special report: high-tech boston
10 trends that may lead to a comeback
The Boston boomlet era
By Scott Kirsner, Globe Correspondent
It's deja vu, all over again.
The most recent boom and bust in the Massachusetts tech sector feels very familiar to those who have lived through previous cycles. But somehow, amid the froth and frenzy of the dot-com days, many wondered if perhaps the dusty history of tech sector booms and busts had lost its relevance.
That didn't prove to be the case.
``This wasn't different at all from the glory days of Wang and Data General and DEC and all the other mini-computer companies that soared in the 1980s,'' says Dan Nova, a venture capitalist at Highland Capital Partners whose first job out of college was as a salesman for Wang. ``[At Wang], there was extreme euphoria, supreme confidence in what we were doing, and then a rude awakening. We've seen the same thing here in the late 1990s and early part of the 2000s.''
``There was an enormous amount of fantasizing in terms of how quickly the world can change,'' says Ray Stata, chairman of Analog Devices, a Norwood-based semiconductor maker. ``We bought into a notion that all the barriers to growth and [technology] adoption had suddenly been eliminated.''
Alex D'Arbeloff, a founder of Teradyne and chairman of MIT's board of trustees, says the fate of many technology companies over the past 18 months reminds him of what Teradyne, a maker of semiconductor testing equipment, suffered through in 1970. ``We went public at $25 a share in April of 1970,'' D'Arbeloff recalls. ``The stock went to $39, but by December of 1971, it was at $5. Our orders just stopped.''
So what's different about this latest downturn?
Its suddenness and steepness, for one thing. ``I think we're in a very serious situation,'' says John Cullinane, the founder of Cullinet Software, the first software company to be listed on the New York Stock Exchange. ``I see people tightening belts everywhere, and hunkering down for the hard times.''
``I've never seen so many technology companies in so many sectors so severely impacted,'' says Andy Miller, CEO of the public relations firm Miller Consulting Group, which specializes in technology. ``It was a huge tsunami that rolled over everything, and we're awash in the wake of it right now. Nobody knows where to go.''
But another important difference, according to some observers, is that the Massachusetts tech sector is more diversified than ever. Among those that have survived this latest extinction-level event are makers of networking equipment, data storage firms, technology services and consulting businesses, software manufacturers, defense contractors, robotics developers, chip-makers, and wireless communications concerns.
``A [region] with bets all over the table, on lots of different technologies, is a healthier region,'' says Ross Gittell, an economist at the New England Economic Project. ``And right now, we have a more diversified set of high-tech companies than we've had in the past.''
The tech community is absorbing the lessons of the dot-com era. Industry veterans expect to see startups formed over the next few years that are more disciplined and will grow more slowly. They posit that the tech community will be oriented around multiple ``boomlets'' - promising technology niches that might profitably support five or 10 companies - rather than one massive boom like the Internet, or mini-computers before it.
``I think we'll see a lot of little booms [over the next few years],'' says Gururaj ``Desh'' Deshpande, chairman of Sycamore Networks in Chelmsford. ``Innovation hasn't stopped. In the next ten years, the world will create as much innovation as we had in the last hundred years.''
The advent of the Web and the funding of so many companies to take advantage of it was a ``once every 50 years kind of thing - or maybe even longer,'' says Shikhar Ghosh, chairman of the Massachusetts Software & Internet Council and CEO of the Burlington software company Verilytics. ``People waiting for the next big thing are really going to be disappointed,'' Ghosh says. ``I think the theme [for the next several years] will be a lot of worker ants working on smaller problems over longer periods of time.''
An era of technology boomlets will be driven by the same forces that made Massachusetts a fertile environment for the inventors of the telephone, radar, and the time-shared computer: the intense amount of research and development activities supported by universities and corporations. ``We rank high in all of the measures of innovation,'' says Joyce Plotnick, president of the Massachusetts Software & Internet Council. ``It all comes down to brainpower: patents per capita, college graduates, venture capital. We rank at the top in all of those.''
No one is willing to handicap the odds that one of the nascent boomlets in Massachusetts will produce the next wave of public companies, but several promising companies are active in areas like advanced speech recognition; robotics; broadband Net access that is easier and less expensive to install and maintain; implantable medical devices; biometric systems that recognize individuals based on their fingerprints, faces, or voices; and, mini-generators that would replace batteries in portable devices like laptops and cell phones.
There's a widespread sense that some of the toughest companies have gotten their start in bleak times, boding well for companies being launched now. ``Those few [companies] that get started over the next 12 months will probably have a high-caliber idea,'' says Deshpande, who started Cascade Communications in 1990, during a full-blown recession, with just $125,000 in seed money. The company was sold seven years later for $3.7 billion.
``Lots of the great companies we know of today, like Cisco, Sun, Oracle, EMC, Cabletron, were all formed and went through the valley of death in the late 1980s and early 1990s,'' says Nova. ``If you look at what defines those companies, it's great business practices, and discipline. They were not born during a go-go era.''
The boomlet era could also be characterized by tighter relationships between technology companies and their customers. Many dot-coms were run by jingoistic pioneers developing an exciting new product or service without much concern about the eventual market.
``We've seen a lot of what I call `push phenomena' in the past, where the tech world said, `Here's the minicomputer' or `Here's this wonderful new software package,' '' says Gary Beach, the publisher of CIO Magazine in Framingham, a technology trade magazine. ``In the future, we'll see more demand-side revolutions, where users and customers say, `This is what I want.' ''
Forging closer connections to the markets they serve is something Massachusetts technology companies understand better than their Silicon Valley counterparts, according to John Cullinane. ``We have lots of people here who are good at creating technology, and lots of hospitals, banks, and other institutions who are very good at using technology,'' Cullinane observes. ``We don't create technology in a vaccuum.''
But Cullinane says that just as his software company, back in the 1970s, was forced to jump through hoops to prove the value of its product, so too will today's tech companies. ``We've seen tremendous cutbacks in [corporate technology] budgets, as we saw in the 1970s,'' Cullinane says. ``You have to show how you're going to give them more bang for their buck, and produce more results with fewer people.''
Most of Massachusetts' biggest technology success stories, such as Lotus, EMC, Teradyne, and Wang, have had their roots in serving big corporate customers, not individual consumers. On the other hand, some of the highest-profile failures of the Internet era were companies like the entertainment site iCast and the online retailer Furniture.com, which tried to target consumers.
Dan Bricklin, the co-inventor of the electronic spreadsheet and currently chief technology officer at Trellix Corp., predicts that the next phase of growth in the state will be driven by ``boring but pragmatic back-office type stuff like provisioning of cellphones and doing nutrition calculations for hospitals.''
Supplying technology to large companies doesn't insulate vendors of technology from bumps - or gaping ditches - in the road. But according to David Hayes, chief executive of the Boston staffing company HireMinds, many of the jobs he's currently looking to fill are at technology companies ``that have deep customer relationships with established companies, not the ones with the sexiest technologies.''
At Fidelity, chief information officer Don Haile concedes his technology spending in 2001 has been curtailed. But he says the company is very interested in new systems that can reduce costs, and also more futuristic methods to make it easier for customers to execute trades and get information from Fidelity.
On the cost-cutting front, Haile is exploring an IBM product that can reduce by 50 percent the amount he spends to back up Fidelity's massive databases. On the forward-looking front, the company recently announced a partnership with GM's OnStar service to enable stock trading from OnStar-equipped automobiles. And Haile says, ``I think other kinds of wireless and wearable technologies - pervasive computing - will drive a lot of the technology industry. We're in the infancy of this game, and we want to be in on it early.''
Just as technology buyers like Fidelity are dedicating at least some energy to thinking ahead, makers of technology are also struggling to maintain a reasonable level of investment in research and development. ``It's important to line things up so that when people start buying again, you have the best hot dog,'' says Deshpande at Sycamore.
``You've got to keep yourself moving, even when things have slowed down,'' says D'Arbeloff. ``In 1970, Teradyne had negative order input for five months. We had more cancellations than we had new orders. And what we did was work on new products that started moving in 1972. My advice to companies right now is spend money wisely and develop the new technologies that will be hot a year and a half from now.''
Ray Stata of Analog, whose third-quarter profits were down 80 percent compared to the same quarter in 2000, says that the soft market hasn't caused him to pull back on research and development.
``We're full steam ahead on the engineering side,'' Stata says.
``About 24 percent of our sales go into R&D, and we're not cutting the staffing there. In fact, we're selectively adding. We're moving ahead with the belief that we're serving markets that are for real, and that will come back in the not-too-distant future.''
Stata's only worry about a potential weakness in Massachusetts tech sector is echoed by a number of others: that the state won't produce enough college graduates with science and engineering degrees to support future growth.
``We're seeing fewer engineers being graduated today than there were 15 years ago,'' Stata says. ``We've depending increasingly on H-1B visas [which allow skilled foreign nationals to work in the US when it can be proven that no native-born workers are available] to fill the ranks. And we're increasingly forced to go to Wales, Scotland, India, China - wherever there are engineers - and set up design shops.''
Gittell, the economist, agrees that workforce development will remain a central issue: ``You can't take your eye off the ball on that,'' he says. ``You need to maintain education funding.''
The more optimistic technology entrepreneurs and executives believe their industry has already decelerated to its slowest pace this time around, and things will start to speed up by early 2002. But others are emphatic that the post-Web pause could last longer.
``I don't think we'll see a significant recovery any time soon,'' says Gittell. ``For [Massachusetts and New England] to recover, we need a recovery in business investment nationally and internationally. It's frustrating, but that's the reality of the global marketplace.''
``This isn't like, `Oh, yeah, this will last six months and then we'll have some other grand thing to bail us out,' '' says Cullinane, now president of the Cullinane Group, an investment firm. ``I think [people who expect a rebound in the first quarter of next year] are whistling `Dixie.' ''
But the optimists even see a silver lining in large-scale layoffs or company closures: Both can spark the creation of new companies. These fresher start-ups are often better positioned to take advantage of emerging technologies, new customer needs, and an altered business environment.
``When Digital and Wang and Prime Computer went away, the conventional wisdom said that innovation in Massachusetts would just stop,'' says Hayes at HireMinds. ``But what happened is it freed up all this intellectual capital that went and started up all these new companies.''
Hayes expects that pattern to repeat itself with the castoffs from dot-coms as well as bigger companies like EMC and Lucent.
While the economy may take longer to rebound than the optimists hope, and while the procession of layoff announcements and bankruptcy filings may not have reached its end, nearly everyone interviewed for this story pointed to some promising new technologies percolating in research labs or at local startups. ``There's a lot happening in wireless and bioinformatics, or researchers trying to get a quantum leap in semiconductor performance,'' says Miller.
Stata says that the full promise of always-on broadband access has yet to be realized, and notes that ``in Japan, they're already putting video on their cell phones.'' Ghosh says the Internet has made so much information readily accessible that many new innovations are needed to help people filter and use it productively.
Some of those boomlets could spawn large successful companies, and some could prove dead ends. Regardless, as a result of the dot-com experience, technology entrepreneurs and investors in Massachusetts now have a different sense of the pace, and the degree of difficulty, of building the next generation of tech giants. ``These days, entrepreneurs and VCs alike have a more reasonable, rational, long-term perspective on value creation,'' says Nova.
``Companies are getting back to fundamentals. You need to ask, `What are we really good at? What do our customers really need?''' says John Cullinane. ``You have to slug it out, day in and day out. The world isn't over. It's just different.''
Scott Kirsner is a contributing editor at Wired and Fast Company. He can be reached by e-mail at firstname.lastname@example.org.