Despite the Lean Times, Tech Firms Still Investing in the Future

The most devastating decline in technology stocks in decades isn’t stopping tech companies from investing in the future.

Intel is increasing expenditures for plants, equipment, research and development this year, despite a poor year for earnings. The big semiconductor company is following a dictum of its co-founder, Gordon Moore, that “you must spend your way out of an economic downturn because you don’t get healthy on old products.”

JDS Uniphase--a much smaller company, but the world’s No. 1 producer of light-wave, or optical, components for Internet networks--is also increasing spending this year. JDS is doing so to keep up with demand for its products, which continues strong despite a famine of orders in most areas of technology.

Experts in Silicon Valley do not deny the economic slowdown. On the contrary, most see a troubled 12 to 15 months ahead for companies in electronics, computers and Internet-related businesses.

But having experienced bad times before, veteran venture capitalists take the long view.

“Although stock market indexes are dropping to ankle level, there is little reason for gloom about the long-term prospects of U.S. technology firms. Progress has not stopped. Invention has not ceased,” says Michael Moritz, partner in Sequoia Capital, a venture firm in Menlo Park.

“Technology marches ahead. It has no clue whether we’re in a bull or bear market,” says Andy Kessler, head of Velocity Capital Management, a Palo Alto investment firm.

In the newer technology industries, whatever is happening today has happened before. Loud predictions of “the end of Silicon Valley” and questions about the value of technology companies have accompanied previous downturns. Prominent companies have faded as new stars have emerged.

It is a world in flux, and that is why stock prices are so volatile. But there are steadier underlying trends in which, even today, venture capital firms continue to fund small companies and real advances continue to be made.

The creation of a new Internet communications structure goes forward at a rapid pace, with scores of companies developing optical components and systems to send information via light waves, or photons, rather than electrons, which are slower. The problem is that the long-distance or city-to-city Internet has been built before local Internet connections are in place and functioning. So progress is at a pause.

“The optics business has slowed to a 30% annual growth rate from a 100% annual rate for the last four years,” says James Jungjohann, an investment banker with CIBC World Markets.

Consequently, technology’s next steps are obvious, entrepreneurs and financiers say: Devices and processes to connect the Internet to homes and offices. New uses for the Internet will develop as those “last-mile” connections are made.

Wireless is emerging as a solution. A new telecommunications standard called 802.11b, which facilitates wireless Internet connections to homes and offices, is helping users bypass telephone companies, reports Bharat Sastri, founder of HelloBrain.com, an online technological information exchange. The phone companies have been slow to bring reasonably priced broadband Internet service to their customers.

Products are already on the market. Agere Systems, a new company partially spun off in March by Lucent Technologies, makes circuitry and antennas based on the 802.11b standard and is shipping them in volume.

Lucent, itself a result of the spinoff of Western Electric from AT&T;, is undergoing a massive reorganization after falling behind competitors in product development, incurring losses and large debt burdens. Lucent didn’t skimp on research investment, analysts say, but Internet products it chose to develop proved less successful than those of competitors Nortel Networks and Cisco Systems.

But that’s the way it is in these downturns.

“The deck gets reshuffled in every downturn. Successful companies are preparing now to gain position in the next upturn,” observes Floyd Kvamme, a partner in Kleiner Perkins Caufield & Byers, a venture firm in Palo Alto.

Intel is doing just such preparation. Coming off a year in which the electronics leader suffered delays and disappointments in product development, with earnings falling and the stock price down 63% from its all-time high, Intel is stepping up investment because it needs to change.

The company’s microprocessors--”Intel Inside”--dominate the personal computer field. But computing is shifting to mobile phones, hand-held computers and Internet communications. Intel is developing optical switches and other products geared to the Internet, but hasn’t been able to bring them out yet.

Its investments and efforts to change stem from having been there before. Intel saw U.S. firms cut back on investment in the downturn of the 1970s and lose the market for memory chips to Japanese competitors. Intel itself almost went under in 1982 and was saved only by an equity investment by IBM.

Now Intel is strong--almost $34 billion a year in revenue and $14 billion in cash assets. But it is trying to reform while it can, not sitting on past glory.

Young JDS Uniphase is investing because it must try to stay ahead of the competition in a fast-moving field.

The lesson is that technology goes through cycles and the victors in one era can lose in the next.

Radio Corp. of America, or RCA, was the driving force of radio and then television, but failed to make a transition to electronic computing and communications and lost its independence. Motorola did make that transition and became a global power in communications and electronics.

Other lessons include the fact that technology takes a long time to become fully commercial.

Regis McKenna, whose marketing innovations brought Silicon Valley firms to national attention, points out that it took decades from the invention of the transistor in 1947 at Bell Labs to Intel’s microprocessor powering personal computers.

And it took 25 years from the Defense Department’s development of the Internet in 1969 to the founding of Netscape Communications with its Web browser in 1994. The Internet still is far from commercially developed.

Longevity is no guarantee of survival, but adaptability can be. Xerox never successfully adapted to changes in information technology and is now an endangered company, harried by competition and burdened by huge debts.

IBM, by contrast, started out behind in the computer industry after World War II, but invested steadily. By the 1960s, it swept away competition from Burroughs, General Electric, RCA, Honeywell and others.

Then IBM adapted to the age of the personal computer and when it lost ground to changing technology there, it changed again to emphasize computing and Internet services. It remains today a successful global company and a technology leader.

“Very few companies can last two or three cycles, much less a century,” notes William Davidow of Mohr, Davidow Ventures of Menlo Park.

Finally, predictions about technology are hazardous. In the recession of 1919, after World War I, Forbes magazine asked on its cover whether the market for automobiles, then a craze momentarily cooling in sales, had reached saturation point.

Products and trends to watch for in the next cycle: voice-recognition technology to operate phones and computing devices without push-buttons and keyboards.

“And breakthroughs to deliver video on the Internet as Napster now delivers audio,” says Kessler of Velocity Capital.

Even in bad times, as the fellow says, “invention has not ceased.”

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James Flanigan can be reached at jim.flanigan@latimes.com

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First Steps to Change

Companies and society often take years to adopt inventions and innovation, as is illustrated by history:

Printing press, circa 1450 By 1500, an estimated 30,000 titles had been published in Europe, leading to an information revolution that continues six centuries later.

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Telephone, 1876

American Telephone & Telegraph incorporated, 1885

* By 1939, AT&T; controlled 83% of all U.S. telephones and manufactured 90% of all U.S. phone equipment.

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Model T, 1908

Henry Ford introduced assembly-line production of the Model T. About 15 million had been produced by the late 1920s, making cars accessible to the average American.

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First powered flight, 1903

DC-3, first successful commercial airliner, introduced, 1935

* The Wright brothers’ 57-second flight at Kitty Hawk opened the door to commercial flight, jets and the space shuttle.

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Television, 1927

By 1951 there were about 15 million TV sets in the United States, up from 1.5 million the year before.

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ENIAC, Electronic Numerical Integrator and Calculator, 1946

Apple II introduced, 1977

* ENIAC and the Apple II revolutionized computing.

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Transistor, 1947

Intel founded, 1968

* The world’s first microprocessor, Intel’s 4004, was introduced in 1971.

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The Internet, 1969

Netscape founded, 1994

* Netscape’s graphical interface led to an explosion of Internet use more than two decades after the first computer was connected to the ARPAnet, the precursor to today’s Internet, in 1969.

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Sources: “International Directory of Company Histories,” “The Timetables of History,” Britannica.com

Researched by NONA YATES/Los Angeles Times