Why the Tech Sector doesn’t have to worry about a Recession

by Ashok Nayar

So the market is crashing, your house is worth nothing, your income is equivalent to the minimum wage in Canada, and you’re worried about what’s next. Well, don’t fear! Start a website!

Erick Schonfeld at Techcrunch predicts that a drop in corporate spending will actually benefit Web 2.0 companies. Erick says

While a belt-tightening might not be good for the IBMs, Dells, and Oracles of the world, Web 2.0 companies should do fine—even thrive. All of those Enterprise 2.0 startups out there, or even Amazon trying to sell Web-based computing infrastructure, are actually at an advantage. Customers are more likely to try cheap cloud computing when they can no longer afford the alternatives.”

I think the technology sector should be relatively unharmed. The reason being that the majority of current companies that are web based, are generating their revenues from advertising. And advertising is actually a sustainable model. If you have a good product, you can go to any ad network, be that AdSense, Yahoo Publisher, Federated Media, etc, and generate revenue. Back in 1999, companies didn’t actually have real revenue models, and the bubble burst.

In the case of an economic slowdown, typically marketing and advertising are the two main areas in which spending will be curbed. But CPC (as opposed to print/CPM) advertising will be extremely popular. The reason being that it’s based on a conversion ratio, so the only time you pay to advertise is when the user is ultimately directed to your site. CPC ads have great analytics and can be tracked to the bottom dollar. In a recession, companies are required to do anything to improve sales, and there will be great interest in online CPC advertising. As long as advertising goes strong, so will the companies that are supported by it.

As far as the market is concerned, Microsoft reported record earnings last week and was up in a down market. It’ll be interesting to see how Google and Yahoo fair in this down market after reporting earnings later this week. Personally I think Apple was crushed by the shorts, and not be any other possible event. Their earnings are up, sales are up, image is good, and there’s no legitimate reason (other than being overbought) that the stock should be at $130. Time will tell.