Tech's rust belt takes shape

It’s really interesting to see that silicon valley is constantly re-inventing itself. Bye bye stuffy and old hardware technologies. It’s now software, connected and vertical. And consumer-driven.  

[reproduced from the Wall Street Journal]
Tech's Rust Belt Takes Shape
By DON CLARK And SHIRA OVIDE

Technology has long distributed its riches unequally. But the sector has seldom seemed so sharply divided between disrupters and the disrupted. Computing pioneer International Business Machines Corp. IBM on Thursday reported its revenue dropped 5% after failing to close big software and hardware deals. IBM is also in advanced talks to sell part of its server system business to Lenovo Group Ltd., according to people familiar with the matter, the same company that bought IBM's personal-computer business in 2005. Microsoft reported a strong gain in earnings for its third fiscal quarter with a 19% rise in profit and managed to surprise its investors. Google on Thursday provided more evidence it is weathering the storm of lower prices for online ads on mobile devices when the Internet giant reported stable revenue for the first quarter. Software giant Microsoft Corp., once known for rapid sales of PC software, reported that the business that includes its Windows operating system turned in essentially zero growth after one-time effects of software revenue deferrals. By contrast, Internet innovator Google Inc. said Thursday revenue grew 31% in the first quarter, while profit rose 16%.

The growth disparities are just the latest repercussions of technology shifts—including the rise of mobile devices and slowing growth in personal computers, the replacement of conventional software with online versions and outsourcing corporate internal computing operations to facilities run by other companies.

Tech's turmoil bears similarities to the way old-line industrial companies in America's Rust Belt lost sales to rivals in Asia and other regions.

But the disrupters this time are mainly domestic and born since the Internet revolution took hold in the mid-1990s, often offering free or low-cost alternatives to widely used products.

Google, for instance, has been relentlessly broadening its foothold from Web search with online competitors to Microsoft's applications. Even Apple Inc. which transformed the hardware market with its hit iPhones and iPads and is still growing quickly, has run into tough competition from mobile devices running Google's free Android operating system.

Companies that have failed to gain major footholds in tablets and smartphones, meanwhile, are suffering more severely. Dell Inc., reacting to prospects of slower growth, is taking particularly aggressive action by proposing a deal to go private.

Many of the companies shaking up tech markets are fleet-footed startups. "You have a very audacious set of emerging companies that truly believe in the next five years they can replace these old-line guys," says David Wah, a managing director for technology, media and telecom investment banking at Credit Suisse Group. Online business software company Workday Inc., which was founded in 2005 and went public in October, reported that revenue for its fourth quarter ended in February rose 89%. By contrast, the entrenched incumbent in business software, Oracle Corp., reported a 1% drop in its revenue in its most-recent quarter. Another example is Box Inc., a Silicon Valley startup also founded in 2005 that lets customers store their data online and tap into it from mobile phones and PCs. Aaron Levie, its chief executive, says the closely held company's revenue grew more than 150% in 2012 and it expects another doubling again this year. Mr. Levie argues that today's Web-based technology makes it easier for consumers and corporate employees to try new things. Box, in fact, claims 150,000 businesses and 15 million individuals use its service. That phenomenon, which has helped companies like Facebook Inc. penetrate large firms, makes it hard for older technology suppliers to remain entrenched the way they once did. "What is happening here is that the control and the amount of power that one company has over the ecosystem is really changing," Mr. Levie says.

Not that many older tech companies will concede that their fast-growth days are gone for good.

Microsoft, despite effects of slow sales of its new Windows 8 operating system, reported Thursday that third-quarter net income rose nearly 18.5% to $6.06 billion. The company holds back portions of sales from Windows and Office versions that come with the ability to upgrade to the newest version at little or no cost; revenue grew 18% when those figures are included, or 8.2% when they are not.

While not growing as rapidly as younger tech stars, pockets of the Redmond, Wash., company have been surprisingly resilient. Its division selling back-end services posted 11.2% revenue growth in the last quarter. Microsoft's unit that includes the Xbox videogame business also posted higher-than-expected revenue growth of 33%. Microsoft, in response to rivals like Google, is offering online—or "cloud-based"—versions of products such as Office, the bundle of word processing and spreadsheet software the company has long sold.

Across both business and consumer, I think we have a really exciting set of cloud services," said Peter Klein, who said Thursday he is stepping down as Microsoft's chief financial officer. Another example is Intel Corp., which has struggled to get its chips into mobile devices and reported Tuesday that first-quarter profit dropped 25% on revenue that declined 2.5%. But the company is nevertheless pumping about $12 billion annually into upgrading its factories to use more advanced production process, betting that the products they churn out will find a place in future smartphones and tablets. "That creativity and drive that first attracted me to Intel almost four decades ago has never been higher," said Paul Otellini, who is giving up the job of Intel chief executive next month, during a conference call with analysts.

IBM, meanwhile, has been praised during the past decade for moving successfully into services and software and reducing its reliance on less-profitable sales of mainframes and servers. Under Chief Executive Samuel J. Palmisano, who stepped down at the end of 2011, it accelerated that strategy by buying more than 140 companies since 2000 and improved its earnings per share using stock buybacks. Now, Chief Executive Virginia "Ginni" Rometty is pushing IBM into new areas such as mobile and cloud computing, as well as security and social media software. But the company reported Thursday that total revenue in the period ended in March fell more than Wall Street expected, weighed down by broad weakness in its services, software and hardware businesses. Net income fell 1% to $3.03 billion. The company reported $23.41 billion in revenues, which fell 3% when adjusted for currency fluctuations.

Google, meanwhile, provided more evidence it is weathering the storm of lower prices for online ads on smartphones and tablets. While those ads generally cost less than those on sites accessed by PC users over the Web, marketers increasingly say that the prices of ads sold by Google for the mobile-device version of its search engine are going up. Excluding Google's Motorola Mobility hardware unit, which wasn't incorporated into Google until around the middle of last year—the company said revenue rose 22% to $12.95 billion from a year earlier. Profits totaled $3.35 billion. The average price that advertisers paid when people clicked on ads on Google sites fell 4%, compared to a 6% drop in the fourth quarter. The ad-price drop, which was paired with a 20% rise in the number of times people clicked on Google's ads, was the smallest since the company began experiencing such declines in the fourth quarter of 2011. Larry Page, the company's chief executive, vowed to keep the company's spending on low-margin businesses such as Motorola's mobile devices and its ultra-fast Internet and video service in check. "I'm certainly not worried about the expense," he said during a conference call. At the same time, Google is positioning itself for the future in computing as it rolls out its Google Glass wearable-computing device to software developers. "I get chills when I use a product that is the future, and that happens when I use Glass," Mr. Page said.

—Amir Efrati, Spencer E. Ante and Rachael King contributed to this article.