There has been a good deal of literature on the recent subprime mortgage financial so-called crisis. I haven’t seen anything related to the impact of this downturn on the high tech industry. Let’s hence cross the chasm and write a brief note about it.

In short and broadly speaking, what the subprime lending crunch is all about:

Not-so-professional professional lenders like NovaStar & New Century Financial grant mortgages to low-revenue borrowers; interest rates pick up and so does the debt burden, from a low-revenue borrower view point; so, low-revenue borrowers can’t actually refinance the interests of their debt, which means they have to sell their property. But since a large number of low-revenue borrowers act the same way and the real estate market shows uncertainties, estate prices go down, which urges potential buyers to wait longer, and refrains borrowers to refinance their debt, and so on and so forth. At the end of the day, this year’s subprime credit crunch looks a lot alike what happened in Japan in 1993, although and fortunately at a much lower scale: mortage lenders limited partners (mainly financial institutions: banks or insurance companies) as for a due subprime lenders can’t refinance because their low-revenue borrowers are having a hard time making both ends meet. Henceforth, subprime lenders are stated insolvent and go bust, their assets being redistributed to their lenders, and the remaining to their accounts payable & shareholders. It goes without saying that the last ones to get their money back, namely the shareholders, usually don’t get it all back (this is A)… Meanwhile, financial institutions from all over the world have invested, on behalf of their in subprime securities, supposed to be zero-risk investments. However, it appears these zero-risk investments happen to be very risky (this is B). A + B = generalized lost of confidence in financial markets that central banks try to diminish by printing dollar bills aimed at making sure local financial institutions, which have invested their clients’ money at zero-risk rates, don’t fall; scapegoats nominated: debt / risk rating agencies like S&P, Fitch, Moodies (the usual suspects); increased volatility due to higher sensitiveness to macroeconomic perspectives.

Nothing so bad after all. Everybody knew there would be a downturn at some point. The point is that nobody knew how bad it would turn out to be, and when it would occur.

Impact of subprime crunch on the Software industry:

R&D budget cuts: this is typical everytime there’s a downturn: large corporations cut R&D budgets (which I find dumb since downturns are excellent times for innovation and fostering one’s competitive advantage through information systems; but well, I’m not in charge here). End result: software sales aimed at R&D departments (eg. Dassault Systèmes’ CATIA) are likely to suffer temporarily.

Online Advertising. Well, let’s not beat around the bush: what about Google? My call: any crisis can only be positive for Google; offline commercials are harder to track. Through online advertising, you get to gather scientific ROI metrics, and benefit from increased accountability, flexibility, reactivity. A crisis can only accelerate the shift from offline advertising to online ads. It would be a good time for Microsoft to launch its AdCenter platform. Advertisers are dying to be able to choose between Google (which has become pretty expensive being alone over years) and something else than Yahoo! Overture. By the way, Criteo is soon to release Criteo Ads worldwide (only available in Beta and in French as of today) as an alternative to Google.

US subprime crunch will necessarily benefit independent software vendor SideTrade, a net working capital killer SaaS company (reduced net working capital increases free cash flows and accelerates debt refinancing – which is always a smart move when interest rates go up).

• US subprime crunch will also benefit procurement management software (for cost control reasons obviously).

• The subprime crisis will have no impact on retail (people will still need to eat and buy consumable &/or perishable goods), storage investments, and security solutions.

• Telco-related software technologies potentially driving cost killing (like VoIP systems: remember Skype is software, not telco) will regain interest from corporate buyers and CIO since negotiations are likely to get tougher with mobile and land line fleet vendors.

• CRM and BI / Datamining shouldn’t suffer from the downturn since it is generally agreed that it costs more to acquire a new client than to keep existing customers.

Impact on subprime crunch on IT consulting:

Severe shortcuts are expected in IT consulting, especially in banking / insurance where uncertainties are likely to remain higher for a short period of time (a few months). Such redundancies will have a positive impact on the software industry where finding skilled developers has become nothing less than a nightmare. Last and not least, the subprime crunch is very likely to accelerate the ongoing IT & BPO offshoring trend.

Impact on Venture Capital:

On the one hand, venture capitalists may suffer from limited partners (financial institutions in general + wealthy individuals and families) appearing less eager to increase VC-managed funds. On the other hand, venture capitalists invest in private equity that isn’t correlated with either the fixed income market (high tech startups never raise debt).

So what, is that a draw? Not quite. My call is that the VC market will suffer if stockmarket indexes remain low. The reason I believe so is that IPO opportunities will result dampered for a mid-term time frame.