Effect of the Depression on Technology

Here’s the state of play as I see it: it is expensive and difficult to borrow and this shows no sign of change; the US debt is rising instead of falling, propelled by the Iraq War and the reliance on China for material goods unreciprocated by a reliance from China on American goods; and this adds up to difficult times for business in America for at least three years and possibly longer. From these premises, it’s possible to cautiously guess at what the future will hold. (Bearing in mind that every day brings new revelations about the grim state of world finance, so the crystal ball is murky at best)

First, this recession will be good for innovation because recessions generally are. During boom times, companies direct development and occupy great talent with at best evolutionary improvements over the state of the art. Companies are great chasers of new things, but aren’t great at making new things. A recession means technologists cease to be paid vast amounts to duplicate the work of others. The Great Tech Bust of Ought Two gave us 37Signals, Flickr, and del.icio.us and there’s a strong argument to be made that many companies spent the next six years chasing what they created.

Second, this recession will be great for free and open source because of the shortage of cash. Last recession saw the mainstream legitimisation of open source operating systems (youngsters, take note: there was a time when it wasn’t automatically okay for an IT department to use Linux) because it was clear and away the most cost-effective choice. The saying I use is, “come for the price, stay for the quality”. Perhaps this recession will legitimise many of the applications (CRM, finance, etc.) higher up the stack. (However, I’m not about to stick my neck out and predict 2009 as The Year of the Linux Desktop)

Third, open source services and cloud computing will benefit from the tight financial situation where conditions will favour opex and not capex. It wil be nigh impossible to borrow to buy hardware or a major software license. An open source software product is free to get through the door, and services around it are delivered from opex not capex. Similarly, cloud computing lets a company pay a little to use someone else’s enormous capital investment. It looks like, if the rumours are true, Microsoft will launch Windows Cloud just in time. Don’t expect to see anyone else putting in new data centres any time soon—in fact, the days of deep-pocketed investors covering high burn rates are over for a while.

Most consumer apps will be a harder sell with the US dollar in the gutter while the country haemorrhages cash overseas. This is bad but won’t make profit impossible, you just have to really be making something consumers need. Apps like Wesabe might find a whole new audience in a recession (disclaimer: O’Reilly is an investor in Wesabe). The conditions don’t suit speculative acquisitions, so expect a return to the focus on the bottom line that (very briefly) characterised the fallout from the ’01 tech bust. Sorry, dreams of getting people to pay for your toothpick collector social network may have to wait until the return of the stupid money in 2013.

As Phil Torrone said, people will have more time than money. This is good for open source software, but also for hardware and Make-style reconnection with the objects around us. The low-cost high-impact physical events we’ve created (Ignite, hacker meetups, coworking spaces, foo/bar camps) will thrive even as big-ticket conferences feel the effects of pinched pennies. The killer app in the “web meets world” space may just come from a Maker with spare time who sees a great need.

That’s how I see the world and what I think it might favour and disadvantage. How do you see it? What am I missing? Share your views in the comments, and a Head First SQL fridge magnet set for the commenter whom I find the most insightful.

  • Well, while I wouldn’t go so far as to say that depression is good for the ICT industry, it does have some positives as you’ve pointed out. Probably more so than many other industries. A couple of more points come to mind:

    – Particularly if the depression and thus cost savings continue for a longer time, the telecommunications industry should see some increased demand for telepresence and other high-tech remote meeting facilities as companies cut down traveling costs.

    – Additionally, bandwidth demand and call volumes in general are likely to increase, along with renewed interest in lower cost VoIP-solutions. While on the surface of things this is good for the providers, there will probably also be continued moving towards capped or limited data packages (on fixed as well as mobile connections) to contain heavy users.

    – Another area where IT will be needed more is general cost cutting and process improvement; anything that can further be automated will be automated.

  • daniel


    I wonder about a couple of things you say here. First, ” The Great Tech Bust of Ought Two gave us 37Signals, Flickr, and del.icio.us and there’s a strong argument to be made that many companies spent the next six years chasing what they created.”

    Is that true? Was it the tech bust that gave us these companies or did the tech bust clear out a lot of the other noise that might have kept us from finding these gems. How many other such products/companies/frameworks might we have had if there was money to be had.

    Second, what happens to the time that people have to produce open source software in times of recession/depression. When you are working more for less money, do you have the time to devote to open source?

    I don’t know the answers to either. Just asking.


  • gregor

    Sorry, dreams of getting people to pay for your toothpick collector social network may have to wait until the return of the stupid money in 2013.
    After the economic disaster in Argentina at the end of 2001, lots of people suffered for many years. At the same time, involvement in cultural activities (theater, sport, dance etc…) went up big time. A friend of mine told me that although it looks counter intuitive, people did that to avoid becoming “loco”.
    People might pay with attention (time) instead of money for a toothpick collector social network…

  • Scott

    While these are no doubt going to be tough economic times, it is ignorance to claim that we are ALREADY in a depression. A depression is 4 consecutive quarters of negative economic growth. Has not happened. May not happen. The US is a pretty resilient bunch of folks.

    So, perhaps you can limit your articles to your sphere of influence and expertise and save us the time of having to digest your political tripe ( trade deficits, et al ) about why we are in these current conditions. I can assure you it is not as simple as “we don’t sell enough of our goods to China.” There is blame enough for everyone on this one.

    That being said, I agree that tough times foster innovation. As the saying goes, “Necessity is the mother of invention.”

    Those in the technology industry will have the unique ability to provide the levers to keep productivity up while things are going bump around us.

  • mlvlvr

    I think you have the sign on the dollar term wrong. The dollar is strengthening now, not weakening: $1.35/Euro compared to $1.60/Euro a few months ago. Why? a) The US is ahead of Europe and Asia in feeling the pain, or b) The US is deemed more capable of getting itself out of this, or c) You were right and this is just noise.

  • While I don’t subscribe to the depression scenario, although I do think we are in for a very rough ride, I think that the need to shed costs will finally start the cloud computing ball rolling. I expect a major corp. to dump MS Office and use a competing cloud product[s] as a cheaper alternative. I also think Ellison will get his eye poked when it is shown that cloud databases scale better than Oracle and are vastly cheaper, leading a number of prominent businesses to desert Oracle for the cloud. Companies will start to abandon their “secure inside the firewall enterprise solutions” for cloud systems in search of lower costs. I expect a real Web 2.0 (harnessing collective intelligence) application that is tailored for business will arrive and give that move a big push as companies see the real value in Web 2.0.

    What I think will really make an impact is some cloud/cloudlet infrastructure that will free end users to build their own apps instead of relying on IT. This will be as big as the PC revolution in freeing users from their corporate IT gatekeepers.

  • hi Nat,

    I’m working as a contractor now for Fortune 500 company. There is a lot of fear that the client I work for might prune down the number of contractor if the economy goes down any further. That puts the onus of PRODUCTIVITY and PERCEIVED productivity on us.

    Otherwise, the focus on productivity on consultants/contractors/employees will keep growing. What that would mean to me is that Groovy/Rails/JRuby on Rails will be open to more places than otherwise.

    Groovy/JRails will be used for all those scenarios where you want a quickNdirty app. Offshoring/outsourcing/rightsourcing along with CLOUD COMPUTING will become even stronger than now.

    Professional Open source companies like JBOSS(now Redhat) will have more opportunity. More companies should get into the professional open source bandwagon and they will(see spring).


  • Mark


    Your title says “Depression” and your text says “Recession.” Did you mean to mix these, or is it a typo? I didn’t know it had officially been pronounced “the” Depression already.

  • @Daniel – it’s an interesting hypothesis, that the recession just cleared out the noise so we could find 37Signals, Flickr, etc. However, I think the following years are the counter to that: I’m hard-pressed to think of something more significant than YouTube created after the first Web 2.0 conference in 2004 (my benchmark for when things started to feel like they were getting better). YouTube is big, but surely we should have seen more seismic shifts?

    As for time spent producing open source software, my personal feeling is that we didn’t see open source contributions go down in the last recession but I’d love to hear from others in open source what their perspective was. @gregor’s point about cultural activities increasing in Argentina during their 2001 recession sounds like an indicator in favour of open source.

    @Scott – feel free to argue with my premises! I’d love to hear your thoughts on why the US trade deficit and national debt are where they are.

    @mlvlr – thanks for the correction on the dollar. You’re right, things are turning around. I think that’s a sign of the “contagion” spreading from the US to the rest of the world. As you say, the US was ahead of everyone else in feeling the pain. Fingers crossed you can be ahead of everyone else in recovering!

    @anjan – oh that’s an interesting point! I like the idea that whereas Enterprise Java was seen as SAFE before, the same way Windows servers and Oracle were seen as safe, now we might see some of the high-productivity open source frameworks and languages allowed into the enterprise. Thanks!

  • Tony

    Some of the smartest economic minds are saying that what we are seeing is on the scale of the great depression. While it’s true that you can only truly label something a depression or a recession in hindsight, it is clear that we are heading for some very rough times. I don’t think that the author was wrong in using the word depression, due to the severity of the market contraction. What we are seeing is the tip of the iceberg.

    …I think it was Regan that said: “A recession is when your neighbor is out of a job, a depression is when you’re out of a job”

  • I’ve just printed this and planning to share this to my husband. We are dealing with this as I will be graduating from college and entering the job market. The reasons you mentioned were the reasons why I chose to work within Open Source. It allows me to work and tinker without any cost-prohibitive licensing. It provide me opportunities to train myself hands-on outside a formal education. And it provides a forum where problems of that sort can be discussed in the open.

    In case I have to face a 25% unemployment rate like the Great Depression, I will be a hacker housewife and improve my skills while taking care of husband and home. Open Source allows me that luxury.

  • David M.

    While I agree with most of your points, there are some additional considerations. Good for Innovation? maybe. I believe that innovation is a cultural effect within companies and cannot be turned on or off due to economic conditions. For example, if the company has a traditional mindset and values only those incremental improvements that can be envisioned by the product management team as opposed to fresh ideas regardless of origin, then innovation is going to be an uphill climb regardless of how many great ideas are floating around.

    I work for a Fortune 500 company and saw several of the effects you describe today in a sales meeting. The discussion was around upgrading a security appliance that the customer already owns, and the rub was that everyone is freezing capex so whatever we could do as the vendor to make it an opex transaction was the only option for this particular customer. The cloud computing comments certainly mesh well with that dose of reality.

    The recession/depression (remains to be seen, but there is already perceived impact) will also benefit those companies who can show a clearly defined ROI – like virtualization products – but also those companies who attempt to clean up the mess government is going to make. The regulations that come out of the current crisis are going to be draconian, and you can expect more SOX-like regulations with the associated cost of compliance. The companies that try to help nail that jello to the wall will profit – for a while, until companies scream loudly enough and get the initial version reformed or create loopholes.

    The additional costs of compliance will also affect new launches and IPOs due to the additional costs, so there is another negative drag on innovation, or at least the monetization of those innovations.

    Consumer apps will be affected, but maybe you can combine the social toothpickers with a cloud model?

    How about a social network that harnesses its members to contribute to open source projects? Instead of playing facebook games or posting pics of yourself wasted at the latest party, get the members to commit to donating that extra time to a small piece of a large open source project. Of course it would take a large number of people and lots of qualified peer review, but there have to be some projects that could benefit from a legion of even poorly skilled members if given clear directions. Better yet, use it as a learning process – join a new social network and learn to program, starting with your page, then progressively harder tasks. Help others by online mentoring in resource-challenged places, etc.

  • Scott

    Nat —

    My beef was not with you stating that the trade deficit is in large part due to the massive imbalance with China. This is obviously a problem, and one not easily solved. Since China holds so much of our debt, simply imposing sanctions is a high risk proposition. And, Americans like things cheap. Until we lose our appetite for getting a toy for $10 that would cost $20 if made in the US and probably made better, I dont see how you change it.

    My problem was that you tied it so heavily to the current state of the economy, and that you claimed that we are in a depression. We just simply are not in a depression, and I don’t think we will be. In my mind, the last 6 weeks or so of upheaval are the direct result of a few major problems:

    1. People borrowing more than they should and being unable to pay it back

    2. Financial institutions leveraging those debt instruments to record levels, essentially creating a massive house of cards.

    3. The government’s insatiable appetite for money ( as witnessed by the record budget deficits ).

    Quite simply, the laws of economics are tried and true. You can only spend more than you make for so long before it catches up with you. We are seeing this at every level of US society.

    I hold no affiliation to either party running for election, and blame them both equally for this mess. Equally culpable are the millions of Americans that bought more than they should. Caveat emptor, indeed. But we get to cover the mess.

    Enjoy the columns here on O’Reilly. Keep it coming…

  • Nat,

    One added point to how an economic downturn spurns innovation. As companies cut-back to maintain profitability, they tend to slash workers.

    This liberates a great many brilliant people who have many ideas for commercialization, pollinating the landscape with new entrepreneurs and small companies (who are much more likely to embrace the Open Science movement than the Good Old Boys they are running away from).

  • Russell

    To be honest, I don’t think people will turn to Open Source software overnight. They will push their current proprietary hardware and software for as long as their licences allow. Changeovers cost money, and they’ll delay that for as long as possible. However, once the time is up, and their hand is forced – they’ll definitely consider swapping over to FOSS.

  • Well I surely hope this is the case. I’d love to see the Linux community grow at the same time

  • Jim Jones

    Somehow I just cannot imagine a recession being good for anything!


  • Definitely agree with all of your main points, Nat. This recession, with some creative thinking, can open up more opportunities. We won’t see the same type of web technology advances as we did after the dotcom bubble, but certainly we’ll see advances in how people and organizations use the tools we have.

  • @JimH – you’re right, layoffs liberate people. But that’s a pretty upbeat view: Few people greet being laid off in a recession with a cheery shout of “hooray, now I am free to invent the next big thing!”. I try, as I’m sure you do, to balance optimism with awareness of the upsetting human consequences of the recession.

    @Scott – my China riff was mainly about the low currency. I can’t see the USD soaring while the Government and the people both spend beyond their means. It’s like watching a company grow by borrowing and spending, but they don’t have enough asset growth to repay the debts. Nobody notices in the flurry of deals, but when they start to go sour …. I agree completely that the current recession is from idiotic financial industry borrowing.

    @David M – thanks for the supporting anecdote about the Fortune 500 company. It’s a tough time to be selling software!

  • @Nathan – one answer to your question about open source software development. Randr is a small software development company that develops business applications for small and medium businesses. All java, running on apache, tomcat and ubuntu. We are putting all our software up on sourceforge.net and by the end of the year hope to have all our products on sourceforge. (have 7 apps there already) How do we do this? We can afford to devote maybe 10-20% of our time to open source. Some changes a customer will pay for partially and that helps, but the truth is I put in 20-30 hours a week in the evenings, mornings and week ends to make the big pushes happen. That’s my sweat equity. Everyone puts in extra time.

    @Russell – swapping out software is very expensive, in manpower, so we have tried to make our open source software easy to link into with existing applications. Bottom line is we tell our customers to keep the old stuff as long as you can, but add the new apps as FOSS and link the 2 together, through passing data, pulling data, etc. That is working extremely well in many of our customers.

    Will the recession/depression be good for open source? We are seeing more acceptance of linux and open source apps than just a few years ago and I believe we are already seeing a lot more interest in just the past month. I expect that will continue. And once you open the barn door, it is almost impossible to get the animals back in. Meaning, if we see a large movement to and acceptance of FOSS applications, if and when the economy gets stronger, those companies are not going to move over to proprietary and for fee software.
    Vive la revolution :)

  • opps that was Daniel with the question on open source software development.
    Ann Richmond

  • Damn it, after a number of weeks of hard work, I was just about to release silverstripe-toothpick-collector-social-network-module.tar.gz

    What a spoil sport!