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BRAINSTORM

Tech's leaders see a turnaround

By David Kirkpatrick
FORTUNE.COM


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(FORTUNE.COM) -- It's getting hard to deny the signs that the IT industry is starting to emerge from its torpor.

This was evident at last week's Software Innovation conference hosted by the RVC venture capital firm here in New York. I moderated a panel on the industry big picture, and the panelists agreed that things are looking up.

Pat Kenealy, CEO of International Data Group, noted that his IDC research subsidiary had called a turn in the IT market early this summer. A top Wall Street technology manager (who is cautious about being quoted publicly) agreed, estimating that the change came around May or June. He thinks spending on IT is starting to grow substantially across Wall Street.

Then panelist John Taysom, an RVC partner who invests in many enterprise-oriented software companies, observed, "Companies in our portfolio are now getting multi-million-dollar contracts, where before they were struggling."

Everyone was eager to emphasize that what we're seeing from enterprise customers, in contrast to the recent swoons of investors gazing fondly at e-commerce stocks, is nothing like the go-go days of the late '90s. "A gentle tide is moving up from the bottom," said Kenealy, who has a touch of the Irish poet in him.

The next day a few of us from FORTUNE spent an hour with Intel CEO Craig Barrett, closely followed for his oracular utterances on the state of high-tech. Referring to statements the company has made publicly, he said, "We're not ready to declare a recovery but undeniably we see good growth around the world, especially in places like China."

Then this week I met with Bob Hagerty, CEO of Polycom, which makes voice and video-conferencing gear and is just out with some cool new products. He's acutely attuned to the capital budget trends of corporations. Despite seeing a burst of business in the travel-averse times since September 11 and the SARS outbreak, he says that tight business spending remains a restraining factor.

But he delivered the same message as Barrett and the panelists: "Capital budgets have stabilized and are starting to crawl back up in the U.S. Of course in Asia it's been strong for the last 12 months. We don't sense spending constraints there now."

All this talk about China brings me to another related question--whether or not the IT industry is "mature." It's become somewhat trendy to pronounce that it is, with Oracle's Larry Ellison speaking loudest.

But what does it mean for an industry to be mature? That its growth rate slows to something like what consumer products or steel or autos or other sedentary 19th-century-type industries are used to? That new entrants have a tough time getting in the game? Those are the usual definitions.

When I hear Larry talk about industry maturity I really wonder what planet he's living on. Maybe he's just not thinking hard enough about that planet. I wonder what he thinks when he sees articles like the one in Monday's New York Times on Huawei, the Chinese telecommunications and networking equipment phenomenon.

The article reports that Huawei's Chinese sales rose by one-third in the first half of this year, and that its international sales this year will roughly double to $1 billion. And that's less than 25 percent of total revenues, according to the private firm. Admittedly its numbers are a bit mysterious, but nobody doubts that Huawei is surging.

It is inconceivable that IT as an industry has achieved the stasis that the word maturity connotes. It very well may be that many of the U.S.-based giants that currently dominate IT will be unable to grow rapidly anymore, partly because of their sheer size, though a resurgence in corporate spending is clearly to their benefit. But those companies do not by any means constitute the entire industry. And the business of big companies can be cannibalized.

Huawei is not alone. China's PC giant Legend is increasingly on the radar screens of Dell and others, and has announced an aggressive intention to expand internationally. And India's global software players Tata, Infosys and Wipro, among others, are growing rapidly, too. Granted, none of these companies approach IBM or even Oracle in size, but they wouldn't be burgeoning if the industry were really mature.

It may be that the locus of the industry will disperse, and U.S. companies will not dominate in ten years nearly to the degree they do today. Another factor that could dramatically bolster the decline in U.S. corporate influence is the growing adoption of open source software, controlled by no company and generating minimal revenues for anyone. But major new players could still arise and take significant market share.

The tech industry is a strange animal. It morphs before our eyes. It cannot really be compared to any industry that has come before it. Companies don't stay put in the competitive constellation. For example, there is growing competition between AOL, part of CNN's parent company AOL Time Warner, and Amazon, eBay, Google, Microsoft, and Yahoo over control of e-commerce. They were in separate niches before, but with the complex and unpredictable ramifications of headlong change in networks, software, and systems, they are increasingly in the same game.

The IT industry is emerging from its torpor, but the parameters of the industry never stay the same. Don't assume that the same old players will be the ones who benefit long-term.

Questions? Comments? E-mail them to me at dkirkpatrick@fortunemail.com.


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