The outlook for retailing may be dicey, but Gothic Cabinet Craft, a furniture chain with 40 stores in New York and New Jersey, has one variable under tight control: tech spending. It just installed a new computer system equipped with Google (GOOG) Apps, a collection of software, including e-mail and word processing, that runs on a Google data center rather than on Gothic's gear. The cost: just $32,000 for the new PCs and zero for Google Apps. The alternative was shelling out more than $100,000 for computers and Microsoft (MSFT) software. "We wouldn't have been able to do anything if the Google service wasn't available," says Aristidis Zaharopoulos, the company's vice-president.

The chain is among the more than 1 million companies using Google Apps. Large companies are on board, too, including Genentech (DNA), with 17,000 employees. Many customers pay nothing, while others spend $50 a year per user for advanced features.

As the U.S. enters what appears likely to be a painful recession, a major shift is taking place in how businesses assess technology products. They're under terrific pressure to cut costs. According to a newly revised forecast from market researcher IDC, growth in U.S. tech spending will decline to 0.9% in 2009, down from a previous forecast of 4.9% growth. But rather than just slice budgets across the board, many companies are switching to a handful of new technologies that save them money.

These technologies existed during the last recession, but they were immature. Now they're established, and the downturn seems likely to hasten their adoption. Chief among them are software delivered over the Internet, known as cloud computing, such as Google Apps; so-called virtualization software, which allows companies to run multiple applications on a single server computer; and open-source software, which is created collaboratively by multiple companies and is typically less expensive than the traditional kind. "These are tools that management can use to get through a crisis," says Michael Hickey, president of the Business Insight Div. of Pitney Bowes in Stamford, Conn., who just bought software from on-demand supplier Salesforce.com.

STRATEGIC SHIFT

A lot of large companies are tapping these technologies to good advantage. Walt Disney (DIS), for example, uses Linux open-source software on its animated movies.

This strategic shift could alter the competitive landscape of the tech world. Among the vulnerable are leaders such as Microsoft and Germany's SAP (SAP), a maker of software for corporations. Potential gainers include Google, Salesforce.com (CRM), and VMware (VMW), the top maker of virtualization software. "Microsoft would probably like the world to stop rotating. It's responding, but Google is leading the way with technology that's cheaper and quicker," says George F. Colony, president of tech market researcher Forrester Research (FORR).

Microsoft and SAP insist they're not in danger. Microsoft says it's quickly moving applications online, gaining on VMware in the virtualization market, and even using some open-source software. "We're going to gobble up share," predicts Bill Hilf, general manager of Windows server marketing. SAP argues that in times of uncertainty, most businesses will stick with suppliers they know. "If you're not a strategic partner, God help you," says William R. McDermott, SAP's head of global sales and service.

Neither company can afford to be complacent. More than a dozen corporate tech bosses interviewed by BusinessWeek recently say they're making or considering shifts in their tech-buying strategy. Suppliers that don't adjust will be the worse for it when the economy finally recovers.

The most recent federal disclosure forms offer a stark reminder of Microsoft Corp.'s mighty Washington presence: The software giant's tab of almost $2 million for the third quarter alone nearly equaled the amount its rival Google Inc. spent in the first nine months of the year.

But Google already has spent more on lobbying this year than it did for all of 2007 as the Internet search company starts to emerge as a formidable player in D.C. lobbying circles.

The lobbying muscle of both companies was on full display in recent months as Microsoft and Google battled over Google's plans to sell some of the online advertisements that appear alongside search results on Yahoo Inc.'s Web site. Google and Yahoo entered into the partnership in June in an effort to keep Yahoo out of Microsoft's hands.

But Google walked away from the deal last week in the face of an antitrust challenge being prepared by the Justice Department. That retreat marked a key victory for Microsoft, which had mounted a major lobbying and public relations offensive to convince the government to block the agreement.

It's unclear whether the outcome would have been different without Microsoft's efforts as it was hardly alone in opposing the deal. Some of the nation's biggest advertisers also had warned that the partnership would drive up the cost of online advertising and cement Google's control over the market.

Microsoft had "the tail winds working in its favor," said Stanford Washington Research Group analyst Paul Gallant. But he added: "Microsoft played this about as well as it could be played."

Jeff Chester, executive director of the Center for Digital Democracy, a consumer advocacy group that opposed the deal, went even further. "It is possible that the Justice Department might have come to a different conclusion" had Microsoft not become involved, he said.

Indeed, it has escaped no one's attention that the Bush administration has allowed many big, controversial mergers to go through, including Google's recent purchase of online ad service DoubleClick.

While Microsoft and Google were on opposite sides in the battle over the Yahoo partnership, they have found themselves aligned in other big lobbying fights. The two companies led a recent push to open up "white spaces" -- the unused, unlicensed spectrum between television channels -- to deliver wireless Internet access. That effort paid off when the Federal Communications Commission approved the use of white spaces for broadband last week.

Google and Microsoft also have been key proponents of reforming U.S. patent laws to address a mounting backlog of applications and halt the increase in infringement litigation often driven by poor-quality patents.

In both cases, the companies have faced off against other powerful industries with deep pockets and well-established lobbying arms in Washington. In the white spaces fight, Microsoft and Google took on the National Association of Broadcasters. In the patent reform dispute, they have battled the nation's big pharmaceutical companies and other industries that want to leave the existing system intact.

Microsoft has had a presence in Washington for years -- which it beefed up significantly after becoming the target of a major Justice Department antitrust suit in the late 1990s.

The Redmond, Wash.-based company spent $6.9 million on federal lobbying during the first three quarters of this year, compared with $9 million in all of 2007, according to disclosure forms. The company easily outpaced Google and Yahoo combined in the third quarter -- spending $1.98 million, compared with Google's $720,000 and Yahoo's $570,000.

But Google is catching up. The company spent $2.1 million on federal lobbying during the first nine months of this year, compared with $1.5 million for all of 2007. And while not all big technology companies have chosen to play active roles in the nation's capital, Google wants to be a key participant.

"Google clearly appreciates the importance of engaging in Washington" since it has a lot at stake in number of critical policy debates, said Ed Black, president and chief executive of the Computer & Communications Industry Association. "Google has been ramping up at a rapid pace for a Silicon Valley firm."

The Mountain View, Calif.-based company opened its Washington office in 2005 and has hired people on both sides of the aisle to staff it. It has made an active effort to engage public interest groups and has hosted seminars on a range of issues at the Washington office. In addition, Google Chief Executive Eric Schmidt endorsed President-elect Barack Obama during the campaign.

Contributions by Google's political action committee totaled about $282,000 during the 2008 campaign, according to the Center for Responsive Politics. But that tally again was easily outpaced by Microsoft's $1.7 million during the same period.

Chester remains concerned that much of the corporate lobbying takes place behind closed doors -- even if it involves matters that have major implications for the public, such as the fight over the Google/Yahoo partnership.

"The issues of paramount importance to the public and the economy often get played out as fights between corporate behemoths," Chester said. "It's shameful that these digital giants have engaged in business-as-usual politics. It shows that our Internet policies are up for sale regardless of the consequences for consumers and competition."

As they waited for Microsoft's Oct. 23 quarterly earnings call to begin, analysts and others were treated to a rousing rendition of the theme from The Lone Ranger. Nostalgia for the heroic masked avenger might seem ill-suited to these dour economic times. And yet while the software giant didn't exactly come to the rescue of worried investors, its results left many feeling reassured.

As other tech bellwethers have done, Microsoft has cut its forecasts and is having difficulty predicting the future. Still, the company's fiscal first-quarter numbers show the floor is not falling out from under global IT spending. Microsoft (MSFT) not only beat analysts' revenue and profit expectations in the period that ended in September, but its forecast for this quarter is based on an assumption that the recession will be mild.

Redmond (Wash.)-based Microsoft expects PC sales to grow a respectable 10% to 12% this yearend shopping season. "It's important to keep things in perspective," Chief Financial Officer Chris Liddell told analysts who asked for details on the depths of the slowdown. "We still see revenue growth."

Office Sales Remain Strong

First-quarter sales grew 9%, to $15.06 billion, beating analysts' expectations for $14.8 billion. Profit rose 2%, to $4.37 billion. Liddell said conditions "clearly deteriorated" as the credit crisis worsened in September, but didn't say by how much. Still, sales of server software used by corporations grew 18%, and sales of the Office productivity program remained brisk as well.

Microsoft showed surprising strength in its consumer-products division. While sales fell from last year, when the company benefited from blockbuster sales of the Halo 3 game for its Xbox console, sales exceeded Microsoft's expectations and profit rose to $178 million, from $167 million. Even Microsoft's beleaguered Internet business had good news. While losses nearly doubled, to $480 million, sales grew a respectable 15% despite a difficult online ad market.

Underscoring the difficulty of assessing a weakening spending environment, Liddell gave a wide range of forecasts for the first half of 2009. But even that range is more optimistic than might be expected. For example, Microsoft's worst-case scenario calls for sales of $64.9 billion in fiscal 2009. That's 2.55% short of analysts' consensus expectations for the year. Apple (AAPL), which has a reputation for setting low financial targets that it almost always beats, indicated on Oct. 21 that sales in the current quarter could fall 14% below consensus estimates. Networking equipment maker Juniper Networks (JNPR) said two days later that current-quarter sales might fall to $921 million, 4.7% below analysts' estimates.

Emerging Markets Are a Wild Card

Even if the country suffers from what Liddell described as a "deep recession," Microsoft will grow 7% for its fiscal year, compared with 18.2% for the year that ended in June. If the company's more positive forecast pans out, Microsoft will grow 10%. Liddell expects overall tech spending to stay in the black as well.

One wild card is emerging markets. Russia was the company's fastest-growing market for PCs in the past year. Liddell told BusinessWeek that while the market will slow, it will still grow at a double-digit pace. But turmoil in fast-growing countries is particularly hard to forecast. "It's a real threat that emerging markets will slow down in 2009," says Technology Business Research's Allan Krans.

As upbeat as Microsoft's predictions were, the company is taking precautions just in case. It plans to cut $500 million in operating expenses, partly by slowing hiring and trimming travel expenses. The company also will slow spending on construction of new data centers, server-packed facilities that handle Microsoft's own needs as well as the so-called cloud computing demands of outside customers.

Plenty of Cash on Hand

"It's a surprising thing to do, since they say they're betting the future on cloud computing," Krans says. At a technical conference for its software partners starting Oct. 27, Microsoft is expected to make a host of announcements about its plans to meld typical corporate IT operations with online services that will be doled out from Microsoft's own data centers.

If Microsoft comes across as confident, it's probably because the company can afford to be. It's got $20.7 billion in cash in the bank, and a business model based in large part on multiyear software licenses. That makes for much steadier revenue growth than relying on product sales

Not likely: A deal for the BlackBerry maker would be hostile and pricey. Canadian national pride might get in the way, too

The plunge in Research In Motion's (RIMM) share price has fueled speculation that the maker of smartphones is vulnerable to a takeover—but buyers are unlikely to go BlackBerry-picking anytime soon. Shares of the Waterloo (Ont.) company got pummeled again on Oct. 20, dropping 5.21, or more than 8%, to 53.80. The catalyst was a series of bearish research reports from analysts.

It's not hard to play matchmaker for a company whose shares have lost more than 60% of their value since reaching an intraday record of 148.13 in June—only to plunge to a 17-month low of 50.22 in recent days. Peter Misek, an analyst at Canaccord Adams, was quoted in a recent Reuters report as suggesting Microsoft (MSFT) may be interested should the shares fall much further.

An accelerating rivalry with Apple (AAPL) and an economic slowdown that threatens to curb demand for BlackBerrys are contributing to talk of RIM's vulnerability. On Oct. 20, Bindu Benjamin, an analyst at broker First Global, downgraded RIM to "market perform with an under-perform bias" over concerns that heavy spending in the face of competition will eat into profit margins. The same day, Morgan Keegan analyst Tavis McCourt cut his 2009 revenue growth forecast to 84% from 92%, saying RIM faces a tougher economic environment. James Faucette of Pacific Crest Securities issued a note saying sales of the Pearl Flip, one of RIM's most recent phones, have been "tepid at best." Faucette also said sales of another phone, the Curve, have hit speed bumps in Canada and Britain, leaving results for the current quarter "at risk."

The Case for an Offer Can Be Made

The decline in RIM's share price gathered steam after the company said in September that margins would narrow (BusinessWeek.com, 9/26/08) in the coming months.

Further stock price weakness, the theory goes, might elicit a bid from Microsoft, particularly in the wake of its failed pursuit of Yahoo (BusinessWeek.com, 8/1/08). "If RIM's management would be willing to entertain the discussion, and if [RIM executives] are willing to partner up, I think Microsoft would take their call," Misek says, referring to RIM co-CEOs James Balsillie and Mike Lazaridis.

Microsoft has more to gain from RIM in the wireless arena than it did from Yahoo (YHOO) on the Web, Misek argues. "Microsoft has already lost the war over search as currently defined," he says. "It's now at risk for losing the next search war, in the mobile world." RIM's technology makes more efficient use of wireless data networks, and its software works well with Microsoft's enterprise e-mail tools, adding to its allure, Misek says.