July 27, 2004

View from Silicon Valley- "One-off" insights into Silicon Valley.

© View from Silicon Valley, 2004. All rights reserved.

Thank you all for the feedback on "The Inverse Boom".(*) I received a number of excellent suggestions for items to add or variations on the theme. At the risk or over-using a once-clever idea, below are some additional, less-visible symptoms of the current state of Silicon Valley. Unless you look and listen closely, or dig into footnotes, most of these never seem to get much publicity:

The Santa Clara county median house price is at an all-time high ($599K for June, 2004) but the total assessed value of property in the county dropped 2% over the past year. This is particularly remarkable given home prices and sales volume are up strongly. Not to mention any house held seven years or longer has likely doubled in value (and therefore it's taxable assessment increased 40%+.) This is the first county-wide drop in property value since 1994. Long-time readers may recall 1994 was near the bottom of the last Silicon Valley housing price recession (-38.9% over five years) and the last of four or five consecutive years of drops in the county's total assessed value. Just how weak is the commercial real estate market when it can drag down the total despite huge gains in private home values? What does this say about job prospects going forward?

Prime Silicon Valley home rentals are still not plentiful and some are even taking multiple bids. (Multiple bids to buy houses are reportedly slowing, but still taking place.) However, some rentals are languishing empty and landlords are being forced to lower their asking prices. The apartment market is softer than 2000 and even softer than 2003 as rents continue to decline.

It is not really a "one-off" point but it is interesting to observe houses for sale are being snapped up on the unshakable assumption Silicon Valley housing prices "always" go up. I listened to a prospective landlord explain paying $1.5M for a house listed at $1.25M was reasonable since, based on his "long time" experience, the worst the real estate market might do is drop "maybe 10% for a year or two." Maybe someone can explain to me how to fully and reliably service a $1.5M investment, which is also undergoing easily $50K+ in renovations, by renting it out at $3,100 per month? (Property tax alone is ~$18,000+ per year.)

Rates are cheaper, and leadtimes are shorter, to move your household goods into Silicon Valley than out. In 1999 and 2000, it was the other way around. In both cases, moving companies are/were aggressively trying to win business by giving low-ball weight estimates and "not to exceed" quotes.

Newspapers and radio breathlessly report Santa Clara county added ~4,000 net total jobs in May and now again in June (the gain is 0.0048 or <0.5% in a universe of ~817,000). Digging into the statistics, engineering and IT are flat (within plus or minus 100 -200 jobs). Nearly 75% of the job gains are concentrated in construction, retail and temp workers.

A source reports H-1B visa activity was very high January through March, 2004 but has since dropped to near-zero. This is a clear sign employment in engineering and high-tech jobs in Silicon Valley has softened in the last 90 -120 days. ( I must confess I was surprised to hear any Silicon Valley companies still want H-1B employees. I thought companies would insist any qualified tech person they wanted from India or China be employed in India or China so as to avoid paying US wage rates.)

Children's summer programs were jammed in 2000 but vacant in 2003. In 2004 the programs say they are full but we keep getting into every program we want and they are not full when we get there. Could something have happened between the spring, when reservations were being made, and summer, when the bills were due? One of the programs we use is an inexpensive few hours at a prestigious private school where the regular, school-year tuition runs $20,000 per year. Their administrators are being VERY nice to all the kids who are not full-time students in hopes of recruiting their parents' money.

A large children's day care firm was quoted on the radio today as "optimistic" and experiencing a "slight" recovery from the enrollment drops of the last four years. They are expecting to recover to 2000 work levels, "assuming the current trends hold", "within 18 months." As I have come to expect, the radio reporter emphasized only the firm's expectation of recovery in his summary without mentioning the caveat. Even if they do recover by early-2006, this is still four years earlier than Silicon Valley Manufacturing Group's estimate of 2010 to achieve 2000-level employment. (Editor's note: I don't believe SVMG either.)

I have received more than one telemarketing calls with significant background "pops" and "noise," from people obviously reading scripts, with distinctly Indian accents. Has VoIP now enabled the offshoring of even telemarketing jobs? I thought the quality and clarity of VoIP calls was supposed to be as good as for land line calls. (Maybe they were just using the freebie VoIP you can get from Yahoo.)

1Q04 VC funding was up nationwide but down in Silicon Valley. It was down worse in computers and technology (since Biotech funding was up). 2Q04 VC funding was down nationwide (driven by a drop in Biotech funding) and flat in Silicon Valley. Total nationwide 1H04 VC funding shows Silicon Valley lost market share.

At the risk of picking on any particular company or stock, I will mention Research in Motion's Blackberry is hailed as the "second coming" in electronic gadgets. RIMM reports total subscribers reached 1.34M last quarter and the stock spiked. Today's $61.20 stock price is a 92.40 current P/E and a market cap of $11.44B which is 14.8x times $771M total sales. Obviously, RIMM's recent growth will continue and the stock is going to power straight to the moon, right? Nobody seems to notice cell phones are currently selling at 550M+ new units per year meaning RIMM's market share is 0.0024 or 0.24% of "new" subscribers. It's lower if you calculate their share of total subscribers. Does any of this sound familiar? Does anyone suppose there might be some competition in this niche before RIMM's sales reach a significant share of the total market?

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