» Business » Shadows in the Valley

Shadows in the Valley

By Wendy Tanaka, Forbes
October 10, 2008 15:19 IST
Get Rediff News in your Inbox:

The highways that lace up Silicon Valley are still crowded during the morning commutes. Housing prices are still steep by national standards. And although stocks are down, technology companies have not yet plummeted to the "drill-bit" values--literally pennies--that wiped out so many start-ups during the dot-com bust.

But Silicon Valley is getting nervous.

In pictures:
How to avoid online auction scams
Meet the billionaire inventors

The 1,000 jobs cut by eBay Monday begged the question, who's next? Beleaguered Yahoo!, which spent six months fending off a takeover bid from Microsoft, is said to be mulling a few thousand layoffs. Tech observers say cuts from other Valley giants wouldn't be surprising either.

In pictures:
The Web billionaires

Kevin Freedman, chief financial officer of Slide, a Web applications developer in San Francisco, says eBay's job cuts are "potentially telling from a big company perspective." Freedman, a former director of finance at San Jose, Calif.-based eBay, notes that big Valley companies likely will "limit hiring and potentially ... do what eBay did."

The witch's brew of internal problems, the weakening economy and the banking crisis could produce a swell of bad news from Valley companies over the next few weeks as they report earnings.

As the banking crisis has darkened over the past few weeks, tech companies have begun issuing warnings that their third-quarter results will contain little to boast about. Microsoft's Steve Ballmer admitted that the software giant isn't immune to the economy's slowdown. On Monday, movie rental company Netflix said the number of subscribers in the third and fourth quarters will be lower than it had previously forecast. The Los Gatos, Calif.-based company will report third-quarter earnings on Oct. 20.

"We'll probably see lower revenues, which works its way through the system in the form of lower stock prices, lower head count," says Hank Barry, a director at Howard, Rice, Nemerovski, Canady, Falk & Rabkin.

Although many corporations have invested in risky financial instruments, such as derivatives, Barry says tech companies tend to be conservative investors and likely won't produce many surprises on this front in their earnings.

"Valley companies tend to be pretty plain vanilla in treasury functions," Barry says. "For the most part, tech companies use cash to make strategic acquisitions not to speculate with. They're not looking to it as a profit center."

Although eBay's job cuts were due primarily to sluggish growth in its core auctions business and Yahoo!'s expected layoffs could be attributed to mismanagement, the economy and banking crisis likely will compound any simmering problems within companies.

Technology companies that sell primarily to other businesses began bracing themselves for a slowdown a few months ago when they saw clients in the financial sector begin to rein in their spending. Citigroup analyst Brent Thill says Microsoft and Oracle have been recalibrating their businesses accordingly to avoid surprises.Thill notes that Microsoft has already said it expects revenues to grow 12 per cent this year versus 18 per cent last year. "They're already baked in the slowdown," he says.

If consumers stop spending, tech companies that make and sell gadgets and other items will take a hit. And a slowdown in spending could spell lower online ad spending. Even Internet ad giant Google isn't safe. "The gauge for Google is, will consumers cut back on their spending?" Barry says.

Tech start-ups aren't safe, either. Gawker Media, anticipating an advertising slowdown, last week axed 19 workers from its staff of 133. The company operates a number of blogs including Valley Wag and Gizmodo. Venture funding is likely to get tighter, too: a quarterly survey from the University of San Francisco Entrepreneur Program shows that VC confidence is at its lowest level since the survey's debut in 2004.

The Valley, however, doesn't appear to be headed for a big downturn reminiscent of the dot-com crash earlier this decade. According to California employment data, the Valley lost nearly 180,000 jobs from 2000 through 2004 from a tech workforce estimated to be nearly 1.3 million in 2000. The rebound started in 2005. From 2005 through 2007, the region added 51,000 jobs. From this past January until August, the Valley added 7,400 jobs.

But the year isn't over yet. We've got one more tough quarter to go. It will be a miracle if the Valley can keep adding jobs.

Get Rediff News in your Inbox:
Wendy Tanaka, Forbes
Source: source

Moneywiz Live!