Tech Market Has No Leader

"We have 5,400 retail brokers and I forget how many on the capital market side, and a lot of them are using older computers," Saut said from his Tampa, Fla., office. "The accounting life of this equipment may be over, the useful life definitely isn't."

Raymond James isn't buying new technology, and neither are thousands of other companies -- because there's nothing that they're really motivated to buy. While computer hardware has certainly improved, the software that led to great leaps in business productivity is sorely lacking. And until new innovations attract corporate interest again, technology companies' profits --and their share prices --are unlikely to grow substantially.

Technology innovation and the resulting billions spent by businesses on those improvements fueled much of the stock boom of the 1990s. Now, however, not only are businesses curbing capital spending due to slow economic growth and a fear of falling profits, ever since the Y2K bug prompted a wave of buying, corporate purchasing programs have become much smaller and far more selective.

"There's nothing that's so urgent and compelling right now that companies feel they have to spend money on it," said Rick Sherlund, technology analyst with Goldman Sachs. "Plus, most companies' IT (information technology) spending is constrained anyway, so it'll be a struggle."

For tech stocks, that has meant more than three years of mediocre stock prices and disappointing returns that are likely to continue. Microsoft has traded from $21 to $34 per share since January 2002, and currently is in the $28 range. Intel Corp. has been far more volatile, and while it enjoyed a strong runup in prices in 2003, topping out at $34.12 on Nov. 6, it currently trades at around $21.

In the past, there was a strong correlation between technological innovation and broad-based stock rallies, especially when those innovations were readily useable by corporate America. From the introduction of the IBM personal computer in late 1981 to the rise of the Internet and server-client corporate networks in the early to mid-1990s, the need to keep up with the times kept companies spending -- and kept technology firms coffers overflowing.

But now, there's no overriding reason to spend big on technologies because the innovation of the 21st century has been incremental, rather than revolutionary.

"If you're looking for one tech to change everything, that's a hard barrier to overcome," said Dan Ling, corporate vice president for research at Microsoft who helps oversee innovations that could become part of future Microsoft products.

Incremental innovation won't encourage businesses to part with their capital, thus boosting tech companies' share prices and starting a new rally in an otherwise flat market. Office 2003, Microsoft's latest suite of word processing, spreadsheet and presentation software, is an example.

According to technology think tank Gartner, Office 2003 was projected to capture just 1 percent of the market a this year. Three-year-old Office XP remains the leader with 50 percent market share, followed by Office 2000 with 45 percent. Even Office 97, which saw its technical support cut off by Microsoft in January, was expected to retain a 4 percent market share.

The release of a new Microsoft operating system often leads to increased IT spending, but the newest version of Windows, dubbed Longhorn, has been repeatedly pushed back and is now due to debut in late 2006--without one of its major innovations, a file system that allows users to search by content, not just filename.

Without must-have software, which means mediocre returns on software stocks, hardware makers can only watch their inventory of faster, more powerful computers sit on shelves as business make do with older computers running older software. That was painfully evident Sept. 2, when Intel Corp. reduced its third-quarter outlook due to slow demand for its microprocessors, the brains running the majority of the world's personal computers.

"Order backlogs for most technologies peaked last spring," Raymond James' Saut said. "That means orders are now shipping faster than they're coming in, which hasn't happened in quite a while. I just don't see the drivers for tech stocks that everybody wants to talk about."

Is there anything on the horizon? Ling points to the increase in super-fast broadband Internet service for consumers, which will eventually allow companies to stream TV-quality video to homes. That, Ling said, will not only make on-demand entertainment more widely available, but will also encourage new forms of targeted advertising.

"It's not unlike the introduction of the Internet itself," Ling said. "When a certain number of people have access to it, you see a rapid explosion of companies catering to that market."

Ling also pointed to the shrinking of hard drives -- both in size and price. As storage becomes cheaper, consumers will be able to store far more data in smaller devices, such as cell phones and PDAs. That capability could unleash a new wave of software specifically designed to take advantage of the increased memory.

But these are consumer plays, and while broadband and memory manufacturers may see some gains in the months and years ahead, consumer technology spending makes up just a fraction of overall technology spending around the world. The big buyers are businesses. What will attract them?

Web services, said Sherlund. These are complex programs, stored on computer servers, that workers can access from a variety of places -- their desktop computers at work or home, their laptops on the road and even their cell phones.

These services will allow for a great deal of interactivity, complexity and collaboration, so that people around the globe can work with the same data in real time.

Microsoft, IBM, Oracle and BEA Systems are all working on providing Web services to businesses. However, the technology is considered at least two years away from being widely adopted.

But until then, expect technology shares to remain stuck in a narrow trading range -- along with the rest of the market.

"It's certainly peculiar what we're seeing in tech. We haven't seen this ever, or at least in my 20 years watching it," Sherlund said. "It's going to be a while."

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