High tech amidst a falling economy

Why the technology industry in Massachusetts could survive, thrive, or starve in '09

By Joe Pinciaro

Few people need a newspaper right now to know that the economy is in tough shape.

In unemployment lines, supermarket lines, and - as FY2010 approaches - budget lines, news has been grim for months. Nothing seems to be recession-proof.

Even the technology industry of Massachusetts.

On Feb. 19, Boston Globe reporter Robert Weisman wrote, "The state technology industry is having an identity crisis." Now, that same high tech industry that flourished under the Route 128 moniker decades ago - and has stayed well above water since - could be seeking shelter along with every other facet of the economy as the juggernaut recession of 2008-2009 continues to roll.

But depending on who you ask, Massachusetts high tech also might be well-prepared to weather the storm.

Taxes up, venture capital down

Recent numbers released by the Massachusetts High Technology Council (MHTC) forecast a down year in '09.

Venture capital is tightening up nationwide, and with what some consider an unfavorable tax structure in place, high tech in the area that once hosted America's "Information Highway" could find itself on unstable ground.

"The major stumbling block in Mass. is the high cost of living (hence the high cost of labor), brought about in part by the tax structure," wrote Jeff Ray, CEO of SolidWorks (one of 99 companies listed as members of the MHTC) in an e-mail. "But taxes aren't the only reason."

According to the Tax Foundation, a tax research group based in Washington, D.C., Massachusetts' tax system isn't one of the state's strong points. In the Tax Foundation's annual national review, the Bay State ranked in the bottom 10 percent nationally in corporate tax, unemployment insurance tax, and property tax indexes.

The Massachusetts Tech Collaborative lists states with the ten most vibrant tech sectors. Of the Top 10 Leading Technology States, the Tax Foundation indexes say Massachusetts has the highest corporate and unemployment taxes of all.

The result is an environment not conducive to business, technology related or otherwise. As states battle with one another to keep business - and tax money - within its borders, Massachusetts could be opening the door for them to go elsewhere.

But high taxes may be only one challenge for the high tech sector. Venture capitalists are feeling the squeeze.

According to MassHighTech, Dow Jones VentureSource recently reported that in the first quarter of 2009, venture capital profits via mergers and acquisitions dropped 65 percent from last year. For Massachusetts - a state second only to California in venture capital investment - that could be the first ominous sign of 2009.

But Patricia Flynn, Trustee Professor of Economics and Management at Bentley University, disagrees.

"Yes, venture capital right now is kind of low," Flynn says. "It'll come back. It's not like they're taking the money and giving it to somebody in Kansas or somebody in Australia. They're sitting on it - waiting."

Knowledge is power

Joyce Plotkin, the president of the Massachusetts Technology Leadership Council, noted a "dichotomy in the technology industry" between smaller start-ups and those that are more established.

"We have a lot of little subsectors that are seemingly on an upward curve," Plotkin said, particularly mentioning the robotics, video game, and wireless technology industries.

"I think a lot of people are excited about the fact that instead of one dominant industry," she added, "we have a number of pockets of excellence throughout the sector that help keep the industry moving forward. You see the growth and dynamism in the smaller companies."

Last fall, Harmonix Music Systems, a video game development company that employs 167, was named the 5^th best company to work at in Metro Boston by the Globe. In March, the company - which made a name for itself creating Guitar Hero and Rock Band - made international headlines, announcing the release of a Beatles' version of Rock Band due out in September.

Harmonix, founded in 1995 by two MIT students, is one illustration of the deep and educated talent pool Massachusetts has to offer. With more than 30 colleges and universities in Boston alone, the graduates of those institutions are one of, if not the, state's biggest lure for business.

"You won't find such easy access to brilliance, passion, capital, and strong work ethic anywhere else on the planet," wrote Ray. "Believe me, I know; I travel the world."

As 2009 shapes up to potentially leave a bitter in the taste of the mouths of many business owners on state, national and global levels, at least the tech industry in the Bay State can rest knowing its place stands well above the national average.

The Information Technology and Innovation Foundation, a Washington, D.C. think tank, ranked Mass. as the number one state in both its Innovation Capacity and Digital Economy rankings in The 2008 State New Economy Index: Benchmarking Economic Transformation in the States.

Innovation capacity includes high tech jobs, venture capital, research and development, and science and engineering. A digital economy is a measure of a states' economy conducted electronically. That would include online accessibility and the use of information technology in schools, government services, and health care.

While indexes and capacity rankings may or may not foretell the future of the Massachusetts high tech industry, at least some remnants of the old Information Highway still linger.

In 2009, the tech sector may find itself in an identity crisis or it could stave it off. But at least it has an identity to lose.