MPR: The Not-conomy

The Not-conomy
By Jon Gordon, Minnesota Public Radio
October, 2001

Technology business led the way in the long boom of the 1990s. But the long boom is now looking like a big bust. The dot-com collapse the and the broader economic slowdown have taken their toll on the tech economy, and the September 11th terrorist attacks seems likely to make a bad situation worse. Economists say even though some Twin Cities firms might benefit from a war on terrorism, the area's tech sector will suffer if consumer and business confidence falls.

Ed Driscoll, co-founder and CEO of Twin Cities data services firm Wam!Net, expects business to pick up as an indirect result of the September 11 hijacker attacks. "The information technology services sector is going to be very busy the next couple of years," said Driscoll. Listen to his comments.
(Photo: Wam!Net)

Even before the terrorist attacks, many Twin Cities Internet and computer services companies were hurting. Customers were harder to come by, capital dried up, losses mounted, and profits were a distant hope. Now things looks even worse. Dan Rybeck of the Twin Cities e-commerce consulting firm, ASI Associates, says the events of September 11th exacted a toll. "It's added a new level of instability. Certainly I think all of us are being much more sober in terms of our assessments of the next few quarters or even into the next year," Rybeck says.

Falling consumer confidence could have a devastating effect on Twin Cities tech companies that were already in the dumps, like e-commerce firm NetPerceptions. NetPerceptions has lost $114 million so far this year, and laid off almost half its employees. Telecommunications equipment maker ADC recently cut some 2,000 employees from its Minnesota workforce, and has seen its stock drop precipitously.

If consumers and those who make purchasing decisions for businesses feel squeamish, companies like ADC and NetPerceptions could be hit even harder.

But even as some companies face dark times, some firms are finding silver linings. Data management company Wam!Net has been on the ropes, losing more than $500 million since 1994. But CEO and co-founder Ed Driscoll says his firm, which helps companies store and transport critical data, could see its fortunes improve as businesses discover the importance of protecting information.

"This unfortunate event has focused people on the need for redundancy, for disaster recovery, for backup infrastructures, and anybody that's providing those types of services are going to be very busy," Driscoll says.

Wam!Net's fortunes were improving before September 11th. It scored a new round of financing that allowed it to maintain a $950 million contract to build computer networks for the military, including at the Pentagon.

When American Airlines flight 77 crashed into the Pentagon, many of the computers Wam!Net had already connected were destroyed. Driscoll says the networks themselves survived the attack, and there was no data lost.

"We're beginning to see consumers really pull back," says University of Minnesota economist Ann Markusen. "That will have a negative reflection back on business investment.

Greater awareness about protecting data could also help Plymouth's Computer Network Technology - CNT - which helps companies backup their computerized information so they can survive disasters. Brian Larson, senior director of product management for storage network products at CNT, which employs about 700 people, expects the terrorist attacks could bring in more customers. "We're in a wait-and-see mode right now, but it could definitely have a positive impact to our overall revenue streams," Larson says.

The revenue may also flow at companies that make high-tech security products. "We have received a deluge of inquiries, as well as orders, as well as immediate requests to provide assistance, information, as well as design," says Joseph Atick, CEO of Visionics, a Minnetonka-based company, which makes systems that identify people by facial characteristics or fingerprints. "It's been from airports in the United States, as well as agencies in charge of security in general in the United States, but also from airports as far out as Thailand, Indonesia and other places in the world."

Visionics' share price more than doubled in the days after the stock market re-opened following the terror attacks, and the Department of Transportation asked Atick for a briefing on how his firm's technology might help beef up airport security.

It's hard to say how many jobs might be created by companies that benefit from a "war footing." But such companies are providing a glimmer of hope for technology workers who've been suffering through the slowdown.

Tom Latimer has been looking for a job since May, when he completed a master's degree in management of technology at the University of Minnesota. He' s actually feeling better about his prospects. "There are areas around the Twin Cities that I think are going to expand. And I think in the end they'll hire people," Latimer says.

But it's probably a good bet there will be more companies trimming their payrolls rather than adding to them. A month ago, it looked like Twin Cities techies and the companies they work for would weather the downturn better than places like San Francisco and Austin, Texas, which placed bigger bets on the "new economy." The diversity of our economy was supposed to act like a flak jacket. Now, after the terrorist attacks, the picture is hazy.

The largest tech sector in the Twin Cities - computer programming, data processing and computer services - is expected to take a hit as businesses pull back on spending, in part because of nervousness caused by the terrorist attacks. "We're beginning to see consumers really pull back," says University of Minnesota economist Ann Markusen. "That will have a negative reflection back on business investment. And that's really the toughest thing, because really to get this economy going again, we need business investment to turn around. And so to the extent that computer services serve more business than individuals which is fair to say, they could take a hit in this process."

The outlook is brighter if, like Markussen, you define the Twin Cities high-tech sector in a broader sense, to include things like munitions manufacturing. The Twin Cities has a small weapons-making sector, which could see more business as the result of a military build-up.

Investors seemed to buy into that argument. Alliant Techsystems, which makes precision-guided ammunition for the U.S. military, saw its share price leap upward following the attacks.

Markusen says the Twin Cities economy also benefits from its strong cadre of health-related businesses. "A lot of our high-tech manufacturing is in the medical instruments and pharmaceuticals industries; two industries that are going to be pretty insulated from this recession," according to Markusen.

Economists says it will be weeks, or months, until we start to understand the impact of the terrorist attacks on the technology sector. Dan Rybeck of ASI Associates says things look bleak now, but he's confident the computer and Internet sectors will rebound. He says more firms will want to do business on the Internet, because they saw how well the 'Net withstood the crush of traffic after the terrorist attacks.

"The Internet and online technologies have become so much a part of this culture that their use and importance is only going to increase. We have reason to be optimistic about that," Rybeck says.

One thing's clear: Minnesota tech firms have a bumpy ride ahead as they wait for the economy to rebound.

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