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Adapt or die
A look at five tech and telecom companies that need to make bold moves or risk fading away.
October 9, 2003: 1:14 PM EDT
By Paul R. La Monica, CNN/Money Senior Writer

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NEW YORK (CNN/Money) - With tech stocks enjoying such a huge run this year, it's tempting to say that happy days are here again for all companies. I'm here to put an end to that talk.

Sure, the economy is improving and with that, we should finally see a decent pickup in corporate tech expenditures. But some tech companies face bigger problems than a lack of business spending. They need to make strategic changes to survive.

With that in mind, I've compiled a list of five tech and telecom companies that industry observers think must make bold moves in order to stay relevant during the next few years.

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Sun Microsystems Sun (SUNW: Research, Estimates) has stubbornly stuck to the notion that its technology is so far superior to its competitors that nobody in his right mind would use anything else. The company's almost religious zeal (it even has an executive with the title Chief Technology Evangelist) is starting to wear thin, as is CEO Scott McNealy's constant smack-talking about rivals whose stocks have performed much better than Sun's.

Companies are increasingly choosing servers that run on Microsoft's operating system and Intel's chips as well as Linux-based servers over Sun's Solaris version of the Unix operating system and Sparc microprocessors.

"Linux promises to fulfill the promise made by Unix a decade ago -- a truly cheap, powerful and entirely open computing architecture," said Arnie Berman, chief technology strategist for SoundView Technology Group. "Sun is digging in its heels fighting the trend. As a result, no self-respecting CIO will say she or he wants to do more business with Sun."

The proof is in the numbers. According to IDC, Sun's server revenue fell 19 percent in the second quarter while revenue industrywide was slightly higher. And last week, Sun warned that it would lose significantly more money in its fiscal quarter than Wall Street was expecting.

AT&T Yes, the entire telecom industry continues to be in a massive state of flux and that has depressed stock prices. But companies such as Verizon, Sprint, BellSouth and SBC at least have wireless components that are helping to offset the customer losses in the traditional landline business. AT&T (T: Research, Estimates) does not, having spun off AT&T Wireless (AWE: Research, Estimates) in 2001.

"Wireline as we know it today is in serious decay," said Greg Gorbatneko, an analyst with Loop Capital Markets. "Getting rid of wireless was big mistake for AT&T."

Of course, Ma Bell is still a huge company, and it's unreasonable to expect that it would suffer a spectacular collapse. But the stock keeps coming up in takeover rumors for a reason: It's hard to imagine it ever returning to its former glory. Sales are expected to fall nearly 8 percent this year, a further 5 percent in 2004 and 3 percent in 2005.

The shift to wireless is likely to continue, and AT&T also faces tough competition in long distance from the aforementioned Baby Bells and Sprint, not to mention the likelihood of a slimmed-down MCI once it emerges from bankruptcy.

Lucent Ahh, the once proud Ma Bell family. AT&T spinoff Lucent Technologies (LU: Research, Estimates) continues to lose money, and although it's done a decent job of trimming down its debt load, it still has many problems.

"Lucent will never be the company it once was," said Michael Cohen, director of research for Pacific American Securities. Like AT&T, Lucent is still highly dependent on the wireline telecom business, selling telecom equipment used for landlines.

The company has bolstered its wireless equipment business and is making a push into telecom outsourcing services, but sales for voice, data networking and optical networking still account for more than 40 percent of sales in its latest quarter.

Silicon Graphics This company was once a leading-edge graphics chip manufacturer but decided a few years ago to focus more on supercomputers and high-end workstations.

As a result, Silicon Graphics (SGI: Research, Estimates) is now an unprofitable niche company catering mainly to the defense sector, while graphics chip makers ATI Technologies (ATYT: Research, Estimates) and nVidia (NVDA: Research, Estimates) have thrived thanks to robust demand for high-end graphics in video games. "That should have been Silicon Graphics' market," Cohen said.

Canon: Companies such as Kodak have certainly fallen on hard times due to the boom in the popularity of digital cameras. But Berman thinks that traditional camera makers such as Canon (CAJ: Research, Estimates) could be in for a similar problem as more and more cell phones have camera functions.

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Nearly 20 percent of Canon's sales in the first half of this year came from its camera unit and Berman thinks that camera sales could decline in the coming years once cell phone camera technology improves. "Right now, the camera phones are relatively primitive," said Berman. "But not too far down the line, I would bet that crossover will be a big problem for Canon."

These five companies could be in for rough times ahead. But of course, many tech experts have been wrong in the past. How many times, for example, have people written the "Apple is dead" story?

Still, Apple has remained relevant and profitable because of a steadfast dedication to innovation and a willingness to adapt to changing times. It remains to be seen whether any of these five companies will be able to do the same.

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