The news that Sun Microsystems was laying off 18% of its workforce (that’s 6000 people) counts as the first frost of winter. The financial reality for the tech sector is simple to understand. About 50% of investment worldwide goes to IT – as that spend declines (and it has already started to), so corporate spend on IT will decline.

Don’t forget that the dot com recession was strongly focussed on IT because 100% of dot com capital investment and a good deal of telco investment was in IT. As they jointly fell over, IT companies that focussed in that market area watched their revenues tumble. The IT industry was hurt badly whereas most other sectors were only mildly bruised. The IT sector will be hurt just as badly this time, but so will everyone else.

An Aside: It has been amazing to watch this US Government make the economic train wreck far worse. Why it let Lehman Bros fail is beyond comprehension – what part of “lender of last resort” did Paulson and Bush not understand. (And doesn’t it amaze at least someone that John McCain and the Republican politicians in general were declaring that the fundamentals of the economy were sound, when the credit figures for the US economy were flashing red warning signals, and had been for quite a while, and the full extent of the junk mortgage derivatives disaster was already known.) So, the hurricane came to Wall St at once, the stock market collapsed and the credit markets closed up shop. The US economy began to have a seizure. The immediate impact was a complete loss of commercial confidence, which has seen many companies preemptively shedding jobs – and that in turn has resulted in an instant collapse in consumer confidence which has made a deep recession inevitable. Way to go! (Roll on January 20th 2009)

So the consumer side of the IT market (games, home computers, home entertainment systems et al) is now tanking. And that means it is bad news for IT across the board – as far as revenues are concerned.

In a month or so I’ll do what I do every December. I’ll start writing a series of prognostications about what I think will happen in IT in 2009. It’s going to be hard to be optimistic for much of the IT sector – so I guess I won’t be. There’s one thing that springs to mind immediately and it’s this:

Right now it’s better to be a software vendor than a hardware vendor.

Here’s why. In the last IT recession eBay was inundated with companies selling servers. The same will happen this time, except more so. The availability of significant numbers of second user servers simply pulls the hardware market down. This time I think we’ll see a fair number of home computers put on the auction block too, so the consumer market will be impacted more than it was before. By comparison, you won’t see much software of any kind available on eBay.