Ventures: Wipeout

PREDICTIONS OF WHAT 2003 holds for the local tech industry have a lot in common with typical Puget Sound weather forecasts: mostly cloudy with occasional bright patches.

The continued gloom has to do with money. The tech economy has been in the doldrums since the Nasdaq tech meltdown of April 2000. That collapse has meant venture-capital firms can't easily get the desired huge returns on investments by taking their portfolio companies public, so fewer investments are made in new firms, and even struggling start-ups with good ideas fail due to a lack of capital.

IT'S UNLIKELY this financial climate will change much in 2003. As perhaps a harbinger of the year ahead, Boston- and Europe-based Atlas Venture in December said it would close its Seattle office (and cut its current investment fund by more than a third) after making no new deals locally in 2002. Ed Lazowska, who holds the Bill & Melinda Gates Chair in Computer Science at the University of Washington, opined at the annual WSA predictions panel in Bellevue last month that early-stage companies looking for a financial exit in 2003 will have to either merge or be acquired. Forget an IPO.

While some venture capitalists say publicly that they expect improvement sometime in 2003 (much as, a year ago, most VCs said they expected improvement sometime in 2002), one member of a major Seattle venture firm straightforwardly told me at a holiday reception that tech is in the middle of a five-year downturn. So if you liked 2002, you're going to love 2003. And possibly 2004.

That's not great news for those hoping for a blizzard of new tech jobs, or for companies that provide services to the tech industry. And measured in now out-of-vogue Internet years, it's longer than most entrepreneurs' natural lives.

So what are the few bright spots in this financial overcast?

• WI-FI: Falling hardware prices and new service initiatives have made this wireless networking technology the obvious hot bet. While it's difficult to see how anyone will make money on the commodity-priced equipment, companies ranging from Issaquah's WiMetrics and Seattle's NetMotion Wireless (for Wi-Fi security and reliability software) to T-Mobile USA (for Wi-Fi Internet service at Starbucks) stand to profit from Wi-Fi's rapid adoption in homes and businesses. Friday Harbor analyst Mark Anderson of Strategic News Service goes so far as to predict that Wi-Fi in 2003 will break the "last-mile monopoly roadblock" that phone companies have had in delivering high-speed Internet access.

• EDUCATION: While spending on corporate technology has been slow to recover, spending for K-12 education appears ready to pick up, goosed in part by the Bush administration's No Child Left Behind Act. Anderson expects education to become the fastest-growing PC segment in 2003. Also poised to benefit: software companies that provide Web curricula and infrastructure for schools, such as Bellevue's Apex Learning and Seattle's N2H2.

• MOBILE PHONES: Color handsets, embedded cameras, text messaging, and faster (and less cumbersome) Web browsing and e-mail may give the troubled mobile phone sector the boost it needs in 2003. There's no shortage of major mobile players based in the Seattle area, including Western Wireless, AT&T Wireless, T-Mobile USA (formerly Voicestream), and Nextel Partners, as well as AOL Anywhere, the mobile instant-messaging arm of America Online.

INDIVIDUAL COMPANIES locally are likely to be a mixed bag. SNS's Anderson predicts that Amazon.com will be consistently profitable by the end of 2003. But P.S. Reilly, managing director of Redmond-based research group the Athena Institute, warns that enterprise-software firms—such as Bellevue's Onyx and Seattle's Primus—might be in trouble if they're expecting corporate customers to spend lots of money, broadly deploying software to do things like manage customer relationships or automate sales forces.

And what of Microsoft? Like Mount Rainier, because of its size, Microsoft makes its own weather. Reilly expects Microsoft to be the biggest local player in the slowly building "digital home" arena, which includes everything from gaming (where it competes with fellow local powerhouse Nintendo) to wireless networking to Windows-based home- entertainment systems. While Microsoft has a poor track record in areas outside of desktop PC operating systems and business-productivity software, it is sitting on more than $40 billion in cash—enough for it to continue to fund new efforts with an eye toward a long-term payoff.

Annual tech predictions are usually made to be forgotten in 11 months. Yet considering the gray tech climate, it's hard not to get the impression that those in the tech industry aren't looking for specifics in 2003 forecasts as much as they are hoping for some general sign of comfort.

Frank Catalano is a tech industry analyst, consultant, and author. He can be reached via www.catalanoconsulting.com.