Silicon Valley has spent much of 2008 watching other cities and sectors experience wrenching pain. Comparatively, we just weren’t feeling it here. And for a place that went through such a brutal economic reckoning eight years ago, that was almost more unsettling, invoking the fear that the anvil was going to drop any moment…

Well, it finally has. Yes, the credit crisis and recession have rippled out to the Valley—impacting our world in many ways:

• Public companies: Many public technology companies have the advantage of plenty of cash and little debt. But they have the disadvantage of Wall Street pressure to slash costs fast when revenues slow. Plus, sinking stocks hit the morale of employees especially hard, as much of their compensation is paid in stock.
  
  Innovation: Expect public companies to move slower and be less aggressive with new products.
  
  Employment: Expect hiring freezes at best, and thousands of layoffs. Hewlett-Packard has already announced cuts, associated with its EDS purchase, eBay announced a 10% reduction Monday, and Yahoo is widely expected to follow suit as soon as next month. Will Google—a company that’s over-hired in the view of many—follow suit?

• Startups: It seems the purse strings have officially tightened in the Valley, and everyone from Sequoia Capital to famed angel investor Ron Conway is telling their companies to raise as much as they can, hoard cash, and find a quick and dirty revenue model.
  
  Innovation: Parodoxically, it will improve, as most true advancements seem to happen in down markets. There are always entrepreneurs and investors willing to fund great new ideas.
  
  Employment: Many startups will fail. But this is part of the natural cycle of Silicon Valley, credit crisis or not.

• Venture Capital: Venture capital is really the only part of the Silicon Valley ecosystem that didn’t experience a shakeout after the 2000 crash. I think that’s about to change, as I wrote about in my BusinessWeek column today. Money managers kept pouring money into venture firms after the crash because it’s considered a long-term, high-return play. VC’s 10-year returns have handily outperformed other investments, thanks to the outrageous gains of 1999 and early 2000. Since then, though, there have only been two years of decent returns, from fourth quarter 2005 to fourth quarter 2007. And now that 1999 and 2000 are close to getting kicked out of the 10-year index— i.e. just when the industry really needs a couple good years — fortunes have fallen dramatically.
  
  The risk? Venture firms barely outperform the broader markets. Venture capital is a very slow moving, long-term business. This correction is still a few years off, and will take a few years to work through the cycle. So unlike ramifications of the credit crisis that hit public companies or startups, the immediate impact isn’t there. But make no mistake—when the lifeblood of the Valley is at risk, the impact will felt.

Still believe the myth that technology isn't subject to rocky credit markets? In this segment, Paul Kedrosky highlights a new fear for tech investors: Telecom equipment stocks. Big projects like 3G wireless roll outs in China are subsidized by debt, no matter whose balance sheet it's on. And while telecom equipment stocks are down, they've mostly just fallen with the market. Kedrosky expects more declines in the sector, and ultimately consolidation. Watch the video to see his prediction for what big telecom equipment maker doesn't make it out of this downturn.

From Silicon Alley Insider, Sept. 26, 2008:

BlackBerry maker Research In Motion (RIMM) shocked the market yesterday, sending shares down 20% after hours -- now down 25% this morning in high-volume trading -- when it said gross margins would decline next quarter and next year as the company invests to steal share in the rapidly growing smartphone market.

Not a stupid decision, but a risky one. Deutsche Bank downgraded RIM to "sell" and RBC to "sector perform" this morning, while Credit Suisse upgraded RIM to "neutral."

The one note of the three we've seen today: RBC's downgrade, in which analyst Mike Abramsky cuts RIM's price target to $90 from $165. Why?

• Less visibility to recovering margins -- RIM guided margins in the mid-40% range, while analysts were looking for something around 50%. Who knows when they're going to go up again -- if ever?
• Increased risks to RIM's growth from the crappy economy.

The bottom line: It's probably not a bad move for RIM as a company to invest in the "land grab" and grow its huge market share in the booming smartphone market. But as a stock, RIM is now riskier -- especially if RIM has to fend off similar 'land grabs' from competitors like Apple, Google, Microsoft, or whomever.

Remember what happened to Motorola when it went after market share -- instead of profit -- by helping carriers cut the RAZR's price tag to zero? Not good.

The big differences here: RIM's model is part subscription-based; handset sales aren't their only source or revenue, so subsidizing phones to get more email subscribers isn't a total loss. And this is a platform play, not just a gadget play -- so if RIM can take an early lead and hook people on the BlackBerry platform, it's likely people will keep buying BlackBerries. Whereas previous RAZR owners really have no reason to buy another RAZR, unless they just want another cheap phone.

Earlier: RIM Blows Q2; Subscriber, EPS Guidance Weak; Shares Topple

From Silicon Alley Insider, Sept. 23, 2008:

At long last, the GPhone is here. That's good news for Google bulls, who have been silently praying that one of three possible revenue streams -- mobile, video, and/or display -- will soon ignite and save the company's growth trajectory.

Will Android turn out to be a money factory? We're skeptical. Google is late to the smartphone game, and there's already some capable competition in the market. How Android mints cash has also yet to be satisfactorily explained. (It appears to be part of the $50+ billion mobile advertising market that Eric Schmidt and others keep talking about without providing any details. Some of that market will just replace PC-based searches, moreover, which won't provide any incremental revenue.)

In any event, one Android bull, Sandeep Aggarwal of Collins Stewart, celebrates the GPhone launch by laying out his case after the jump.

From All Things Digital, Sept. 23, 2008:

Google’s new G1 phone announced today is the first real competitor to the iPhone. Like Apple’s product, it’s a serious handheld computer with a powerful new operating system (called Android) and a clever touch-based user interface. Like the iPhone, it’s likely to be a major new platform for third-party software. But it’s also very different, and may appeal to different buyers.

The phone, expected to be the first of many to use the Android operating system, was largely designed by Google, and was built by HTC of Taiwan. It will be sold in the U.S. starting next month by T-Mobile, for $179 with a two-year contract.

After the jump, some first impressions of the G1, based on some experience with a prototype. This isn’t a full review; that will come later, when I’ve had a chance to use a more finished device.

See Also:
Google's Android Phone
Apple’s 10-Million-Mac Year Also Its 10-Million-iPhone Year?
First Test of Google’s New Browser
Why the iPhone Matters

One thing we can learn from YouTube's entry into the mobile advertising business: As Henry and I discuss in the accompanying video, it's still really, really early in the mobile advertising business.

Why do we say that? Because we couldn't help but feel some nostalgia for the early days of the Web when we used our iPhone to check out the sample ad Google (GOOG) placed on YouTube for Mobile Monday.

What was it? Not some new-fangled, interactive, GPS-location-based, behaviorally-targeted, local coupon ad, or a video ad hovering over a YouTube video, or anything like that. Just a small DoubleClick banner ad for Mountain Dew. And, on a less-sophisticated phone we tested the site on, a text link.

The good news for Google: It's still really, really early in the mobile advertising business. We're not sure how many people will end up seeing this ad -- Google boasts that "millions of people" visit the site on their phones a day, but that seems high to us. But in any case, if Google is ever going to make a multi-billion-dollar market in mobile advertising, it's a good first step toward getting users comfortable seeing ads on their phones -- and toward developing smarter, higher-tech, higher-yield mobile ads.

See Also:
Google Still Dreaming Of $50 Billion Mobile Ad Market
More Ads Coming To iPhone Apps: AdMob Expands iPhone Ad Network

The government is out of Google's way: The FCC has just approved the HTC Dream, the first phone that will run Google's "GPhone" Android mobile operating system.

No hi-res product shots included in the FCC's documentation, but we're able to confirm that the Dream will be able to access T-Mobile's nascent 3G data network -- it's been approved to use the 1700 MHz band, the chunk of airwaves that T-Mobile uses for 3G service. And the phone includes a "jog ball," which we understand is the correct jargon for the tiny trackball used on BlackBerries.

Now T-Mobile can start selling the Dream pretty much as soon as it wants. We expect it to go on sale next quarter as promised -- specifically, before Nov. 10 -- that's the date HTC has requested the FCC keep Dream photos and user manuals confidential until.

In the accompanying video, Henry and I discuss how the GPhone could change the smartphone market, particularly for U.S. market leaders RIM and Apple and overseas leader Nokia.

We've had our hands on Apple's iPhone 3G for a month now, as we can easily declare that it's the best cellphone we've ever owned. And more good news: A software update Apple issued Monday night promises to squash some of the bugs we've noticed. But there's still plenty of room for improvement.

Rather than list features or go over the basics -- you can find those anywhere -- we thought we'd evaluate the iPhone 3G and the iPhone 2.0 operating system from three specific perspectives. Read our findings after the jump.

From Silicon Alley Insider, August 18, 2008:

Will new gadgets be able to use airspace between digital TV channels -- "white spaces," or "wi-fi on steroids," as Google has dubbed it -- for Internet access? We'll know more next month, when the FCC is expected to report its latest test results.

That's when we'll find out if gadgets submitted by companies like Philips Electronics pass the FCC's muster. These aren't gizmos designed for consumer use. Instead, the FCC is just looking to test the technology that will automatically detect which frequencies of wireless spectrum are being used by TV stations, wireless microphones, etc., so that a potential Internet device would steer clear of them.

And while "FCC engineers aren't talking about their conclusions" so far, the gadgets aren't exactly flying through their evaluations.

From Silicon Alley Insider, August 15, 2008:

So now we know that the first GPhone is indeed coming this fall. 

Will it be a hit? It's hard to tell much from the supposed spy photos we've seen floating around on the Web.

But someone who's actually seen the gadget -- similar, if not identical to the one in the photos -- tells us that both the hardware (from handset-maker HTC) and Google's Android software suffer from a similar problem: They're technically powerful but not as elegant as Apple's iPhone and OS X.

Specifically, the phone -- apparently a hot item to show off in Google's cafeterias these days -- is big and bulky, and not as sleek as the iPhone. And Android, while extremely powerful, has a less-elegant, less-user-friendly interface than the iPhone (AAPL)

Does this mean it won't sell well? Of course not. There's a lot more variables, like device and contract pricing, software and services, etc., that will help determine its commercial success.

Developers, meanwhile, should get some new software to play with soon: Our source says that Google (GOOG) will finally be publicly releasing an updated version of its software developers kit in the next few weeks. Google has been releasing editions of the Android developers kit to preferred developers for several weeks -- without updating the public edition -- which has ticked off many of its more vocal coders.

See Also:
Google's Android Mobile OS Still On Track For Q4 Launch
Is Google's Android Coming Apart At The Seams?