(FORTUNE Magazine) – The blessings were bouncing off the walls of New York's Carnegie Hall. It was a late February evening, and the banquet crowd of 350, dressed in everything from jeans to suits, sat silently as six Tibetan monks chanted a guttural prayer. Once it was over, everyone dug into the sushi and waited for Marc Benioff to tell them where to go next. Benioff, the CEO of a company called Salesforce.com, had arranged the event to precede a benefit concert for New York's Tibet House, a cultural preservation group. Tall and boisterous, Benioff gave a brief talk, then led the assembled customers, analysts, press, and hangers-on into the adjacent auditorium to hear performances by David Bowie, Ray Davies, Lou Reed, and Laurie Anderson.

Benioff might sound like an unfrozen dot-com executive. After all, the tech industry is still in the throes of its longest downturn ever. Who can afford marketing extravagance when most companies are feeding on scraps? The answer is surprising. While technology is still a wasteland, a few smart companies have managed to turn up fertile soil. They've done so by taking tech's inescapable, most margin-mangling trends--falling prices, standardization, and corporate frugality--and turning them into engines of growth. Benioff, for one, sells sales-force automation software that can be rented over the Internet for $70 a month. With 6,500 customers, Benioff says he will grow to $100 million in revenues this year, up from $52 million in 2002. His main competitor, Siebel, sells a similar product that costs thousands of dollars per person upfront for software, servers, infrastructure, and management. Its sales are expected to drop 19%, to $1.4 billion, this year. During the boom, Siebel was a hot stock; guess what company people are now hoping to own when it goes public this year or next?

There's a new kind of growth in Silicon Valley; it benefits customers more than investors. And in the long run it could improve the quality of life and boost productivity and profits in ways that the dot-commers only promised. To understand it, FORTUNE surveyed the top strategists at a few giant companies, a host of CEOs, and top analysts both on Wall Street and in research firms.

One fact became clear: The underlying tech boom that began the bubble actually has never stopped. It just stopped paying off. Says Eric Schmidt, CEO of Google, the company that has emerged as the head of the new class: "If anything, the rate of innovation in technology has increased in the past couple of years. But that doesn't necessarily make it a good business. The beneficiaries are the end users." Agrees Rob Carter, the CIO of FedEx: "The sound we heard wasn't the bubble bursting; it was the big bang."

Silicon Valley executives who are suffering have one of their own to blame: Gordon Moore. His Moore's Law--which predicts that the processing speeds of semiconductor chips will double approximately every 18 months--got them into this mess. Since the cost of producing a chip (and the device it goes in) stays roughly constant while the power doubles, hardware makers have to either raise prices or sell much more product to keep revenues from declining. Competition, still stiff, generally precludes the former option. Hewlett-Packard's least expensive color printer in early 2002 cost $80. Its successor, launched four months later, costs $50, is 50% faster--but took three times as many patents to produce. Products that are better and cost less are great for customers, and great for companies that can make them profitably (the cheaper printer goosed HP's market share), but they can shrink the industry. Says Schmidt (who was previously Sun Microsystems' chief technology officer and CEO of networking software maker Novell): "Unless there's very rapidly expanding demand, aggregate revenue in the industry must fall. Do the math."

The formula is simple: Too few dollars divided by too many companies equals consolidation. Michael Fleisher, the CEO of tech advisory firm Gartner, is now--after several years of institutional pessimism--one of the most optimistic observers of the industry. He's forecasting significant improvement by 2004, but that recovery hinges on today's thicket of tech companies being cleared out, either through acquisition or bankruptcy. "Of technology brands you recognize today, 50% will be gone in three years," he says. Only such a phenomenon--in both tech and telecom--will diminish brutal competition on price. Mark Bruneau, CEO of Adventis, a telecom-consulting firm, sees the six major wireless carriers turning into three. All this turmoil is also forcing investors to toss out beliefs created during the boom. Says Kevin Rollins, president of Dell: "The structure of the industry is changing a little bit. In each category a few larger companies are winning. That wasn't true in the heyday of the dot-com boom. Investors then saw that all boats in the industry rode up on the same tide. Now they have to be stock pickers."

No wonder investors are continuing to bail out of tech. Over the past two years technology and science mutual funds have seen a $12 billion net outflow, according to Lipper Analytical Services. The Nasdaq is up from its October low of 1108 but still 70% down from the 5049 it hit at its peak in March 2000.

But there is hope. Companies like Google and Salesforce.com have figured out the new order and are making it work. The key for companies is to think beyond their products--to get in their customers' doors to help remake their work, their way of doing business, and their industries. "You know that old saw that 'railroads are not in the railroad business, they are in the transportation business'? We are facing something similar to that," says Andy Grove, the chairman of Intel and one of technology's big thinkers (for more, see box). "We have not defined the technology industry broadly enough."

Just ten miles down the road, one of Intel's major partners has come to the same conclusion. "Tech is truly becoming part of the fabric of life," says Hewlett-Packard CEO Carly Fiorina. "Think about the big problems we have to solve now--health care, homeland security, synchronizing the world's information systems to facilitate the flow of goods and services and to prevent the flow of undesirables--all of those are technology opportunities."

That's why companies that are succeeding today are abandoning the box. The biggest innovations are coming not in hardware but in software and what is loosely called services--everything from outsourcing deals to sophisticated methods for applying old technology in new ways. Hardware's percentage of total IT industry sales has declined dramatically--from 47% a decade ago to 38% now, according to research firm IDC. And hardware sales actually fell in both 2001 and 2002 while sales of software and services merely froze. There's a virtuous circle too. The more hardware prices decline, the more easily companies and consumers can acquire devices on which to use software and services. Those sectors benefit even while suffering from their own price pressures.

Smart CEOs and investors have also stopped looking just at the best tech companies. They now look at the best companies using technology--those that are putting in systems that help reconceive business models. Take three-year-old JetBlue, which in a time of airline implosion remains solidly profitable and grew 63% in the most recent quarter. The company uses only industry-standard Intel servers and Microsoft software, and it automates every aspect of its operation that it can. It sells 71% of its tickets over the Internet. That's partly how it has kept its cost per seat-mile to 6.25 cents, far lower than American's 11.39 cents or even Southwest's 7.5 cents. Its market cap of $2 billion is more than twice that of American and United combined. Another example is a company that has been considered too exclusively tech: Amazon. Amazon uses the Internet and state-of-the-art tech tools, yes, but its competitors are as much Wal-Mart and Sears as eBay. The benefits of its system: Last quarter Amazon turned over its inventory at a rate of 19 times a year, vs. Wal-Mart's 7.6.

"We're moving from an era of killer apps to an era of killer systems, killer business models, and killer businesses," says Bruce Harreld, chief strategist at IBM. "Just spending money on IT never creates any value. It's what you do differently in terms of business processes that matters." Big Blue is putting its money where its strategist's mouth is. Last year it spent $3.5 billion buying PricewaterhouseCoopers Consulting.

Perhaps the biggest single force benefitting the customer--and the companies that learn to ride it--is standardization. Until the auto industry agreed to make the accelerator a pedal and put it on the right, it was harder to drive a car. Once Microsoft Windows became the common standard for PCs, software companies began building many more applications for the machines. More people had a reason to use a PC, so sales burgeoned. Increasingly all computers will likely be driven by some variant of Intel's x86 microprocessor chip design. That expands the software industry by enabling developers to avoid writing for multiple platforms. Adobe Acrobat has brought the same benefits to sending documents over the Web, and the acceptance of the standard USB port for PCs has helped drive peripherals sales. By being the master of standards-based technology, Dell has grown to a $35 billion-a-year company from $18 billion four years ago. Says Dell's Rollins: "Customers find value in standards because they lead to products that are easy to implement, easy to run, and easy to service."

The ultimate standard is the Internet itself. It has become a universal pathway connecting everyone. By adhering to a few simple software protocols, any device can become a node on the Net, any individual can connect with any of the 600 million other people linked to the Net, and companies can communicate easily with customers, suppliers, and employees, regardless of where they are. Says Harvey Cohen, CEO of tech researcher Strategy Analytics: "The web is fundamentally changing the nature of the technology sector. When it initially emerged, companies viewed the web as something they could sell into, sell through, or that they had to connect to. In fact the web is becoming more an umbrella that is part of the product that technology companies sell."

A look at a few of the other most important technology trends underscores the importance of the Internet--without it most of them would be meaningless. Another thing also unites the following trends: They are all allowing customers to get more even as they spend less. And companies that have learned to make the downturn work for customers are the ones that now find themselves growing as the rest of the industry mopes.

WI-FI

No technology of late has attracted more press attention than this wireless broadcast technology. Wi-Fi allows digital devices within a several-hundred-foot range to connect at broadband speeds to the Internet. It is already used in 2.5 million homes in the U.S. to create wireless home networks, a 400% rise from last year, according to research firm Parks Associates. Thousands of public-access points are popping up worldwide, especially at coffee shops, airports, and hotels. Every Dell and Apple laptop now ships with Wi-Fi capability. But where is the business opportunity? The radio hardware is rapidly becoming a standardized commodity. And while companies are competing to set up service networks, it's unclear exactly how any of them are going to turn a significant profit. (For more, see "The Really, Really Messy Wi-Fi Revolution.") This may turn out to be a classic case of the business opportunity flowing not from the deployment of the technology itself but from the kinds of new businesses and business processes it can enable. Wi-Fi technology itself is rapidly improving--soon it will offer vastly more bandwidth, over greater distances. So, says longtime Wall Street analyst and author Andy Kessler, "take it the next step--what can you do with those high-bandwidth connections? You can start eating into the cable monopoly and the phone monopoly." A company that mounted advanced Wi-Fi transmitters on utility poles in a neighborhood could distribute digital video while spending radically less capital than a cable company. As for the phone company, see our next trend.

VOICE OVER INTERNET PROTOCOL (VOIP)

John Chambers turned Cisco into a networking powerhouse by building the most dominant equipment for routing data within corporations. Now he's remaking that equipment to handle all the different kinds of media that can be turned into digital data--especially voice. "Where I am seeing the most excitement ...is in the convergence of data, voice, and video over a single Internet protocol infrastructure...the hottest being IP telephony," he says. The software to manage Internet telephone calls is improving by the day--and the process is getting cheaper. With broadband connections, there are no additional charges to make calls. VOIP is growing rapidly for long-distance calls in emerging markets. Already 37% of international calls originating from India use VOIP.

But combining VOIP with Wi-Fi is the next step--free calling with mobility. That could be a significant improvement over the still-expensive cellphone networks. It will also end up being a money-saving feature on cellphones that use conventional cell frequencies when out of Wi-Fi range. In June, Cisco will ship its first wireless IP phone for offices. Next year phones for any Wi-Fi access point will start rolling out.

LINUX AND OPEN SOURCE

How's this for a useful technology trend? By switching to Linux-based servers that use Intel chips, the company was able to spend $10 million less during the past year. As a result, the company hasn't had to buy big expensive servers with proprietary hardware and software from HP, IBM, or Sun. Talk about deflationary technology. Linux is rapidly becoming the other standard operating system besides Windows. It is the world's leading open-source product, contributed free to the world by a community of developers who collaborate over the Internet to refine it. Open-source software called Apache also runs the majority of the world's Internet servers. Such free products are taking market share in more and more sectors.

How do tech companies make money using a free operating system? IBM uses Linux as a competitive advantage when selling against Microsoft. Red Hat, which supports Linux software, saw its revenues increase 40% in 2002. Its stock is up almost 40% in the past six months while the S&P 500 has been flat.

THE NEW CONNECTEDNESS

During the boom companies splurged on hardware and software. Now they want these systems to finally work, not just inside but with partners and suppliers. A variety of software tools are poised to make that happen. The most prominent among them is Websphere, the flagship of IBM's $13 billion software business. Websphere's sales grew 14% in the most recent quarter. Over the past few years Big Blue has assembled hundreds of separate software products under the Websphere brand, all of which connnect elements of a software infrastructure. Another big winner in this new era will be Accenture, the $11.5-billion-a-year services giant. While it doesn't have its own suite of software products like IBM, its consulting and systems-integration business ranks among the world's best.

SELLING SOFTWARE AS A SERVICE

"We've been on a model where everybody's got to buy their own thing and pay for it in one big gulp," says IBM's Harreld, "so we need a change in how people pay for information technology--so it's more by-the-drink, flexible, buy-it-when-you-need-it." IBM is transforming its operations to be able to offer its customers what it calls "on-demand computing." Meanwhile, Salesforce.com is the most visible of a host of companies that sell various sorts of enterprise software on a by-the-drink basis. Publicly traded WebEx enables online meetings, Employease offers online HR software, and Arena Solutions allows outsourced manufacturing to be managed over the Net. IDC expects the sector to grow to $8 billion in 2007, from $2.2 billion last year.

Salesforce.com CEO Benioff now plans to take the concept further. In early June he expects to unveil sForce, a system that allows any software company or corporate customer to build its own software-as-a-service product. Developers will use Salesforce.com's back-end services to build any business application they can think of.

BROADBAND TO THE HOME

Nothing is changing the technology ecosystem more than the fact that millions of people worldwide are getting their homes connected to the broadband Internet. In the U.S. alone, about 11 million households get access via a cable modem, and another five million over special DSL telephone lines. Jupiter Research expects that total to hit 32 million by 2005. And the speed of these connections is rising as well.

"We're just at the tip of the iceberg of what we can do with our networks," says Mark Coblitz, head of strategic planning at Comcast. Comcast isn't just a cable giant; it's the largest broadband Internet access provider in the U.S., with about 3.6 million cable-modem customers. It expects to have five million by year-end. With all those customers, CEO Brian Roberts wants to begin providing additional services like home networking and to develop new forms of broadband content. Says Coblitz: "We can dramatically change the kinds of things that are available to consumers. High-speed data access can change how people work, how they live, their health care, and their education."

E-COMMERCE AND E-MARKETING

Sales in U.S. retail stores are just barely up. Meanwhile, online sales grew 27% last year, to $45.6 billion. eBay, where you can buy practically anything online, more than doubled its profit in the first quarter, to $104 million, while revenues were up 94%, to $476 million. Despite the burst dot-com bubble, e-commerce companies that understand what consumers want and can deliver it are still growing at a rate that few other consumer businesses their size have ever attained.

Advertising and marketing are simultaneously being transformed. Google, which only months ago, it seems, was accused of having a useful service that could never make money, is now rolling in so much dough that CEO Schmidt says going public was not even discussed at the most recent board meeting. Google makes hundreds of millions of dollars selling advertising keyed to the words that people search for. Advertisers only pay if people click. "What we're doing is using computers to solve one of the unsolved problems in marketing, which is the measuring of things," says CEO Schmidt. Advertisers clearly prefer a medium in which they know exactly who looked at their ad, and in which they only pay if the ad is seen. Industries like TV and magazine publishing, which rely on a quasi-religious faith that the ads they carry really do reach the people they're meant for, could find themselves pressured by the new technologized models. Major advertisers like Ford and McDonald's are upping the amount they spend on online advertising.

In the face of this user-friendly, industry-jamming world of networked technology, only the most culturally nimble, clear-thinking, and specialized tech companies will survive and thrive. If you insist on investing in tech, stock up on antacid. And it won't hurt to have a few Tibetan chants thrown your way.

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