Information Technology and American Business - Information Technology Industry

While IT has been around since International Business Machines (IBM) began mass-producing computers in the early 1950s, it did not become a large part of the U.S. economy until the 1990s. A number of high-tech companies, such as Microsoft and Dell, had positioned themselves as the commercial leaders in Internet, personal computer, and cell phone technologies during the 1980s. When use of the World Wide Web became common in 1994 and the price of electronics began to drop, Americans flocked to these technologies. Revenues in the high-tech industries increased at a rate not seen in any industry since the postwar boom of the 1950s. Microsoft had sales of $140 million in 1985. Ten years later its revenue had increased to $6 billion; by 2004, when Microsoft produced the operating systems for over 90% of computers, its revenue topped $32 billion. Cisco Systems, the leading

TABLE 3.1

Gross domestic product of information technology producing industries, by industry, 1996–2001 and estimated 2002 and 2003
	1996	1997	1998	1999	2000	2001	2002 est.	2003 est.
	($millions)
Total Gross Domestic Product*	7,780,300.0	8,288,600.0	8,812,500.0	9,313,100.0	9,953,100.0	10,199,400.0	10,555,100.0	11,040,634.6
Year-to-year GDI change (%)		6.5%	6.3%	5.7%	6.9%	2.5%	3.5%	4.6%
*Gross Domestic Product here is Gross Domestic Income.
SOURCE: "Appendix Table 1.2. Information Technology Producing Industries Gross Domestic Product By Industry," in Digital Economy 2003, Economics and Statistics Administration, U.S. Department of Commerce, https://www.esa.doc.gov/reports/AppendixTable1.2.xls (accessed November 11, 2004)
Industry
Hardware
Computers and equipment, calc. machines	51,151.5	56,140.3	66,727.0	62,262.7	54,966.8	46,390.4	43,699.8	46,234.3
Computers and equipment wholesale sales	59,767.0	68,224.1	72,395.8	77,211.5	72,212.3	58,795.6	55,400.9	58,614.2
Computer and equipment retail sales	4,794.1	5,465.7	6,110.2	6,431.1	6,410.0	5,581.3	5,785.2	6,120.7
Electron tubes	1,564.9	1,568.4	1,619.4	1,758.0	1,362.1	1,180.6	1,324.2	1,561.7
Printed circuit boards	5,048.3	5,062.3	5,047.7	5,557.1	6,626.8	4,731.7	5,307.3	6,259.2
Semiconductors	51,601.8	64,135.3	59,977.2	68,021.7	67,896.6	44,118.2	49,485.0	58,360.3
Passive electronic components	15,332.2	12,996.1	12,351.3	12,657.7	14,778.6	11,037.2	12,379.8	14,600.2
Industrial instruments for measurement	3,146.2	4,914.9	4,761.8	4,581.3	4,801.6	4,567.2	4,137.9	4,241.8
Instruments for measuring electricity	5,684.8	8,991.8	8,755.0	9,010.4	10,346.8	8,236.5	7,462.3	7,649.6
Laboratory analytical instruments	3,040.5	4,111.2	4,480.6	4,715.0	4,730.3	4,723.1	4,279.1	4,386.5
Total hardware	201,131.5	231,610.1	242,226.0	252,206.5	244,131.9	189,361.8	189,261.4	208,028.6
Software and computer services
Computer programming services	29,412.5	34,967.9	47,654.0	56,405.1	63,261.8	61,145.4	61,818.0	62,693.1
Prepackaged software	47,683.4	52,261.5	61,408.5	69,063.2	75,961.1	77,709.1	78,563.9	80,200.9
Prepackaged software wholesale sales	3,483.8	3,818.2	4,051.7	4,321.2	4,041.5	3,290.6	3,100.6	3,174.6
Prepackaged software retail sales	647.7	710.2	794.0	835.7	832.9	725.3	751.7	769.6
Computer integrated system design	34,039.8	43,940.7	58,225.6	66,114.9	75,136.8	73,733.1	74,544.2	75,600.4
Computer processing, data preparation	23,106.2	24,391.8	26,299.2	30,028.7	33,602.5	37,850.1	38,266.5	38,808.7
Information retrieval services	5,252.9	6,892.9	9,729.7	16,354.3	25,312.6	26,155.7	26,443.4	26,818.1
Computer services management	10,150.4	11,789.0	9,278.9	11,882.5	12,779.5	14,891.0	15,054.8	15,268.1
Office machinery rental and leasing	4,160.1	4,820.9	6,495.8	7,292.2	7,846.8	6,635.5	6,708.5	6,803.6
Computer maintenance and repair	5,941.1	6,631.8	7,961.3	8,480.2	8,494.3	8,652.2	8,747.4	8,871.3
Computer related services, nec	2,460.0	3,385.2	6,060.6	7,496.6	9,330.4	9,548.0	9,653.0	9,789.7
Total software and computer services	166,338.0	193,610.1	237,959.3	278,274.6	316,600.2	320,336.0	323,651.9	328,798.2
Communications equipment
Household audio and video equipment	1,731.2	2,372.8	2,663.0	2,855.0	3,221.2	3,143.0	2,668.4	2,601.4
Telephone equipment, exc. ext. modems	16,958.9	23,766.1	25,415.7	32,744.8	35,843.0	28,005.2	23,776.4	22,087.2
Radio & TV communications equipment	18,016.1	24,273.9	22,839.9	23,122.9	26,756.9	22,751.6	19,316.1	17,943.8
Magnetic and optical and recording media	2,302.1	2,300.2	2,242.3	1,902.5	1,440.6	989.9	840.4	819.3
Total communications equipment	39,008.3	52,713.0	53,160.9	60,625.2	67,261.7	54,889.7	46,601.4	43,451.7
Communications services
Telephone and telegraph communications	163,900.0	166,700.0	173,900.0	193,700.0	208,000.0	218,500.0	224,846.0	240,980.0
Cable and other pay TV services	18,665.4	21,490.0	32,216.0	36,876.2	41,819.5	45,823.4	47,211.9	50,616.8
Total communications services	182,565.4	188,190.0	206,116.0	230,576.2	249,819.5	264,323.4	272,057.9	291,596.8
Total IT-producing industries	589,043.2	666,123.2	739,462.2	821,682.5	877,813.3	828,910.9	831,572.6	871,875.2
Share of the economy	7.6%	8.0%	8.4%	8.8%	8.8%	8.1%	7.9%	7.9%

commercial maker of Internet routers and switches, grew at an even faster rate. Between 1990 and 2001, the company's revenue grew a whopping 31,784% from sales of $69 million to sales of $22 billion. Dell Inc., the 2003 top seller of home computers, saw sales increase from $300 million in 1989 to $41 billion in fiscal year 2004.

The growth of these companies along with the rest of the IT-producing industries had a tremendous impact on the economy. Table 3.2 shows a list of the types of businesses that make up the IT-producing industries. According to Digital Economy 2003 (Washington, DC: U.S. Department of Commerce, 2003), the IT industries as a whole made up roughly 8% to 9% of the United States domestic economy between 1996 and 2000. These industries, however, were responsible for 1.4% of the nation's 4.6% annual average real gross domestic product (GDP) growth over these years. GDP is one of the basic yardsticks used to measure the U.S. economy and is defined as the value, or sale price, of all goods produced in a country less the cost of the materials that went into making those goods. In other words, the IT sector, which made up a little under a one-tenth of the economy, accounted for over one-third of the economic growth. Between 1993 and 2000, employment in the IT industries expanded rapidly as well. IT companies hired people at twice the rate of all private industries and added more than 1.8 million jobs to the workforce. Table 3.3 lists employment of IT industries from 1993 to 2002. Most jobs were added in the software and computer services sectors, followed by computer hardware and communication services.

TABLE 3.2

Information technology producing industries, 2003
*Wholesale and retail from computer manufacturer sales from branch offices.
SOURCE: "Box 1.1. Information Technology Producing Industries," in Digital Economy 2003, Economics and Statistics Administration, U.S. Department of Commerce, April 2004, http://www.esa.doc.gov/reports/DEChap1.pdf (accessed November 11, 2004)
Hardware industries	Software/services industries
Computers and equipment	Computer programming
Wholesale trade of computers and equipment*	Prepackaged software
Retail trade of computers and equipment*	Wholesale trade of software*
Calculating and office machines	Retail trade of software*
Magnetic and optical recording media	Computer-integrated system design
Electron tubes	Computer processing, data preparation
Printed circuit boards	Information retrieval services
Semiconductors	Computer services management
Passive electronic components	Computer rental and leasing
Industrial instruments for measurement	Computer maintenance and repair
Instruments for measuring electricity	Computer related services, nec
Laboratory analytical instruments	Communications services industries
Communications equipment industries	Telephone and telegraph communications
Household audio and video equipment
Telephone and telegraph equipment	Cable and other TV services
Radio and TV communications equipment

The End of the IT Boom

Toward the turn of the century many Americans thought that the IT boom could continue indefinitely. They invested enormous sums of money in IT and IT-related stocks. From late 1998 to early 2000 Microsoft and Dell's stock doubled in value, and Cisco Systems's stock quadrupled. The NASDAQ, a stock index that tracks the value of numerous IT stocks, rose from 2,490 on August 10, 1999, to a peak value of 5,048 on Friday, March 10, 2000—one of largest increases of a major stock index in history. Many Americans invested not only in large, well-established corporations, but also in small e-commerce companies such as Pets.com and eToys. Many of these "dot-coms" were brand new businesses that had yet to produce any profits. People invested in them in the hope that these "dot-coms" would enjoy the sort of huge rise in value that made early investors into Dell or Microsoft millionaires.

On Monday, March 13, 2000, the NASDAQ dropped nearly 150 points to 4,907. The index dropped for several more days, rebounded to a point close to its former high, and then proceeded to fall intermittently for the next two-and-a-half years, finally hitting bottom on October 9, 2002, at 1,114. Other stock indexes, such as the Dow Jones Industrial Average and Standard and Poor's 500, followed this downward trend, ultimately returning to 1998 levels. The entire country slipped into recession. The stock bubble burst because investors began to fear that a large number of IT and IT-related companies were not living up to expectations and pulled their money out of the market.

By 2001 many of the "dot-coms" were out of business, and many established IT companies began posting losses. From 2001 to 2002 Cisco Systems lost more than $3.4 billion, and Dell's annual earnings dipped by roughly $700 million. According to the Commerce Department in Digital Economy 2003, the main reason for the slowdown in the IT industries was that the private business sector stopped buying equipment. Throughout the 1990s just about every type of business—from law firms to paper producers to grocery stores to auto shops—was either buying or updating their computers, printers, and networks. Businesses that did not make such investments quickly became outdated and inefficient and did not survive. By the turn of the twenty-first century, many companies outside of the IT industries were done buying IT equipment. In addition, the components that make up the infrastructure for the Internet—fiber optic cables, routers, and switches—had largely been laid down by the late 1990s, so the need for these components greatly diminished as well.

The numbers in Table 3.1 support the Commerce Department's assessment. This table shows the GDP by sector for all IT-producing industries. As can be seen, those industries that produced hardware components and communications equipment were the hardest hit. The GDP for these industries dropped 22% and 18% respectively from 2000 to 2001. The industries that did reasonably well through this recessionary period were the software and services sector and the communications services sector. Although American businesses as a whole had bought much of their hardware, many still had the need for new software, Internet service, and computer maintenance.

Lost Jobs

In order to cut their losses in this down market, IT companies began laying off many of the workers they had hired during the 1990s. Digital Economy 2003 stated that nearly 600,000 jobs were shed in the IT industries between 2000 and 2002. This job loss accounted for nearly one-quarter of all the jobs lost during this recession. The rate of job loss in the IT industries was six times that of all private industry. Not surprisingly, Table 3.3 shows that the industry that lost the most jobs was computer hardware, which shed nearly 320,000 jobs.

While many of the jobs that were lost simply ceased to exist, two additional trends combined to decrease the number of traditional employment positions. "Outsourcing" indicates work contracted to nonemployees such as temporary workers; "offshoring" refers to situations in which the positions are assumed by workers located in another country where wages are cheaper. With the advent of e-mail, the Internet, and low-cost international phone calls, offices separated by continents could easily be linked through cyberspace. Geography was no longer such a big concern for a company. In India, for instance, there were large numbers of highly educated people who were well versed in English and computer science and were more than happy to work for a fraction of the typical

TABLE 3.3

Employment in the information technology producing industries, 1993–2002
	2002 NAICS code	Employment (000s)										Average annual rate of growth (%)
		1993	1994	1995	1996	1997	1998	1999	2000	2001	2002	93–00	00–01	01–02
Computer hardware
Electronic computers	334111	189.0	175.9	166.2	165.7	172.6	178.3	171.3	168.6	159.3	138.4	−1.6	−5.5	−13.1
Computer storage devices	334112	34.6	35.5	37.7	38.5	39.6	39.0	40.5	38.0	37.0	32.8	1.3	−2.6	−11.4
Computer terminals	334113	24.2	24.7	25.8	26.1	26.8	26.6	25.5	25.2	23.8	21.3	0.6	−5.6	−10.5
Other acomputer peripheral equipment	334119	57.9	61.6	65.8	74.3	77.8	78.4	72.8	70.1	66.1	57.2	2.8	−5.7	−13.5
Computer and software wholesalers	423430	211.0	211.2	221.1	236.0	258.9	287.0	302.0	298.4	280.0	251.4	5.1	−6.2	−10.2
Computer and software retailers	443120	120.4	127.3	137.7	148.1	164.8	175.3	187.8	191.4	178.9	162.0	6.8	−6.5	−9.5
Electron tubes	334411	24.8	24.5	24.0	22.9	21.9	20.7	20.6	20.4	19.1	16.2	−2.8	−6.4	−15.2
Bare printed circuit boards	334412	96.7	102.0	115.3	123.8	132.1	134.0	126.5	139.5	120.2	83.9	5.4	−13.8	−30.2
Semiconductors and related devices	334413	210.5	217.0	231.5	255.5	272.9	279.9	268.0	289.2	292.1	254.8	4.6	1.0	−12.8
Electronic capacitors	334414	16.4	16.7	18.2	17.4	17.0	15.9	15.2	16.9	14.4	11.0	0.4	−14.8	−23.6
Electronic connectors	334417	15.3	15.9	17.3	18.5	20.3	20.4	21.9	24.2	23.7	18.1	6.8	−2.1	−23.6
Printed circuit assemblies	334418	52.7	53.8	55.2	56.9	60.0	62.0	61.8	64.4	60.8	51.2	2.9	−5.6	−15.8
Miscellaneous electronic components	334415,6,9	103.0	105.5	109.5	111.6	115.6	116.9	116.5	121.7	115.1	96.2	2.4	−5.4	−16.4
Industrial process variable instruments	334513	59.6	61.1	63.3	65.2	65.6	67.2	68.9	70.1	67.4	61.2	2.3	−3.9	−9.2
Electricity and signal testing instruments	334515	69.6	68.0	68.0	71.0	72.0	72.5	65.2	65.8	65.1	54.8	−0.8	−1.1	−15.8
Analytical laboratory instruments	334516	38.6	36.8	36.0	36.5	36.9	37.3	36.5	35.7	35.4	33.6	−1.1	−0.7	−5.2
Semiconductor machinery	333295	18.1	19.3	22.4	24.3	24.9	25.2	23.1	24.7	23.2	19.6	4.5	−6.1	−15.5
Office machinery	333313	14.7	14.9	15.6	15.8	16.2	16.1	15.4	15.3	14.7	12.7	0.6	−3.9	−13.6
Total computer hardware		1,357.2	1,371.7	1,430.6	1,508.2	1,595.9	1,652.8	1,639.5	1,679.6	1,596.4	1,376.4	3.1	−5.0	−13.8
Software and computer services
Software publishers	511210	125.9	136.8	157.2	174.8	195.2	214.9	235	260.6	268.9	256	11.0	3.2	−4.8
ISPs and web search portals	518111,2	39.7	41.2	48.6	59.6	70.4	86.4	132.2	194.3	176.8	142.1	25.5	−9.0	−19.6
Data processing and related services	518210	223.4	226.9	242.6	252	268.4	282.8	307.1	315.7	316.8	305.3	5.1	0.3	−3.6
Computer and software wholesalers	423430	11.9	11.9	12.5	13.3	14.6	16.2	17.0	16.8	15.8	14.2	5.1	−6.2	−10.2
Computer and software retailers	443120	15.7	16.6	18.0	19.4	21.5	22.9	24.5	25.0	23.4	21.2	6.8	−6.5	−9.5
Custom computer programming services	541511	199.4	220.6	255.7	286.4	331.8	388.6	464.2	540.0	562.9	511.8	15.3	4.2	−9.1
Computer systems design services	541512	190.1	209.4	242.6	285.2	343.2	408.1	468.7	502.9	520.3	462.4	14.9	3.5	−11.1
Computer facilities management services	541513	51.8	51.4	52.8	54.5	55.4	58.6	63.9	64.9	64.6	58.4	3.3	−0.5	−9.6
Other computer–related services	541519	43.6	49.9	60.2	75.3	96.3	119.6	136.1	146.5	150.1	130.1	18.9	2.5	−13.3
Office machine rentals and leasing	532420	10.5	10.6	11.0	11.5	12.0	12.8	12.9	13.1	12.9	13.0	3.3	−1.5	0.6
Computer and office machine repair	811212	39.9	41.4	44.6	48.2	51.2	51.4	51.0	47.7	48.3	46.6	2.6	1.3	−3.5
Total software and computer services		951.9	1,016.7	1,145.7	1,280.2	1,460.0	1,662.2	1,912.6	2,127.5	2,160.8	1,961.0	12.2	1.6	−9.2
Communications equipment
Telephone apparatus	334210	92.4	92.0	93.8	96.2	100.8	105.6	101.6	106.5	97.2	70.6	2.0	−8.7	−27.4
Broadcast and wireless communications equipment	334220	93.3	100.2	110.6	112.4	113.8	110.8	104.4	107.3	102.5	89.1	2.0	−4.5	−13.1
Audio and video equipment	334310	57.2	57.6	53.8	52.9	52	53.2	52.4	52.1	47.4	41.6	−1.3	−9.0	−12.2
Fiber optic cable manufacturing	335921	14.7	15.4	15.8	15.9	16.4	16.9	17.9	20.4	20.2	15.1	4.8	−1.2	−25.1
Software reproducing	334611	20.3	21.8	23.7	24.8	25.4	26.3	26.9	28.2	27.1	25.3	4.8	−4.1	−6.4
Magnetic and optical recording media	334613	5.4	5.7	6.2	6.5	6.7	6.9	7.1	7.4	7.1	6.7	4.8	−4.1	−6.4
Total communications equipment		283.3	292.8	304.0	308.8	315.1	319.7	310.3	322.0	301.5	248.4	1.8	−6.4	−17.6

TABLE 3.3

Note: NAICS is North American Industry Classification System.
SOURCE: "Appendix Table 2.2. IT-Producing Industry Employment, 1993–2002," in Digital Economy 2003, Economics and Statistics Administration, U.S.Department of Commerce, April 2004, http://www.esa.doc.gov/reports/appendixtable2.2.xls (accessed November 11, 2004)
Communications services
Wired telecommunications carriers	517110	624.5	621.9	611.1	603.2	629.9	652.1	688.1	719.2	732.2	662.4	2.0	1.8	−9.5
Cellular and other wireless carriers	517212	47.4	60.3	75.9	92.5	111.0	121.1	134.3	155.7	171.0	168.7	18.5	9.8	−1.3
Telecommunications resellers	517310	170.5	171.8	171.2	171.6	181.3	188.7	200.2	213.6	214.1	185.7	3.3	0.2	−13.3
Cable and other program distribution	517510	75.8	80.4	86.6	94.6	96.9	102.4	110.9	123	129.2	128	7.2	5.0	−0.9
Satellite and other telecommunications services	517410,910	15.1	15.3	16.5	17.5	19.3	20.4	20.5	21.2	25.2	28.9	5.0	18.9	14.7
Communications equipment repair and leasing	811213	18.1	18.2	19.2	20.3	20.9	20.8	20.6	19.8	20.1	19.4	1.3	1.5	−3.1
Total communications services		951.4	967.9	980.5	999.7	1,059.3	1,105.5	1,174.6	1,252.5	1,291.8	1,193.1	4.0	3.1	−7.6
All IT-producing industries		3,543.8	3,649.0	3,860.8	4,096.9	4,430.4	4,740.3	5,037.0	5,381.6	5,350.4	4,779.0	6.2	−0.6	−10.7
(Year to year rate of change)			3.0%	5.8%	6.1%	8.1%	7.0%	6.3%	6.8%	−0.6%	−10.7%
All private industries		91,855	95,016	97,866	100,169	103,113	106,021	108,686	110,996	110,707	108,886	2.7	−0.3	−1.6
IT share of all private industries		3.9%	3.8%	3.9%	4.1%	4.3%	4.5%	4.6%	4.8%	4.8%	4.4%

American hourly wage. Companies such as Dell moved high-paying technical assistance jobs, low- to mid-level computer programming jobs, and even technical documentation jobs to other countries.

According to Mark Gongloff in "U.S. Jobs Jumping Ship" (CNN/Money, July 2003), nearly 40% of U.S. companies have either contracted IT services or have run a pilot offshore outsourcing program. Deducing the number of jobs that have moved overseas since 2000, however, was all but impossible. The Bureau of Labor Statistics (BLS), the government agency in charge of recording who loses their jobs and why, only began counting the number of jobs moved overseas in 2004. In "Mass Layoff Statistics in the United States and Domestic and Oversees Relocation" (Washington, DC: Bureau of Labor Statistics, December 2004), Sharon P. Brown reported that 10,722 U.S. positions in private, nonfarm industry had been eliminated between January and September 2004 because the work had been moved to another country.

IT Becomes a Mature Industry

By 2003 the IT industries showed signs of recovery. As can be seen in Table 3.1, the GDP in the IT-producing industries grew by 4.6% to $871.9 billion in 2003 as business spending on IT equipment began to accelerate. In the first nine months of 2003, IT spending by the private sector rose 2.3% on average. Consumer/household spending on IT equipment, which did not abate as sharply during the recession, grew faster through 2002 and into 2003. In addition, the IT industries did not cut back on research and development during the recession. Consequently, many new products were in their pipelines by the end of recession. Nevertheless, employment numbers in the IT industries had not recovered significantly by 2003. In Digital Economy 2003, the Commerce Department reported that these developments taken together point to the fact that the IT industry had settled into maturity. Future growth, the report predicted, would likely be more modest and less volatile than it was in the 1980s and 1990s.