti-trust -- ushering in the independent software and plug-compatible hardware businesses. Reagan presided over the breakup of AT&T -- setting the stage for massive innovation in telecommunications.
If you want to understand the financial meltdown, read Niall Ferguson's article in Vanity Fair: "Wall Street Lays Another Egg." It logically lays out the causation of the disaster, complete with historical backdrop.
If you're busy, here's my instant summary:
Factor One: Real estate
The belief, going back to Roosevelt, and most recently promulgated by G.W. Bush, that all citizens should own a home.
Factor Two: Converting mortgages into securities
Wall Street bundled mortgages into securities, supposedly attenuating risk, but actually making it hard to ultimately assess the value of the loans.
Factor Three: Subprime mortgages
The securitization of mortgages theoretically made it possible to take on riskier loans (subprime mortgages), as long as they were bundled with better risk loans. This strategy worked as long as real estate prices kept rising and interest rates remained low.
In these economic times, it's best to stay close to the people in companies that buy things -- the sourcing and vendor management (SVM) professionals. At Forrester's sourcing Forum in Florida this week I hosted a dinner for ten vendor management executives and four vendor reps.
This group was fascinating. They are experts in purchasing, evaluating vendors, arranging sourcing agreements, pricing, and negotiation -- the front lines of their company's operational and capital expenditures. The role is still in its infancy -- some are still tough purchasing agents while others have graduated to a more complex model of "diplomacy" -- seeing all of the interests around the table and working to arrive at a solution that helps everyone succeed.
Over dinner the executives worked on a simple question: "What are sourcing and vendor management best practices in a recession?" So if you've ever wondered how the screws will be tightened, here's a peek under the tent:
But now comes Intel's announcement that it expects revenue for the fourth quarter to be down 10% from its original forecast. What does this mean? I have a few thoughts:
1) Intel is not the bellwether that it once was. Personal computers and servers, the primary destination for Intel's processors, are not nearly as large a percentage of tech spending as they were back in 2001.
2) Layoffs in the economy have already begun. Fewer employees, fewer PCs needed.
3) Large companies are accelerating virtualization projects. Virtualization is a fancy word for running more applications on fewer servers. It is greener (less power), simpler (fewer servers to break), and cheaper. Good for companies looking to lower capital expenditure and operating expenses in a recession, but bad for Intel.
Forrester has been predicting that the two tech segments that would be hit hardest in the recession are computing hardware (PCs and servers) and communications gear. But services and software (Intel plays in neither) would fare better. Exit polling would appear to indicate this result.
Quickly: For tech, this recession will be different than 2001-2003
Content: I'm not an economist. But I've been present for a bunch of recessions and watched how technology markets survived. And I spend a lot of my time talking to management teams at large companies about economic conditions and their businesses. Here's my view of the effects of this recession on technology. If you want Forrester's formal view of the recession, check out Andy Bartels' report, What the Financial Crisis Means to the Tech Market.
Here's my take:
1) Tech will be down, but not out. 2001-2003 was a tech depression. Spending stopped, projects were canceled, excess inventory flooded the market destroying pricing. Cisco lost half a trillion dollars of market cap. Why? Tech had a long way to fall. Tech spending in 2000 in the U.S. was up 12% -- there was fluff and fat everywhere. When the bubble burst, the fall was precipitous. But tech spending was up only 6% from 2006 to 2007. Users of technology are far more disciplined and have cut out the nonsense. So yes, growth will slow, but it won't fall off a cliff.
Quickly: automation is outstripping human common sense.
Content: Two cases are relevant. 1) Google's dissemination of old United Airlines news resulting in a precipitous UAL stock slide, and 2) exotic, computer-generated financial instruments leading Wall Street into fatal waters.
What happened? In the first case, a system unchecked by human beings made a mistake resulting in massive damage to an already fragile public company. But that's nothing compared to the wreckage caused by the inscrutable mortgage securities.
My father was a part-time banker who loved to extol the virtues of what he called "small town banking." It was all pretty simple: his bank took deposits and loaned that money to people whom the bank officer had gone to high school with. This was important, because bankers are not the highest IQ animals on the savanna -- they needed good doses of trust and information to sleep at night.