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The Honolulu Advertiser
Posted on: Tuesday, February 25, 2003

Federal spending giving a boost to tech industry

By Jon Swartz
USA Today

SANTA CLARA, Calif. — Mark Forman is a popular man in Silicon Valley these days.

The nation's top information technology official came to town recently to drum up support for the federal government, which is beefing up computer security spending and streamlining the technology-procurement process.

What he got, unlike previous visiting bureaucrats, was rapt attention. Nearly 50 CEOs dined with him. The next day, he addressed more than 200 people at Sun Microsystems and 150 at Cisco Systems.

"I've seen $200 million contracts (signed) in two months or less," he told a room of hopeful executives.

There's more to come. While war might hurt the overall economy, it, along with increased homeland defense spending, could boost the tech industry, mired in a nearly three-year funk.

The Bush administration plans to increase government spending on computers, software and services to $58.1 billion for the fiscal year that started Oct. 1, up 17 percent from $49.8 billion in fiscal year 2002.

Business spending on technology, by comparison, is expected to grow 2 percent to 3 percent this year after being flat for two years. Although expanding more slowly, the nearly $2 trillion a year corporate market is still more than 30 times the federal tech budget.

Nevertheless, the tech industry, hungry for growth, is mobilizing like soldiers to cash in on federal spending.

"The government is an oasis in a dry commercial climate," says Rich Yamarone, chief economist at Argus Research. "This war, unlike any other, could invigorate tech."

All kinds of products stand to benefit, from Cray supercomputers to Silicon Graphics software. Big tech companies such as IBM and Oracle, which have partnered with federal contractors for years, are most likely to profit, analysts say.

About 20 percent to 25 percent of Oracle's revenue comes from database software sales to governments. Increased federal tech spending should result in "consistent revenue growth," says Kevin Fitzgerald, an Oracle senior vice president.

Anne Altman, managing director of IBM's federal division, agrees: "It presents a great deal of opportunity." IBM's federal division saw revenue grow 25 percent in 2002.

Other tech winners of the federal spending windfall include those selling:

Supercomputers. Cray said this month that it received $62 million in supercomputer and service orders for what is believed to be government defense use. The deal is equal to 40 percent of the company's 2002 revenue.

Cray, a leading supplier of equipment for the intelligence community, declined to comment.

Silicon Graphics (SGI), a graphics workstation pioneer, on Feb. 18 announced the largest defense contract in its 21-year history: $26 million worth of supercomputers, software and services to the Defense Department for the development of aircraft and missiles.

SGI, whose defense business has surged to 35 percent of total revenue from 20 percent a year ago, has also developed so-called urban warfare visualization technology. It gives U.S. military planners a three-dimensional view of Saddam Hussein's palaces and other Baghdad landmarks.

Computing devices. Dell Computer in October sold 60,000 personal computers to the Marine Corps, whose combat troops could use them for e-mail and other communications on the battlefield. A rugged case has been designed for the military.

Panasonic laptops and Compaq hand-held devices are used by U.S. troops in the Middle East to check for signs of biological or chemical attacks. The computers also collect data on injuries and ailments as part of a $4 billion Defense Department project to convert paper records to digital form for nearly 9 million soldiers.

Despite increased federal spending on technology, it probably isn't enough to lift the overall tech sector out of its worst downturn ever. That won't occur until the second half of the year, when commercial expenditures are expected to pick up, says Sung Won Sohn, chief economist at Wells Fargo.

"What tech really needs is for American companies to start spending again," Sohn says.