081309 Tech Recovery

020 021 022 024

Earnings report surprises Europe: The young and the jobless Insurers and the health-care plan Verizon vs. Apple

NEW BUSINESS

TECH GETS READY FOR A RECOVERY Companies are betting on a consumer-led turnaround, but many don't share the optimism By Cliff Edwards and Olga Kharif

So this is what the recession of 2009 looks like from Apple headquarters in Cupertino, Calif. The company blew past Wall Street's expectations for the most recent quarter, with profits surging 15% and revenues rising 12%. Apple said it could've done better, as consumers flocked to stores to buy its low-priced laptops and the new iPhone introduced last month. 'Apple can't make Macs and iPhones fast enough," says analyst Gene Munster of Piper Jaffray. "Clearly, they were caught off-guard." A sign of things to come ? Perhaps. While these are still rough days for many companies, the tech industry's giants are beginning to see signs that consumers could step up their spending in the coming months. Chipmakers Intel and Texas Instruments joined Apple in reporting better-than-expected earnings and said their customers are beginning to build up inventories in anticipation of stronger demand later this year. Paul S. Otellini, chief executive of Intel, told analysts that chip demand rose steadily between April and June. "Overall consumption is recovering," he said. U.S. consumers appear to be acting on a combination of falling prices BUSINESSWEEK I AUGUST 3, 2009

for computers and other gadgets and growing confidence about job security. Margaux Berwitt, a 26-year-old attorney in Miami, held off replacing her battered Dell laptop until mid - July, when she saw a new Toshiba on sale for $499, or one-third the price other old computer. "I waited the longest time possible to get a new laptop," she says. "I wanted one for less than $1,000." The average price for a laptop has dropped to $675, from $867 a year ago, according to researcher NPD Group. The tech sector's growing faith in consumer spending is no small thing. Consumers account for two-thirds of

TECH'S RALLY Major technology stocks have surged this year on hopes of a rebound in consumer spending APPLE RESEARCH IN MOl :'i AMAZON.COM

Data: Bloomberg

the U.S. economy, and they can help keep retailers, factories, and restaurants in business. While most companies remain in belt-tightening mode, investors have focused on the bullish outlook from tech's bellwethers. The Nasdaq index is up 22% for the year. "My hunch is, [this recovery] will be about consumers; businesses are going to continue hunkering down for a while," says Simon Johnson, a professor of entrepreneurship, global economics, and management at the Massachusetts Institute of Technology Sloan School of Management. To be sure, a sharp decline in business spending could swamp any consumer revival. There's also no guarantee consumers will be able to lead a recovery. Their spending could falter if too many more lose jobs or see the value of their homes decline. The U.S. unemployment rate is already 9.5%, its highest level in 26 years, and is expected to top 10% shortly. On July 21, Federal Reserve Chairman Ben Bernanke explained the risks during a congressional hearing. "Job insecurity, together with declines in home values

019

and tight credit, is likely to limit gains in consumer spending," he said. Otellini and Intel acknowledge the risks to any recovery, both in the U.S. and abroad. But the chip giant is taking its cue from Dell, Hewlett-Packard, and other big customers, which are replenishing inventories after slashing them in the worst of the downturn. HP and Dell are both big players in China, where the government stimulus plan is boosting consumer and business purchases of PCs. In the U. S., computermakers hope consumers will scoop up the stylish and affordable computers they're creating to coincide with Microsoft's launch of its Windows 7 operating system in October. Otellini said he has "a clear expectation for a seasonally stronger second half." Texas Instruments is another company that tends to see early shifts in demand, because it sells semiconductors to tech companies anticipating what lies ahead. The Dallas-based company says its order backlog jumped 27% in the most recent quarter as

customers began purchasing new supplies. "That's given us increased visibility and confidence in the outlook for the third quarter," says Kevin P. March, the company's chief financial officer. TI says demand has improved for chips that go into mobile phones and those that power flat-panel TVs and GPS navigation systems. DANGER OF A SUPPLY GLUT Price-cutting at Apple helped spark the strong demand for its products. The company dropped the price of its entry-level MacBook Pro to $1,199, 40% below the previous lowest price. That helped Apple sell 13% more laptops last quarter than it did the year before. "We're obviously thrilled with the results," says Apple Chief Operating Officer Timothy D. Cook. The company also cut the price of its entrylevel iPhone to $99 and introduced newer versions starting at $199 with a wireless contract. Tech companies are coming up with new ways to market their gadgets to

budget-conscious customers, too. Dell, HP, and others are striking partnerships with U.S. wireless carriers such as AT&T and Verizon to sell subsidized portable computers and other devices if consumers signup for service contracts. "We think that's going to be a big business," says Ronald G. Garriques, president of Dell's consumer division. The risk, of course, is that tech's new optimism is misplaced. If computer makers and others build up their inventories in anticipation of demand that never materializes, they could recreate the supply glut that pummeled earnings throughout the industry in late 2008 and early 2009. Consumers may be their best and only hope. Analysts don't anticipate corporate customers will start increasing their spending until March 2010 or later. Carlo Ciriello, financial analyst for industry research firm iSuppli, says that building up an oversupply of inventory would be like "applying frost to blossoming green shoots." 1 BW 1 -WithArikHesseldahl

AUGUST 3. 2009 I BUSINESSWEEK