Devil's Advocate: Blind optimism

Stock markets, tech sales, software licensing - all these must pick up soon, right? Martin Brampton isn't so upbeat, despite the subject of recent columns...

Think of my subjects& Microsoft making record profits but the money maybe leaking away to the open source movement. My mailbox full of investment advice about which stocks to sell. Analysts recommending buyers to take advantage of vendor weakness to secure bargains in software. And some even people talking about the start of a new upturn.

Are they premature? In amongst the rival pitches to sell advice on which companies are headed downwards, a few optimists are claiming there are investment bargains to be had. Perhaps they are right but the economic signs are still pointing to weakness in the major economies. It is as well to remember again the plight of Japan.

The Japanese stock market has done nothing but move sideways for the last 20 years. There have been dips, which have prompted talk of buying opportunities. And there has been the odd surge, provoking talk of the market pushing towards new heights. But every movement has quickly petered out, leaving few gains worth speaking of for the average investor.

Alarmingly, the Japanese economy as a whole has fared no better. Consumers are set on saving rather than spending, despite zero interest rates for depositors. With prices falling slowly, there is little incentive to spend rather than wait for lower prices. Demand is lacking, leaving the economy stagnant.

For the moment, we seem to still have a boom mentality, despite the catastrophic falls in technology stocks. That old British standby - house price inflation - is making many people feel financially secure. Yet, it is not long since the recession of the early nineties left shoppers unwilling to buy anything that was not heavily discounted.

Bargains in software are worrying for the pessimists amongst us. It is hardly any time since technology was described as causing a dramatic improvement in productivity, especially in the US. Now, that shift is suspect. As the accounting scandals unfold, the reality of the productivity gain is looking doubtful. Nonetheless, many still think that information technology is now the bellwether of the modern economy.

Hunting for bargain software is all very well but expecting prices to fall can easily become a habit, as the Japanese example shows. Frequently, as we have discussed before, there is a tendency for technology buyers to be followers. They try to buy the market leader, holding back until a vendor emerges as leader. Then, they bemoan the lack of competition.

Collective behavior that waits for prices to fall can easily become self-fulfilling. The vendors struggle to cut costs and launch campaigns based on low prices just to stay in business. In the short term this may work but the likely outcome is poor support and reduced development effort. Once the idea that prices are falling has caught hold, buyers will continue to expect further falls, creating a downward spiral for many vendors.

A vicious twist to the spiral is that small vendors are most affected. We can afford not to shed tears for the large vendors forced to tighten their belts. But very often, the critical innovation and competition in the technology market comes from small companies. Without them, software is liable to be expensive and lacking real originality.

Now and again a new company, created on the back of a technical innovation, grows into a large and prosperous organisation. More often though, the objective of the people who work to translate novel ideas into commercial success is to sell out to a big company or to float on a stock market. In the latter case, the company is usually too small to escape the predatory interest of a large technology company, and quickly disappears.

So, it is much too soon to be optimistic about the start of a new boom. Of course, the most intriguing potential comes from open source. Could a completely different model of software development lead to technological innovation and economic gain without being vulnerable to the boom and bust business cycle?

Let silicon.com know by posting a Reader Comment or email Martin directly with your thoughts.

** Martin Brampton is a director and founder of Black Sheep Research (www.black-sheep-research.co.uk ), an independent consultancy providing research, writing and speaking services on a wide range of business and technology subjects. Martin was previously a director at Bloor Research, and has worked with IT as a user and analyst for over 20 years. He is a frequent contributor to silicon.com's Behind the Headlines TV programme and can be contacted at silicon@black-sheep-research.co.uk .