Silicon Valley May Boom Again

Business Week has a relatively upbeat assessment of Silicon Valley's future.

Valley veterans also are quick to note that Silicon Valley is still where the venture-capital community is putting its money. In 2003's second quarter, 33.6% of the country's VC funds went to Valley startups, two points higher than its share in 1996. Venture capitalists, beaten and bruised though they may be, haven't gone away. "Silicon Valley occupies the same central place that it always has" with investors, says John Doerr, a partner at Kleiner, Perkins Caufield & Byers.

Silicon Valley faces problems in part due to a more general skepticism toward tech buying. Information technology buyers have become more reluctant to buy from new small companies which face poor odds of long term survival. They also have tired of buying buggy products that do not turn out to provide much return on investment.

But let's be clear: There will be no return to the frothy foolishness of the boom. With the weak economy, global unrest, and lingering skepticism by buyers, tech spending will probably recover to a modest 6% or so next year, and just shy of its 10% historical average in 2005. The biggest problem: Many IT buyers refuse to purchase anything that won't guarantee a return in six months. "There's a big backlash against technology and a lot of skepticism about what it can do," says technology consultant and author John Hagel III.

Another reason to be optimistic about the amount of future demand for technology is that past spending may turn out to provide bigger benefits than the skeptics have been claiming.

A recent study by Massachusetts Institute of Technology economist Erik Brynjolfsson and University of Pennsylvania's Lorin M. Hitt says the biggest gains come five to seven years later. If true, last year's 4.8% productivity surge traces to investments made in 1997 or before. And that would mean big gains from the late-'90s technology spendathon are still coming.

Moore's Law and similar patterns of advance with fiber optics and disk storage continually drive up the power of computers. Applications that previously were not feasible come into the realm of the economically possible. In a competitive environment companies have to continually try to develop new ways to cut costs and the steadily advancing power of computers make them the tool of choice for developing means to cut other costs. Therefore they have to invest in IT or be beat by other companies that will make the investments.

The real wild card for American and other Western IT industry workers at this point is just how much IT work can be outsourced to India and China? Also, as IT becomes such a large portion of total budgets it becomes inevitable that IT itself becomes a target for cost cutting and companies will look to automate the work that IT workers do.

Posted by Randall Parker at August 11, 2003 10:14 AM