Tech firms eager to gobble stimulus funds

The biggest federal public works project since World War II offers tantalizing possibilities for the struggling tech market.

President Obama's staggering $787 billion economic stimulus package, passed in February, could be a financial oasis — especially for an industry facing a precipitous drop in tech spending by economically ravaged corporations and consumers.

It allocates tens of billions of dollars for tech upgrades to energy ($4.5 billion for smart grids), health care ($20 billion for electronic medical records), broadband deployment and education.

The dizzying amounts have tech giants jockeying to land government contracts, the first expected to be awarded in the next few weeks. IBM ibm, General Electric ge, Cisco Systems csco, Intel intc and some well-positioned start-ups are among suitors poised to capitalize.

"This is a once-in-a-lifetime deal," says Sean Maloney, chief sales and marketing officer at Intel, which is working on broadband projects with governments in the U.S., Japan, Vietnam and others. "This dwarfs the Marshall Plan and the New Deal. It is unimaginably large, and will never happen again. It is incumbent on us to spend it wisely."

Adds Cisco CEO John Chambers, "I think technology can transform health care, can transform education, can transform the environment — not just from smart grids or better utilization of data centers, but also change our lives in a positive way."

IBM, GE and Cisco are expected to reap financial rewards because of their expertise in IT infrastructure. The largesse will assuredly filter to third-party tech partners that work with IBM and Intel, and to small businesses. Intuit CEO Brad Smith notes the stimulus plan is designed to free up credit for small businesses and stimulate start-ups.

"It takes more than one company to innovate the economy and fix systems in need of repair," says Teresa Carlson, vice president of Microsoft Federal, which works with federal agencies, the Defense department and the intelligence community.

Jobs, jobs, jobs

A $30 billion stimulus investment in health care IT, broadband expansion and intelligent utility grids could produce nearly 1 million new jobs within a year, according to research by IBM and think tank Information Technology & Innovation Foundation.

IBM's services unit, for example, could benefit financially from the initiatives, but the analysis said most jobs would go to small businesses. "IBM and GE are all over this," says Andrew Bartels, an analyst at Forrester Research.

Bartels estimates about $70 billion of the projects have a tech element, with about $28 billion up for grabs in IT contracts in 2009-10. The stimulus will generate more than $100 billion in tech spending in the next five years, market researcher IDC predicts.

Some consumer activists fear, however, that a good chunk of federal contracts will go to a small pool of companies such as IBM and Cisco, blunting long-term innovation at the expense of job creation and economic expansion.

Another concern is who will oversee or regulate how the money is spent, says Mindy Spatt, a spokeswoman for The Utility Reform Network, a consumer advocacy group. "We live in the age of AIG. It is a legitimate concern where money is going."

While any tech spending is welcome, it could be offset by a 3% annual decline in IT spending, to $537 billion this year, according to Forrester Research.

The upside is that stimulus projects could act as seed money for public and private works, leading to more investments by state and local government, and via private investors, Bartels says.

Among the tech contenders, by category:

•Broadband. The government has allotted $7.2 billion for broadband deployment. It is a building block for improvements in education, health care and energy, says Jeff Campbell, senior director of technology and trade policy at Cisco, which has helped expand high-speed Internet access in the U.S., Europe and elsewhere.

For now, it's unclear which communities would benefit from broadband expansion — and under what capacity, says Milo Medin, chairman of M2Z Networks, a start-up that's trying to build a broadband network in the U.S.

Major deployment of broadband could create 300,000 jobs for the telecom and tech industries, according to a study by the non-profit Information Technology & Innovation Foundation.

Some 6% to 10% of all U.S. households — especially those in rural areas — do not have broadband Internet access. Some 75 million to 85 million American adults do, according to the Pew Internet & American Life Project.

"We don't want to live in a nation of (technology) haves and have-nots," says Carl Guardino, CEO of Silicon Valley Leadership Group, a trade association that represents about 300 Silicon Valley companies that employ 500,000 in California.

•Energy. Tech companies are preparing to make a dash for about $43 billion in energy-related programs, including $4.5 billion to develop smart-energy electric grids and $2 billion to develop advanced battery technology for electric cars.

IT companies will help utility companies understand demand in real time and manage power more intelligently. Much of the spending, and jobs, will go toward updating and modernizing utility grid infrastructures; developing and installing high-tech meters, digital sensors and other analytic tools; and construction of a smart grid.

One possible model could be a large-scale version of a smart grid IBM and the Department of Energy designed in Washington state from 2006-07. The power-management system helped businesses and residents in 112 homes reduce energy consumption 15% during peak hours and save an average 10% on electricity bills. Such efficiencies reduce, if not eliminate, the need to build costly power stations, says Stephen Stokes, vice president of sustainability and green technology at AMR Research.

"IBM stands to gain substantially from the stimulus package through its work in smart power grids the previous few years," Stokes says. "They are playing very hard to own a key role in such a global transformation."

IBM is investing $1 billion a year in energy-efficient technology, or about one-sixth of its annual R&D budget.

General Electric, another contender, is developing an ambitious energy-management system on Maui that would let Maui Electric closely control peak energy use and make the best use of wind power. The big guys hardly have a lock on such projects, however.

Contracts are just as likely to go to specialized vendors that can move nimbly. SolFocus, a solar-energy equipment company that raised $47 million in funding in January, thinks it is uniquely positioned to sell or provide equipment to municipal utilities, such as the Palo Alto, Calif., water-treatment facility, universities, state prisons and the military.

"These are companies that are changing or transforming markets, much as Cisco did in the network router industry (in the late 1980s)," says Cynthia Ringo, a partner at venture-capital firm DBL Investors.

•Health care. Obama is advocating providing up to $59 billion in federal funding for health care — about $20 billion for electronic medical records.

Funding is intended to hasten digitization of patient medical data and prescriptions. Electronic health records and e-prescriptions are coveted by health care experts because they can quickly be shared online by hospitals, doctors and patients, and they displace error-prone paper files.

The benefits don't end there. Bill Vass, president and COO at Sun Microsystems Federal, predicts a reduction in fraud and waste, better on-site care for victims of disasters, and establishment of computer networks at underserved health clinics.

The scope of projects can vary, from a contract to help a physician install an electronic health record in an office (estimated cost: thousands of dollars) to hosting a nationwide health information exchange (estimated cost: millions of dollars). IT companies will be responsible for installing and maintaining systems that allow the exchange of electronic records. Some funds will go to doctors as a financial incentive to digitize records.

Tom Romeo, IBM's vice president of federal government, foresees a day soon when medical data are easily exchanged like traffic on a cellphone network. Last month, it unfurled an electronic records exchange system for granting disabilities benefits for millions of Americans. Some 200,000-plus jobs could be created with proper investment in health care projects, Romeo says.

Siemens Healthcare has invested heavily in a state-of-the-art electronic medical-records system called Soarian that lets hospitals in Ohio, Massachusetts, Pennsylvania and elsewhere transparently share patient data such as EKGs, brain scans and MRIs, and intuitively make medical decisions based on predefined best practices of physicians. It has also significantly reduced the chances of incorrect prescriptions. Siemans believes it is in an advantageous spot to land federal deals, says Luis Castillo, a senior vice president.

The winners take all?

At the core of the competition for federal dollars is a fundamental shift in how some of the biggest tech companies do business.

IBM, Intel and Cisco are expanding their roles in digitizing key pieces of infrastructure, from "smart" electric utilities to electronic medical records.

IBM, which for decades was synonymous with burly computers, has rebounded from a major restructuring in the 1990s and remade itself. Since 2000, it has scooped up 100 companies, sold its PC business and other low-margin hardware businesses, and pumped its annual R&D investments to $6.3 billion.

Cisco has moved beyond its core computer networking gear. Last month, it said it would start selling computer servers for the first time in pursuit of money that big organizations spend on "data centers" that run their computing operations.

For them and others, the stimulus is a once-in-decades opportunity to make fundamental changes to the nation's infrastructure, says Ken Dulaney, an analyst at researcher Gartner.

"These companies always have their eyes on the future," says Rep. Anna Eshoo, D-Calif., whose district includes Silicon Valley. "They are willing to take risks. If they don't, they won't last."