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The Coming Tech Shakeout ... and Why It Isn't Bad

You can't have an industry without income, and the smaller the income, the smaller the industry. By that measure, anyone with something to lose in the technology industry should be nervous when looking at the revenue generation front. It's grim -- a lot more so than many companies are openly admitting. Ironically, that isn't all bad, because we're in the middle of seeing a massive rightsizing of spending, companies, and expectations.

The tech industry needs a dietFirst let's deal with the grim parts of the news. On the consumer front, retailers are the real sign of conditions, and the portents are dark. A number of industry experts are coming out with stories so disheartening that they would be enough to empty a convention of cardiac specialists.

About 160,000 stores will have closed this year and 200,000 more could shutter next year, said Burt P. Flickinger III, managing director of consulting firm Strategic Resource Group. That would be the industry's biggest contraction in 35 years. In March and April of next year, Flickinger expects 2,000 to 3,000 malls to shutter.
If you exclude oil and automobiles, sales dropped between 5.5 percent and 8 percent from November 1 through December 24 year over year. Electronics and appliances sunk almost 27 percent, according to SpendingPulse, a division of MasterCard Advisors.

That data is based on all payments through the MasterCard network as well as estimates of other channels. Perfectly representative? No. Close enough that you have to take it seriously? Yes. In addition, the numbers are worse than on their face, because so many retailers cut deeply into prices in an attempt to stimulate spending. Unfortunately for them, you can't convince consumers to spend what they don't have and cannot borrow. As further proof of the mindset in which people find themselves, consumer confidence hit an all time low in December. At 38, it was down from November's revised 44.7 figure, according to the Conference Board. Home defaults are rising, house prices are dropping, jobs are getting axed, and people don't have the resources to keep spending at the rate they once did. Staging post-season sales "that are exceeding Black Friday in their intensity" won't change that fact.

As for businesses, businesses cannot easily borrow and are cutting budgets and staff right and left, because executives think that the next few years could be rough. CEO confidence is almost as low as that of consumers. Investors have so little confidence in the near-term future of business that the price of oil can barely stir even with full-blown fighting in the Middle East. Semiconductor companies are already heavily reducing production plans and Web content sites are expecting 50 percent revenue slowdown.

As I said, grim. But businesspeople must be careful about being as deluded by the slowdown as they were by various business bubbles. The reduction is real, but it's a scaling back of what shouldn't have been there in the first place. To fuel industrial growth by nothing more than unsupported borrowing is to put troubles off until later. Now later has finally come along. Now is a chance for companies to get themselves in order. (Can you believe that a vice-president of Fry has been arrested for embezzling more than $65 million from the company? How could they and their auditors have not had a clue?) Investors can rescale their expectations, and the industry as a whole can become more realistic. Instead of viewing success as the ability to run up share numbers and dump them off onto someone else, perhaps we can return to measuring what the company actually does, and not how a group of emotionally-driven gamblers, otherwise known as stock purchasers, are feeling on a given day. What we need is an industry diet. Some companies will disappear, and with them, their jobs. But smarter companies will become more resilient and efficient. The question is what is more important: moaning about problems, or finding a way to get beyond them, now and in the future.

Dieting image via Flickr user bensonkua, CC 2.0.