Networker: Who knows internet business?

Who knows internet business?

So if a corporate goal is to maximise profits, this will suggest that
companies would move their investments out of unprofitable areas into profitable
ones, regardless of whether they had any history in that industry. Take
for example the FII Group, a British shoe maker. In February last year
the company decided to change tack. The shoe business was slow, it had
lost its main retail outlet, and it was wondering what to do.

The solution: to get into the business of providing infrastructure for
mobile Internet data services (a decade earlier it had tried to make money
in the blood testing market). If this sounds odd, it is. The mobile internet
data services area isn't just new, it hasn't actually happened yet. Telecommunications
companies (telcos) across Europe have invested hundreds of billions of
dollars betting that in some years time it will be possible to make money
out of these services using third generation or 3G mobile networks.

These telcos, including BT and Vodafone are some of the biggest companies
in the world. Yet the amount of money they had to borrow to buy 3G licenses
has sent panic through both the telecommunications and banking industries.
Their credit ratings are collapsing amid fears that they will simply lose
most of the money they borrowed.

Not surprisingly, FII Group has nothing like the resources of these
large corporations, and in addition it knows nothing about Internet data
services, except that it expected to make lots of money. For a brief moment
it was right. Shares climbed to an all-time high within a few weeks of
the decision, around the time that the entire internet business area was
about to collapse last March.

Actually there is a link between hi-tech investments and shoes. When
US multi-billionaire Warren Buffet was warning investors to get out of
the Internet area (shortly before the bubble burst), he showed his resolve
by investing in a US boot manufacturer. The comparison is interesting.
Those companies that have the flexibility to pull out of one business and
move immediately into another are mainly in the financial sector.

Corporations that actually make money by producing something (like newspapers,
shoes or groceries) have a much harder time. In general the reason they
have survived producing things, when most profits are in financial speculation,
is because they have a particular edge. This could be technology patents,
a monopoly of production, industry know-how or special relationships to
politicians. Moving into a non-related sector loses these benefits, and
companies also have to fight with the existing players for space.

That is why the internet was so attractive. By and large it was vacant
land. Any company moving in would be in much the same position as any other.
Unfortunately for most of these companies, the bubble has burst, sending
the financial speculators off in other directions. While FII Group admits
its internet mobile data investment has problems, it has also decided to
get out of the shoe business and focus on speculating in other investments.

Financial speculation on technological, medical and other fads may be
risky but its more profitable than actually producing something.

BY GREG HARRIS

(<gregharris_greenleft@hotmail.com>)

From GLW issue 435