Technology

There’s no doubt in my mind that the U.S. economy is headed for a recession. The Federal Reserve just cut rates — again — down to 3.50%. This, coupled with oil’s rising prices, the fall of the value of the dollar, the rise in inflation, and the credit lending problems are all pointing to a dramatic downturn in the stock market. Heck, U.S. markets opened today down 5% but managed to come back a few points through solid intraday trading. This isn’t just a random blip on the radar, it’s a signal.

The genius behind the Drama 2.0 blog posted his thoughts on the recession’s effect on the tech industry so I’m going to jump in and post two impacts of the recession right here.

What Will Get Cut First?
When budgets get tight and revenues aren’t as high as they were in the glory days, what will go first is marketing. You can’t dip on your core competencies and get rid of a dozen highly-skilled engineers because then you’re cutting your own throats. Getting rid of your top people and replacing them with low-level morons was the reason that CompUSA went out of business, and cutting the head off your engineering department is a similar mistake.

When advertising gets cut, the ones with the lowest ROI will be the first to get the slash, and that’s going to mean CPM advertising. With CPC, a company is putting all their effort into converting the click on their own website so they control the conversion rates. CPM ads put all the pressure on the publisher to get good click-through rates, and if they’re paying top dollar for CPM rates on popular sites and aren’t getting a good CTR, then it’s a waste of money. AdWords and AdSense aren’t going to drop much, but CPM rates will.

Investors Change Their Tune
VCs have been pouring dollars into companies like paper money is going out of style (*cough*) and 2008 will be the year they take a more careful look at their investments and investment strategy. Investing in pre-revenue companies with no revenue strategy is a lot different than pre-revenue companies that have a solid revenue strategy, and you can guess which type of company won’t be raising as much money this time around. The theory of “past success indicates future success” when it comes to startup founders is going to be flipped around and although an entrepreneur may have had a big name a few years ago, investors will realize it’s a totally new game in 2008. If you’re giving away the cow (the service) and the milk (unique value proposition) for free then you don’t have much of a leg to stand on when it comes time to introduce a revenue model for your “at scale” company. You may be big, but you’re not sustainable. And money doesn’t grow on trees anymore.

It’s astounding to me to think about Google and then picture them buying Sprint, a “real company” in my eyes. Google’s a search company and Sprint makes things and builds things and has advertising and all the things “real companies” seem to have. But to put things in perspective, Google has a market cap of over $200 billion which is more than 4x the market cap of Sprint Nextel, so Google is certainly a larger company.

Google’s Open Handset Alliance announced last week had a lot of hand-waiving and fun illustrations, but was short on actual product. Phones running Google’s Android platform are nearly a year away from being in consumer’s hands, so there are a lot of questions still up in the air. If Google were to acquire Sprint Nextel, it would certainly give more credibility to their hand in the poker game of their cellphone “alliance” and might open up some additional avenues in regards to generating revenue.

So many people hate the telecom industry and cable companies that if Google were to purchase Sprint and use their infrastructure to build out a high-speed, long-distance wireless network, I can see many people ditching Comcast or TimeWarner and jumping on the Google bandwagon. Broadband pipes are so locally saturated in the major metropolitan areas that wireless alternatives might be a good fit for people fed up with lobbyists having a larger impact on their cable companies then their own petitions. Personally I’d love to see Google sell a WiMAX set-top widget that would coordinate with a cellphone widget to push WiMAX speeds to me wherever I am. Unfortunately with Google pursuing the handset alliance it seems if these pipe dreams (no pun intended) come true, iPhone users will be left out in the cold. At least until a 3G iPhone appears and by then anything is possible.