It was another depressing month on the market. The FTSE100 slumped 7%; so the 9% fall in NASDAQ or the 6% fall in the UK FTSE SCS Index were not that dissimilar.

It’s been an even worse first six months of the year for the FTSE100 down 13% since 1st Jan. Put against that against the 2% fall in the Techmark and the 6.6% fall in the FTSE SCS Index and they look quite good! Telcom was the worst hit with a 21% fall in the UK Telcom associated indices as waning consumer confidence hits both mobile and broadband takeup. It was EVEN worse for the European Indices with the FTSE Euro Telcom Index down 26% and the FTSE Euro tech Index down 30% this year so far.

So how does this compare with the great Y2K/Dot.com crash of 2000?

You may remember (it is actually carved on my heart!) that the Dot.com bubble burst on 6th March 2000. The FTSE UK SCS Index fell 35% in the first six months of 2000 (ie 1st Jan 00 to 30th June 00) That dragged the FTSE100 down 9% and Techmark down 10%.

Awful. Sure – but it was to get MUCH, MUCH WORSE! At the Regent Conference in Feb 2000 I had predicted a 60% fall in the Tech Index, from its then high, by end of 2000. I was greeted with a metaphorical round of rotten tomatoes as the indices continued to rise that month and people really did seem to believe that the indices could defy gravity - for ever. But in the event it actually turned out to be worse than that!

The comparisons between today’s Index levels and those of eight years ago on 30th June 2000 – when the FTSE SCS Index was already down 35% YTD and a massive 45% off its March 200 high - make uncomfortable viewing. The Indices just kept falling...and falling, reaching their nadir in 2003 when the FTSE SCS Index was just 289! It has nearly doubled since but is STILL down 82% in the eight years since 30th June 2000. Techmark is also down a massive 56% and even the FTSE100 is down 12%.

The future?

I’m not for one moment suggesting that we are in for such massive falls again. Simply because we start from such a lowered base that such a fall would deem the whole sector pretty valueless if it did! But it would be a very brave or foolish man who suggested that, in the current climate, there was not a lot of further ‘downside-risk’ in the market.

Footnote

Researching the article meant pulling out copies of SYSTEMHOUSE from those days.
The frontpage editorials included some of the best, most classic, headlines ever to appear in SYSTEMHOUSE like:-

- The Emperor’s New Clothes (Jan 00) – describing the crazy dot.com ratings

- Dot.Con (Feb 00) describing the dodgy tactics and accounting of some of the new stock market entrants. I doubt I would risk writing such an article nowadays. I think my experiences of getting sued by Boo.com at that time really did make a lasting impression on me!

- It doesn’t take a Rocket Scientist (July 00) with its front page photo of W von Braun – explaining the fall, predicting even more decline and making the comment that the industry was still ‘Living in Denial”.

As new readers might by now be realising, I have never courted popularity and have often said things that were pretty universally unpopular. I do not intend to stop now!

I asked a few of the analysts I know and respect for their views.

George O'Connor from Panmure Gordon replied:

I think that the "compare and contrast" with 2000 is prescient. If you recall then through 2000 companies kept on issuing positive statements which the market did not believe. Before the year was out we had a eureka moment and a sharp rise is share prices as investors said "Crikey what if they hit estimates then valuations look cheap". Q4 saw a strong rally. We had another eureka moment shortly afterwards when, on full year results, the 2001 forecasts came back leading to the second and sharper fall. I see a similar pattern this year. Currently trading on a P/E of 13.4x there is upside potential in the sector valuation - given the continued positive newsflow by October/November the sector could well rally then - but given a deteriorating environment this could well be the last opportunity to reduce holdings.

In my view it is difficult to be too clever in playing the sector. For example, we all appreciate that there should be a wave effect of increasing poor operational news which would match which vertical markets the tech companies play in and what they sell - ie first hit financial services permanent staffing company - last to be hit outsourcer in government - however the market is likely to take a sector wide approach - and hit the sector hard on the first significant weakness.


Anthony Miller from Arete Research replied:

I am more in the "Eeyore" camp on this as I just cannot see any basis for the "second half" rebound that so many analysts are predicting. I take a very simplistic view on IT spending trends, thus. Even if the 'credit crunch' ended tomorrow – and there are few who'd place a bet on that – I just can't see CFOs turning round to their CIO and saying, "OK, problem's over – go back to spending at same course and speed as before"!

First, I think they'd wait a prudent quarter or two just to make sure the crunch really was over and the lull was not just the eye of the hurricane. Then the strong temptation would be for CFOs to say (as they did after the dot.com crash), "well, we've cut IT spending to this level and the world hasn't crashed around us; this is now our new base line. Now, tell me again which of those IT projects we deferred are really going to give us a return this year." This bodes worse for software vendors than IT services, and, dare I say, better for the IT services players with strong offshore delivery, i.e. those who can deliver "more for the same" or, perhaps more likely, "the same for quite a lot less"!

As ever, SITS companies with long term contracts and a high proportion of recurring revenues usually prove more resilient during troubled times.

Always a sucker for anniversaries, 20 years ago this month the very first Holway Report hit the streets. I’d been awarded a contract by IBM to study their mid-range agents (S/36, S/36, AS400 etc) IBM was worried (as well they should have been!) about the financial security of these agents and I was asked to devise a set of ‘Performance Indicators’. I ‘invented’ some 20+ different ways of ranking performance (easy ones like revenue, profit, cash and more difficult ones like debtor and creditor days, revenue/profit per employee, ROC, profit/revenue per £ of staff cost etc.)

Having produced the report for IBM, I was having a beer with Geoff Unwin (my old ‘mucker’ from Hoskyns – later to become Capgemini) . He asked for a copy which I naturally couldn’t give him. So he suggested I add all the members of the CSA (now Intellect) and publish it as the Holway Report. He even took a business card from his wallet and wrote “One order for Holway Report” and signed it.

The rest, as they say, is history. The Holway Report begat Systemhouse which begat Hotnews. By 2000 it was a £1.4m revenue business worth £5.8m when acquired by Ovum in Nov 2000.

To this day, people still seem to have a ‘soft spot’ for the Holway Report – or the “Bible” as it was often called. Amazingly, earlier today I had a call from a reader investigating spin-offs from UK banks (wonder why?) and asking for details of NatWest’s sale of Centrefile to Ceridian in 1995. (I was able to supply it…)

1988 and all that

So what was I reporting on in that first Holway Report in 1988?

The first page was full of hope for the UK software and computing services (SCS) sector “with Systems Designers acquiring SCICON and Cap merging with Sema Metra resulting in the UK having two major international computing services companies”. Back then IBM was the only ‘foreign-owned’ Top Ten supplier to the UK market. But it was a highly fragmented market. I estimated that the Top Ten suppliers had 24% of the market (the same figure today is around 50%)

Back in that first Holway Report, I estimated the total SCS sector as being worth £2.5b. It now totals £31.4 billion. That’s a CAGR of 14% pa. Contrast the ‘record’ 25% growth in 1997/98 to growth in the current decade which has been low single digit (or negative).

In 1988 I broke the SCS market down as follows:

- 43% Packaged software
- 27% Custom software and Consultancy
- 6% Training and Support
- 24% Bureau processing

It is worth remembering that only 20 years ago the big names in the sector were the bureaux – like Centrefile and Istel.

I estimated that the UK SCS market had grown 20% between 1986 and 1987. Separately, I reported that Line charges “as more and more systems are linked together” grew by 29% to £340m – still less than the £544m that DP Departments spent on paper supplies.

The Trends section of the 1988 Holway Report was all about rampant acquisition fever. I wrote that my old friends at Regent (where I am now an NED) had reported a 68% surge in UK software and computing services acquisitions to 119. Figures for 2007 are three times higher than that. Indeed my first ever theme was ‘Acquisition Indigestion’ – a theme I still use 20 years on! I was worried that the imminent European Community would mean that “good UK computing services will be acquired by leading European companies”. Although that turned out to be correct, why did I not mention the threat from the US players?

I gave grave warnings of relying on hardware margin without ‘added value’. Still depressingly true today as Computacenter continues to discover.

I forecast that ‘systems integration’ would be the hottest area “as the days of the single manufacturer installation will disappear”. It probably seems strange to today’s readers that such a state of affairs ever existed but my first 20 years were spent dealing with clients who were wedded to “IBM”, “ICT” or whatever.

Back in 1988 the average P/E was 16.8 – amazingly similar to today! But of course, we reached 100+ P/Es during the dot.com bubble. Of the 50 quoted SCS companies in 1988 most have disappeared. Logica is the only ‘biggie’ remaining. Others still there include EDP, Kewill, Macro 4, MicroFocus, Microgen and…Total. Why, oh why Total was ever/still is a public company I will never know. They had a market value of £8.5m in 1988. Total is ‘worth’ just £3.2m today.

My final piece of Holway advice was “Companies that 'stick to the knitting' will buck market trends. All the evidence shows that companies in the computing services sector that diversify into radical new areas in which they have had little previous experience often fail”. So gratingly, annoyingly obvious…except that so many companies did- and are still doing – just that! And they are still failing as a result.

David Mitchell, who heads IT Research at Ovum, started his review of Oracle’s FY2008 results as follows:

“If I may borrow the phrase that my friend Richard Holway uses to describe UK companies that deliver consistently good results, Oracle is in danger of becoming boring.

Oracle set out five years ago to deliver a minimum 20% compound growth in non-GAAP EPS, and for the past four years has been exceeding that target - posting a CAGR of 26%. The continuation of the acquisition strategy, together with good fiscal management, has generated consistent returns and the bravado that once characterised it has faded, for the most part. The growth in free cash flow being generated continues to impress, with the 4Q08 figure growing 38% to $7.159 billion."

You can read David’s full review here Oracle: continued growth and a demanding future


I think you will find David’s comments on Oracle’s difficulties making any money out of their SaaS offerings, fascinating. They have only just turned a profit on the service. So God help the other product companies attempting the move. The transition to SaaS is certainly going to have some major effects on depressing company performance at software companies that traditionally sell product licences ‘upfront’. It will take a long time for the financial benefits to work through – during which shareholder patience might be tested somewhat.

I recently met Stuart Miller co-founder and CEO of ByBox who have recently been named as the fastest growing technology company in the UK according to Deloitte Fast50 – they have delivered five year compound growth of 15,274% and currently turnover £26m. They keep winning prizes…last week they won the IFW Award for Innovation and Miller was named Oxfordshire Business Person of the Year.

ByBox is not a ‘technology’ company in the established sense. Founded in the US in 2000, it won a contract with Royal Mail in 2002 and soon went onto acquire the field support operations of Hays plc. ByBox now has a network of 18,000 dropboxes in the UK plus a through-the-night distribution network delivering 20 million items a year into the dropboxes. In the past it was predominantly used for mobile engineers. But it now faces a great opportunity in the consumer space with a service that is very much a product of the internet revolution.

Apparently nearly 12% of all internet orders – around 10m items pa - cannot be delivered because the purchaser is out and/or they need a signature. This creates significant extra cost for the supplier and huge inconvenience to the customer. The simple solution is to direct your parcel to the nearest ByBox and you can then pick it up yourself having been supplied with the access information by text message.

I guess the ‘quirky’ bit of this that fired my imagination is when Stuart told me that they had just done a deal with BT to convert some of its phone-box estate to a hybrid dropbox/phone box. The photo should self-explanatory. So your nearest collection point is your nearest phonebox. Not only that but it’s a neat solution for BT which you has to maintain all these phone boxes which few people now use because everyone’s got a mobile phone.

I really warm to this concept. A neat solution to a major problem in a market (sales via the internet) which is set for continued high growth whatever the economic environment.

ByBox is currently privately owned with no VC or PE involvement. They are considering a funding round in about 12 months' time to be used for continued expansion in Europe (they have already deployed successfully a dropbox network in France from retained earnings) as well as to accelerate the UK consumer solution (there are lots of phone boxes to convert!).

I wish Miller and ByBox well.

I’ve been away for the last two weeks although I’ve been keeping a close eye on events. We sailed from Monte Carlo and ended up with Tower Bridge rising to let us through to moor beside HMS Belfast. It is an interesting sign of the times that I had broadband speed wi fi in my cabin for the whole journey - much to the disgust of my wife!

To be blunt nothing very exciting has happened in that period. Stock market indices have continued to slump – the FTSE100 is down 7% since I went away, NASDAQ down 5% and the FTSE SCS Index down 4%.

Bid activity continues. Indeed the ‘trend’ seems to be for the remaining quoted companies to be fought over! Quintiles has put in a competitive bid to Parexel at Clinphone. David Mann at Flomerics had seen himself in the middle of a bidding war from Mentor and Autodesk with the story getting even more interesting with Cadence’s bid for Mentor! However, today Autodesk has withdrawn from the fray. Maybe the same will happen to Mentor if they are distracted with their own bid situation. When sellers get too greedy, buyers walk away and share prices slump.

Some other things that caught my eye were...

Over the last five or so years, the Consumer has been the driver in tech NOT the Enterprise. This had reversed the state of affairs which had existed since the start of IT in the 1960s. Consumer tech spending not only drove up the obvious candidates at the front-end (like Apple, Nokia, Nintendo etc) but also the companies supporting them (chip designers like Intel), the servers they utilised (like Cisco) and the networks they used (like Vodafone). This all had hugely beneficial knock on effects on the whole IT sector including the big iron makers like IBM, the consultancies like Accenture and the IT services player like Logica and Capgemini.

So how the consumer reacts to the economic slowdown is about the most important indicator around. In the last few months, the indications have not been good.

It started with warnings from the consumer backroom boys like Cisco who found that those at the consumer sharp end had waning confidence which affected forward orders for ‘heavy lifting gear’.

But now the full effects of the slowdown are apparent at the sharp end too. Carphone Warehouse and Vodafone have both warned of slowing demand for mobiles and, indeed, for broadband too. John Lewis and DSG have warned of a slump in sales of big ticket tech items like plasma TVs. Even Apple has had to completely reverse its strategy for the iPhone in the light of disappointing sales.

Today’s announcement from DSG gives further evidence with a massive 50% slump in profits from their consumer computer operations (eg PC World). This outstripped the 10% profits downturn in their home electronics operations (eg Dixons, Currys). The silver lining is that those consumers with any cash left after paying the mortgage, doing the food shop and filling up the petrol tank, can get some amazing discounts of up to £450 on a range of 60 laptops! As CEO John Browett said “We are operating in a challenging environment. The economic backdrop continues to be difficult and we remain very cautious about consumer confidence”.

Last year I gave a prediction that the whole UK IT scene would experience no growth in real terms in 2008 and 2009 (ie a headline growth of c3% when inflation is included). I gave the caveat that this would apply only if we didn’t see a major slump in consumer tech spending. As is now usual with Holway’s pronouncement, they were widely criticised for being ‘Too gloomy’. As is also usual, Holway would now say that they weren’t gloomy enough!

In the immediate post 2000 period, we saw the UK IT sector retreat by upwards of 5% pa for a couple of years - ie a real recession. I didn’t think we would see that happen this time around. I’ll update my forecasts later in the year but I’m getting a distinct feeling of déjà vu.

I see that HM Government has hired Martin Read – the ex-CEO of Logica – to front yet another study into why Public Sector IT projects go wrong. See FT 22nd June – Govt hires IT troubleshooter. There seem to have been countless attempts to do just that since Labour came to power in . Indeed I thought that John Suffolk’s appointment as Govt CIO a year back had the same objectives…as indeed did Ian Watmore before him!

We seem to have a Government obsessed with ‘reviews’. It seems to be:

1 - Experience a problem
2 - Setup review headed by external and often ‘failed’ CEO
3 - Review reports
4 - Reviewer gets a gong and returns to obscurity
5 - No action taken on review
6 - Same problem reoccurs, so loop to (1) above.

I don’t mean to make light of this crucial subject. It’s just that with 40+ years experience of either running projects or reporting on them, I think the basics of what HM Government does wrong in IT are pretty well known by now. Perhaps I should (re) sell them one of my many reports on the subject! Surely it doesn’t take a genius to realise that having a clear specification and not completely changing that spec during implementation is pretty key to success (or otherwise). As are things like having top project managers on the procuring side and developing good working relationships with your suppliers. Or not going live without stress volume testing the system first.

When will they ever learn, when will they ever learn.

Logica has appointed Portugal Telecom's head of international operations, João P. A. Baptista, as Chief Executive, International, the RoW bit of Logica's business outside of the UK, France, NL and Nordics representing c16% of Logica’s revenues.

This is Logica's third senior management appointment from the telco sector, after CEO Andy Green (BT) and COO Craig Boundy (C&W). I also understand that Gary Bullard, ex of BT, is to "coach" (retrain) the top account managers at Logica.

My ‘problem’ with this is something I have commented upon many times before. The ‘IT services’ undertaken by a company like Logica is often quite different from what masquerades as IT Services in a telco. Personally I’d have been happier if Green had recruited some really experienced managers from the top global IT services players like EDS, CSC, Accenture, Capgemini etc.

Last month I featured the latest Ofcom Child and Adult Literacy Audits. I was so intrigued by this that I asked Ofcom to provide me with more detailed ‘granularity’ on the use of the internet by children in the various socio-economic groupings. I am particularly interested in this because of my involvement with the Prince’s Trust (where I chair the Technology Leadership Group) which helps young disadvantaged people get a start in life.

The Ofcom research is about as disturbing as you can get. 76% of youngsters aged 8-11 in the ABC1 socio-economic group have access to the internet compared with just 52% in the C2DE group. It gets worse in the even more important 12-15 age group (ie just coming up to the start of their GCSEs) where 88% of ABC1s have internet access compared with 67% of C2DEs.

Put round the other way, only 12% of ABC1s have no internet access compared with 33% - or nearly three times the number – in the C2DE group. I’m sure that a comparison between ABs (probably nearly 100% having internet access) compared with DEs (probably less than half) would be even worse.

Bluntly, how any youngster can progress at school nowadays without internet access – preferably via their own PC at home – is beyond me. It is the equivalent of a house without a book or encyclopaedia.

Not having access to a PC also means that the rapid growth in popularity of social networking (like Facebook) is not available to the very poor. Does this matter? Let me quote from an article by Mary Ann Sieghart in The Times of 12th June. It is a good read – about how social mobility has got worse under Labour and how we now have “to act to reverse this shameful trend”.

Sieghart says “The working classes on the whole have smaller (though often closer) networks of friends. The middle classes tend to have wider (if shallower) circle of acquaintances from whom they get the best advice on schools, universities and jobs, and with whom they can place their children on work experience. They can afford to buy houses in better catchment areas. They have broadband access at home, shelves of books and quiet places for their children to study. They can even “help” with coursework.”

I happen to believe that social networking could assist social mobility. Even at its most basic level, I’d rather have youngsters socialising on the net than in groups on street corners. If the net can help them broaden their minds and circles too – what a real bonus that would be!

I remember a calculation in 2000 that the money spent building the Millennium Dome could have equipped every youngster in the UK with a laptop. Today the cost would be even less. Frankly I think that every UK youngster should have a PC and a broadband connection ‘as a right’.

Many of the ills of this country are down to us going backwards in terms of social mobility. I was extremely lucky to have lived in an age where grammar schools allowed working class lads like me to progress. Generation M could find the same social mobility via digital media. But clearly the very poor are being excluded - Digital Exclusion this time. We really should do something about this before we lose a whole generation – a terrible price to be paid by all socio-economic groups.

So Yahoo seems to have spurned Microsoft in favour of Google.

Readers will know my consistent views on the proposed Microsoft/Yahoo coupling –ie I was against it from the start. I won’t replay my reasoning –you can reread it if you wish.

Microsoft really must understand that the battle for search is over and they have lost. That actually doesn’t matter that much as the next battle is far more important and could be terminal for Microsoft.

I have often referred to the generational trend from Desktop (Microsoft won) to Webtop (Google won) to MyTop and now MobiTop. There is no obvious MobiTop winner (yet). The way Microsoft are going right now they stand a good chance of losing – mainly because they are fighting the wrong battles. They remind me of BT before Ben came along, when BT were far more concerned about preserving fixed line voice and ISDN revenues than gaining traction in mobile and broadband. Just as nobody would now dream of building a fixed line communication system in a developing country, so nobody would dream of building software which only ran/resided on an individual PC.

Microsoft could still be the MobiTop giant. But it has to start fighting the right battles. Tomorrow’s battles not yesterday’s.

I’ve been following Chris Winn and Sanderson for what seems like centuries. But I’ll start the story in 1999 with the Alchemy-backed MBO which valued Sanderson at c£114m. Sanderson, under Alchemy, begat three main operating units which, in turn, were floated or sold:

- Civica – public sector software and IT services – IPO and then, last year, became yet another ‘public-to-private’ backed by 3i

- Talgentra – billing and revenue collection system solutions primarily to utilities, public sector, finance and comms – was bought by Experian

- Sanderson – ERP systems – was the subject of an AIM IPO in Dec 04.

Let me freely admit that I’ve been involved to some extent in all of these companies. Indeed, I was (still am) an EIS investor in the ‘new’ Sanderson. That investment looked pretty good when they IPOed at 50p in Dec 04 and even better when they rose to a high of c74p soon after. Didn’t look so good when the share price slumped to 32p earlier this year.

However, today’s interim results have put a rocket under the shares which are up 7% to 40p in the first hour of trading today. Revenues for the six months to 31st Mar 08 are up 60% to £13m – mainly helped by the acquisition in Q3 last year of Retail Business Systems and of Elucid earlier in 2007. The problem is that I can’t see from the release, or the presentation, what the underlying organic growth is. My suspicion is that they were flat in both retail and manufacturing.

PBT was up 48% at £965K. EPS was up an impressive 46%.

Why do I still have a soft spot for Sanderson? Indeed, why did I keep the shares when I liquidated most of my equity portfolio in Q4 2007 (smart move as it turned out!)?

1 – The ‘Boring’ bit is that Sanderson ‘Stick to the knitting’. They know their verticals of Retail (c550 customers like Harrods and French Connection) and Manufacturing (c180 customers) inside out – as well they should after all this time.

2 – The ‘Exciting’ bit is that Online sales are now a specialty of the group. Given that online sales by ‘bricks-and-mortar’ retailers is still a major growth area, Sanderson are well positioned.

3 – They make c50% of their revenues from contracted, recurring activities like maintenance, support and recurring software. This covers c70% of the cost line.

4 – They pay a pretty impressive dividend; c7% at a 40p price. And that’s tax free to those like me who invested under the EIS scheme.

5 – Chris Winn, Sanderson’s Chairman is a good, old friend and fellow Archers addict.

Exactly what the future holds for Sanderson is less clear. Their problem is the old one of ‘scale’. Do they become a ‘consolidator’ – with all the attendant problems which this creates? Something I seem to have written more warnings about than any other subject. Or do they get acquired? My money – literally! – is on the latter. The only issue is When?

Logica has appointed ex-Unisys Europe head Jean-Marc Lazzari to replace outgoing ex-COO, Jim McKenna as head of its new Outsourcing Services division. Lazzari will be based in Paris.

I guess my first impressions were that Unisys is hardly the best example of a successful IT outsourcing operation and that Paris is hardly the centre of the European outsourcing universe. On the otherhand, perhaps the real opportunities for Logica lie in mainland Europe - rather than in the mature and highly developed UK ITO (and BPO) markets. Lazzari has a big job and one that is crucial to Andy's plans for Logica. Lazzari has to knit together Logica's fragmented outsourcing delivery into a cohesive unit, blend it with offshore, and then make it work seamlessly with its onshore-based consulting and systems integration activities.

Big ask, Big task. As a Logica shareholder, I hope he's up to the job!

My iPhone 2.0 piece yesterday created a fair amount of interest. Although most of it was of the "I'm going to get one now too" variety, I did get a fair smattering of "Don't" too.

Simon Ainslie, who heads Nokia UK, had already told me to "hang on for the Nokia E71". More details of this have now been announced. See picture. It also will be 3G, WiFi, GPS, camera etc - and it has a QWERTY keyboard too. Available second half of 2008 - so I'd have to wait even longer!

Other alternative is the Blackberry Bold - with similar wait. All the smart phones now have a similar range of features to the new iPhone 2.0. I think it now comes down to:

1 - Do you want a QWERTY keyboard? Can you really manage on a touchscreen?

2 - Can I live with O2 (only choice on the iPhone)or should I stick with Vodafone as a carrier which has served me so well both in terms of its extensive UK coverage and abroad?

3 - Do you want a 'sexy' device like the iPhone or a more staid looking E71 or Bold.

If only life wasn't so complex!

It's been a tough year. As readers know, I've been raving about the iPhone for a long, long time - but I always said "I never buy a V1.0 of any Apple product". Now the wait is over. I will be first in the queue for an iPhone 2.0 on 11th July.

It's now, pretty much, got everything I always wanted and the price has fallen considerably too. 3G, camera, GPS etc. Indeed, I now wonder if I wasted my time and money buying a SatMap a few months back. Could OS 1:25,000 maps come to my iPhone?

O2 has, this morning, announced that, in the UK, customers choosing either £45 or £75 per month tariffs will get the new 8GB iPhone 3G for free. It will cost £99 for those on a new £30 per month tariff. The 16GB model will be free for those on a £75/month tariff, rising to £159 for lower tariffs. It will also be available to Pay & Go customers, with pricing still to be announced, and to business users

I have little doubt that the new iPhone will accelerate the move to mobile internet -as I discuss in the My Generation post below. I also think that Apple has done enough with the new iPhone to really break into the Enterprise market big time. They seem to have removed almost all of the obstacles to any company saying "No iPhone, you can only have a Blackberry".

But I don't think Research in Motion should have sleepless nights. Indeed their share price finished yesterday up 2% - compared with a 2% decline for Apple. The iPhone will just massively enlarge the whole smart phone market. Even my wife wants one now.

Thanks, Steve. Can't wait until July. I'm sure the wait will have been worth it.

I've just started to put together a paper/presentation which includes how internet use varies by generation and, from that, how this might affect the future. I'll certainly give HotViews readers access to this as it develops.

But the start point was defining the "Generations" which I have done as follows:

Baby Boomers - DoB 1946 -1964 - Typically in their 50s and 60s

 

Generation X - DoB 1965 -1983 - Typically in their 30s and 40s

 

Generation Y - DoB 1978 - 1994 - Typically 18+/20s

 

Generation M - DoB 1995 onwards - Typically pre-teens/young teenagers.
(Source - Wikipedia)

 

It is what Generation M is doing now which has the greatest effect on how internet use will change in the future. Generation M has always had a mobile phone and a broadband connection. But, as both are now ubiquitous, Generation M doesn't overly stand out. 82% of 16-19 year olds in Generation M use the internet compared to 79% of 35-44 year olds in Generation X (the 2nd highest group according to Ofcom).

What does make Generation M stand out is their use of social networking with 63% of 16 -19 year olds in Generation M having one or more social networking profiles compared to just 12% of 35-44 year olds in Generation X. As Generation M morph into the next Generation, then it's almost guaranteed that social networking will become an accepted norm and clearly usage with mushroom.

Of course, Generation M were the first to demand social networking on their mobiles. Facebook is the 'Killer App' for mobile data. Amongst UK smartphone users, Facebook is the #1 app - being used on average for 1hr 44m a month. This requirement to access Facebook (and other social networking sites) 'on the move' has been one of many reasons behind a 10-fold increase in global mobile broadband connections in the last year. The GSM recently announced the 32-millionth mobile broadband connection - up from 3m in Mar 07.

Last week, iSuppli put out a research document - Wireless Social Networking Revolution Poised to Reshape Tech Industry - suggesting that wireless social networking will generate $2.5 trillion (yes, trillion) by 2020 from products, services, applications, components and advertising as smartphones and mobile broadband become the 'norm'.

 

I can't verify the iSuppli number or the research behind it but it doesn't sound that crazy to me; particularly if you add Generation A.

 

Generation A? - According to The Times today that's the 400m 30-40 year olds in the "expanding middle classes of Asia, Latin America, Eastern Europe, Middle East and Africa". These people have just bought their first ever fridge. They now want food to put in it, a car to go to the shops in and a mobile phone...

...and then, of course, a mobile broadband connection for their local equivalent of Facebook. Mobile broadband because the last thing these countries will do is dig up the streets to lay fixed line cables. Indeed, the GSM Association announced on 15th Apr 08 that , at the end of 2007, the number of mobile broadband connections (315,000) in Indonesia surpassed the number of fixed line broadband connections (300,000).

 

We really are on the cusp of a major Revolution (the title of my Thought Piece and, of course, the music that will accompany it).

 

And still most people over the age of 45 just 'don't get it'.

Footnote - Stewart Ferns describes 'people like us' in the old, developed world as Generation Z -but I think that's a step too far!

As I know there are a few Logica watchers amongst the regular HotViews readership, I thought you might be interested in reading George O'Connor's (the Software and IT services analyst from Panmure Gordon) Morning Note on Logica today. To download the pdf Click here. It's best for you to read it direct as it contains forecasts and a Sell recommendation - and I don't do either of these on HotViews!

Basically, George thinks that "Logica has very little room for manoeuvre in a deteriorating operating environment and risks hitting debt covenants. Given concerns about falling day rates, declining utilisation and IDC reducing industry revenue growth forecast, [Panmure Gordon] revisited Logica forecasts to pose the question – what if?"

I'm afraid that George comes to a pretty similar conclusion to myself - and a number of other analysts. Ie that Andy Green's plan is "not radical enough; Logica remains the halfway house - too small to be large, too large to be small". If you reread my April views on Logica's Business Review I made much the same comment (indeed, it's been repeated by many others since):

"Logica’s problem is that they are Logica. They are a mid-sized player doing lots of different things in lots of vertical areas in lots of countries in Europe. They are a ‘mid-sized generalist’. For many years they have been a ‘mid-sized generalist’ and if Green’s plan is followed they will continue to be a ‘mid-sized generalist’.

If you have read Holway’s views over the last 20 years you will know that being a ‘mid-sized generalist’ is an increasingly uncomfortable place to be."

OK, I've used that title before when Informa bought Datamonitor (for c£600m in mid 2007) which had bought Ovum (for c£43m in late 2006) which had bought my own company Richard Holway Ltd (for c£5.8m in late 2000).

This morning Informa confirmed to the Stock Exchange that it had received an approach from UBM concerning an all share merger. This followed much speculation about who might buy Informa and articles in The Sunday Times yesterday and the FT today forecasting Informa in UBM merger talks. In turn, this might flush out other bidders eg from Private Equity.

Whether Datamonitor was a good deal for Informa and its shareholders is open to debate. Informa took on a lot of debt in the process (not a good place to be in today's climate) and their share price has slumped by around 40% since; a rather greater slump than the 25% fall in the FTSE Media Index in the same period.

Personally I rather like the idea of a UBM/Informa coupling which would create a new FTSE100 sized company with a market capitalisation of c£3b. My old boss, Geoff Unwin (who was the CEO of Capgemini) has just stepped down as the Ch of UBM. However, how it plays with the band of old Ovum and Richard Holway Ltd people still with Datamonitor, is another matter. Quite a change from working directly for the boss in his back room to being part of a FTSE 100 company!

Q - What is the most popular group on Facebook?

In my Industry Analyst of the Year piece last week, I commented at how well NelsonHall had done in these rankings and mentioned they had 'only' 20 staff. John Willmott, who founded NelsonHall, sent me a note saying "We know that we are the global leader in BPO against any criterion. Still it's good to be seen to get to number three in relevance in IT services globally. It demonstrates the quality of the material. We are around 20 people - but if you are giving numbers please point out that that is more services analysts than most firms and that, for example, Gartner have four part-timers on BPO globally. Otherwise your audience just tends to assume that 20 is a small number when in fact, in this industry, it is a very large number."

Very happy to point that out!

I've also mentioned NelsonHall's excellent Industry Insight emails on news and views in the global BPO world which come out every week. I thought they may be just for clients (or free-loaders like me) but John has kindly put them on their website for all to see. You can access them Click Here - which I notice includes the very latest dated 9th June 08. Well worth book-marking.

(Rereading this, it sounds like a NelsonHall commercial. I have no connection with them, honest!)

Capita is to buy IBS for £77.7m/187.85 per share. As they have already received acceptances for 70% of the equity it is in effect a 'done deal'. Given that IBS had cash of £12.7m (at 31st Dec 07) and the excellent 40% profit margins IBS has achieved, the price Capita is paying looks pretty fair and reasonable.

Background
IBS provides products and services to the UK local government and social housing sectors with four main product sets: OpenHousing, OpenFinancials, OpenRevenues and OpenContractor.

Until 2007, IBS had performed strongly with double-digit growth and good positive cashflow. This was reflected in the share price which hit 200p in July 07. However, in Jan 08, IBS put out what was effectively a profits warning which caused the share price to slump from 165p to 111p. So today's bid of 187p doesn't even put IBS back to its 2007 position.

Results to 31st Dec 07 showed PBT up 6% at £7.6m on revenues also up 6% at £19.8m; generating £6.3m operating cash to achieve £12.7m in nett cash at the 31st Dec 07 year end..

Viewpoint
SITS revenues from the UK local government marketplace are "tightening" as IBS admitted.

But although not growing at the double digit rate experienced of late, it is still growing faster than the UK SITS marketplace as a whole.

IBS, of course, has a niche focus – where it has “a well respected product set”. As we know well, good companies in niche markets can buck general market trends.

IBS has two main ‘niches”

Revenue and Benefits – I think this market will be very tough. There were only two significant new tender situations in 2007. So IBS is going to experience great competition for any new installations which come along. On the other hand, IBS makes 70% of its revenues in this area from existing customers upgrading. If a new systems installation is a optional luxury, systems upgrades to existing systems then become a necessity. Indeed, the marketplace might actually favour those (like IBS) with a strong installed base. The supplier is usually the only person able to tender for such work.

Social Housing – IBS won a very healthy 18 new contracts in 2007 with the likes of Sandwell Homes, United Welsh HA, Villages HA, Cadwyn HA, ISOS Group and Aragon HA. It’s a good market and I can’t see any reasons why this niche should be adversely affected. Indeed, economic conditions actually add to the demands for social housing.

IBS competition comes from a range of players which included Capita, Northgate, Anite, Civica (who purchased Comino – a social housing specialist in 2006)

IBS' biggest threat came from the unrelenting move by local authorities towards outsourcing and shared services. To play in that market you have to be big – and the biggest player here (and more generally, the biggest UK BPO player) is Capita! Against IBS’s single-digit growth Capita grew its local authority revenues by an impressive 23% to £345m in its latest FY. – putting it at twice the size of its nearest rival (BT with local authority revenues of c£185m)

IBS didn't play in the outsourcing market and found itself squeezed out as authorities combined workloads and move to Tier 1 suppliers. This would be especially true in the Revenue and Benefits area – less so in Housing.

However, this can bring opportunities too. The supplier landscape to the local authority marketplace is consolidating. Anite’s local authority business (indeed the whole of Anite) is ‘For sale’. Northgate (which had flat revenues of c£116m from the local authority market in 2007) has been purchased by KKR. HBS and Vertex (both in the Local Govt Top Ten) are also ‘under new ownership’. Comino (the most direct competitor in the social housing market) was bought by Civica in 2006.

Conclusion
I have long thought that IBS was "a healthy little company". It’s prospects in social housing were good although it faced a tough market in Revenue and Benefits.

However, it lacked any scale and being mid-sized in a consolidating market was becoming uncomfortable.

The deal with Capita was entirely what I expected. It makes huge sense for both parties and goes on Holway's "this is a sensible M&A deal" pile. Mind you most of Capita's deals get put on that pile. See my "Dullness is an Asset" at Capita - posted yesterday.

After my post - "Dullness is an asset" at Capita - yesterday I received the following email from Paul Pindar (CEO at Capita)

"Thank you very much for your kind piece Richard. Don't worry...we intend to continue to bore....!!"

Paul

Given the news today re: the acquisition of IBS (see above) one really can't accuse Capita of being dull!

The world, as we know, is divided into those the 'Get' social networking and those that Don't. I have found that many 'Don't Get it" people are as fanatically biased against it as any other bigots I have come across.

A year ago I wrote an article on HotViews - The Corporate side of Facebook - which featured, amongst other examples of corporate use, how Ernst & Young in the US had been using Facebook to attract graduates. I actually got quite a lot of feedback to this story - almost all of the "it will never work" or "it's just a gimmick" type.

So I was both interested, and not a little pleased, to read the annual survey of 43,000 US undergrads by pollster Universum (USA) as reported in Businessweek 9th June 08. Amazingly, Ernst & Young had shot up from the 12th ranked 'ideal' employer in the US (Google is #1) in 2007 to 4th in 2008 (Google is still #1). This was the sharpest rise in the history of this poll and "its web-based recruiting - particularly Facebook" was cited by the pollsters as the reason.

As Generation M hit University (which they are now doing), any employer who doesn't embrace social networking, not only in their recruiting but in their general "way of working", is going to be at a serious disadvantage. You have, as they say, been warned!

Can I commend you to read - Dullness set to be an asset as Capita seeks government boost - in today's FT.

Long term Holway readers will know that we invented the Holway Boring Award back in 1993 and gave it to any listed SITS company with a 10 year (or more) unbroken record of EPS growth. Only two companies - Sage and Capita - still retain their Boring Awards. Both have their Boring Award Cups displayed proudly. The word "Boring" took on a whole new meaning as a result with companies being quite proud to be described as "Boring".

I see many echoes of those virtues quoted in today's FT article on Capita.

"Whereas most companies’ chief executives try hard to convey the glamour and excitement of their industries, Paul Pindar of Capita is happy to embrace the austere image of the business-process outsourcing field his company dominates.

That dullness is now starting to look like an asset as consumer confidence fades, and fellow chief executives look enviously to the long-term collection of outsourcing contracts that have allowed Capita to look for growth as most other companies batten down the hatches.

...In spite of its focus, or perhaps because of it, Capita today is often cited as one of the most respected companies in the FTSE 100. It has beguiled the City with its resilient earnings and tidy balance sheets:"

Interestingly, Paul Pindar refuses to apologise for not expanding Capita outside the UK. Pindar reckons the potential BPO market could amount to nearly £100bn a year in the UK alone. Only about £7b of that has been realised; a quarter of it by Capita - the UK BPO leader by a country mile.

"Sticking to the knitting" may indeed be Boring to some. But I cannot count how many companies have come a cropper by believing that, just because they do well in the UK, they have an automatic right to succeed overseas.

One thing the FT article doesn't really point out is that Boring is actually pretty good for shareholders too. Since their IPO in 1989, Capita shares are up 180-times. Not only the all-time best performer in the Holway Portfolio but the best of any FTSE100 company. Sure, at 668p, Capita is down 4.3% YTD. But that is better than the 6.25% decline in the FTSE100 in these 'troubled times'.

If I have one message to Paul it is "Please continue to be Dull and Boring. I like Capita just the way it is".

HotViews often amazes me. The readership just grows and grows. The feedback (for some reason, almost all by email rather than via the comments on the site) not only increases daily but it is mostly from top-level CEO-types. Last month I attended a debate run by a well known IT recruitment company. I was greeted by a young lady who was clearly an avid reader of HotViews. She said that HotViews was distributed to all its many hundreds of staff by email each day. I have no way of counting the number of HotViews that get redistributed within companies but it could double (or more) the readership as measured by the standard counters.

Anyway, what really amazed me was the feedback to my Bo Diddley story yesterday. It was the first I have ever posted which had nothing to do with IT. Except it drew the biggest (positive) reader response ever! I could understand it if they were all from nostalgic 60 year olds like me (one eminent reader pointed out she had been to the same show on her 16th Birthday in 1963 in Manchester) But many were from much younger readers, all recognising the contribution Bo Diddley had made to music over the last 50+ years.

Clearly I should consider giving up the IT analyst day job and become a music critic

Sorry to return to a pet beef of mine but I happen to think that getting our young people interested in maths is key to the future of the technology sector in the UK. Practically every one of the tech companies that I admire and/or have relied on over the last 40 years have been established by people with STEM backgrounds. In latter years these have included the founders of Google and Facebook.

So why is studying a subject that could land you a career that could make you a billionaire considered as geeky?

A study released today by think-tank Reform reported that, since 1990, a "lost generation" of nearly 440,000 pupils had given up maths after GCSEs at a total cost to the economy of £9b. It blamed decades of ‘dumbing down’ where GCSE maths had become little more than a "tick-box test" with pupils needing under 20% to gain a grade C in the top paper . It added that teenagers who dropped the subject at A-level missed out on £136,000 in lifetime earnings from top City jobs.

Reform deputy director Elizabeth Truss said: "In today's Britain it is acceptable to say that you can't do maths, whereas people would be ashamed to admit they couldn't read. We need a cultural revolution to transform maths from geek to chic."

You can read more in The Times Can’t do attitude to maths ‘has cost economy £9b’

My other beef over the last few years is that even when our young people get the right qualifications they can't find the 'entry level' jobs in the UK IT sector. This was evidenced again recently in a study by ATSCo - See Financial Times 26th May 08 - Overseas moves cut IT salaries . The skill shortage in our sector now is for those with 5+ years experience; particularly Project Managers. Few UK employers are taking on raw recruits - preferring to get those 'entry level' jobs undertaken in India and other offshore locations. Those few raw recruits that are taken on have seen entry level salaries static for the last few years - not the greatest incentive to "Get into IT".

So, in a few years, the only people with 5+ years experience will come from India - as will the new wave of Project Managers we so need.

So with declining STEM education and few entry level IT jobs, the UK seems to be sleepwalking its way into IT oblivion. Let's just hope there are enough media-oriented jobs to go around...

The Institute of Industry Analyst Relations has just published its Analyst of the Year survey which you can read Click here. Firstly, let me congratulate David Michell , Senior VP IT Research at my old firm Ovum, for getting the EMEA Analyst of the Year Award and runner up (to Ray Wang @ Forrester) for the Global Award.

The top ranked practices were - as you might expect - Forrester, Gartner and IDC. But it was some of the other firms in the rankings that really surprised me. Boutique firms were extremely well represented in the upper echelons of the rankings. Firms like Redmonk, Freeform Dynamics and MWD which, amazingly, was ranked globally at No 8 in the Analyst Firm of the Year rankings. MWD was formed in 2005 by ex-Ovumites Neil Macehiter and Neil Ward-Dutton and have since been joined by Angela Ashenden and Bola Rotibi. Bola, who used to be at Ovum, was ranked No 8 globally and No 5 in EMEA in the IIAR Survey. I say "amazingly" as MWD is still a "four person shop".

In the Services Listings, NelsonHall was ranked No 5 (behind Forrester, Gartner, IDC and Ovum). NelsonHall has less than 20 employees (also including a clutch of ex-Ovumites). Their weekly NelsonHall Industry Insight is a really good read for anyone interested in the BPO/IT services sector.

The lists show that individual analysts often have more 'influence' than the companies that employ them. It shows how they can transfer that influence when they leave/change research firms. It also shows that small boutique analyst firms can have as much, or more, influence nowadays than companies 100s of times their size. Add to that the "Power of the Blogs" and you can see how the powerbase of the big, old established research firms is under greater threat today than at any time in their long history.

This post has nothing whatsoever to do with IT but I just want to tell you about what happened to me on 25th Oct 1963. I was 16 and had just started my A Levels. At that time, the Package Tour was the fashion and our local theatre in Taunton, Somerset was the venue. My friends and I booked our seats because of the headline act - the Everly Brothers.

The second act in the first half was a new group called the Rolling Stones who had just recorded a Chuck Berry track - Come on. They were sensational and were paid £42. 10s for each show. After the interval, Bo Diddley came on with "The Duchess" - to be honest, he made more of an impression on me than even the Rolling Stones. I had never heard music like that live. Never seen a big guy in a sequined jacket playing on a homemade rectangular guitar. Fantastic over amplified sound. But the beat was...so infectious that it still rings in my head today. Bo Diddley is recognised as being one of the major influencers on the Rolling Stones and many other groups.

The opening couple of paragraphs in Detica's announcement of full year results to 31st March 08 give a pretty good indication of the 'two-speed' performance at Detica - and onwards to the industry as a whole

CEO Tom Black said "We are pleased to announce another set of good results for Detica. Group revenue increased by 30% to £203.2 million, driven by organic growth of 8% and the full year impact of prior year acquisitions. Adjusted Group profit before tax increased by 47% to £25.4 million and adjusted diluted earnings per share increased by 36% to 14.6 pence. Overall, the Board is of the view that the performance was satisfactory and demonstrates the ability of the business to achieve good results, even in difficult years.

Our Government business delivered an excellent performance with revenues growing by 43% to £124.1 million but the performance of our Commercial business was mixed with challenging market conditions in the Financial Services sector impacting growth."

Or, to put it more dramatically, Detica's UK Government business grew by 20% whereas revenues from Investment Banking declined by 22% in H2, with the US particularly badly hit. "The Investment Banking sub-sector is expected to remain subdued for at least the next 12 months".

Security is Detica's strength - and a current hot market sector globally. It is involved in a wide range of 'security-type" activities - in the UK on eborders and Met Police, in the US with Homeland Security and other agencies, in the Retail Banking with systems designed to detect and prevent fraud and misconduct. Indeed Detica's security activities are actually bouyed by turbulence in the Financial Services sector.

I've been a strong supporter of Detica - and Tom Black in particular - for many, many years. Indeed they came within a whisker of getting a coveted Holway Boring Award a couple of years back. In a way, it a testimony to any firm if they have such a balanced business that dire market conditions in one do not bring down the whole house of cards.

It's also a sign of 'the man' that Tom Black has taken over direct responsibility for the non Govt/Commercial bits of the Detica business in the UK and US. If anyone can sort them, Black can! This leaves the current COO, Colin Evans, focused solely on our Government business in both the UK and the US.

Atos Origin is not the only company with 'activist' shareholders.

I see that Carl Icahn is to buy up to $1.5b more shares in Yahoo as he readies his proxy battle to replace the company's board to force it to relook at the Microsoft bid (if one still exists....). Icahn already owns 10m Yahoo shares plus options to buy another 49m shares.

Also two EDS shareholders are using legal action to try to block the HP takeover. The Intermountain Ironworkers Trust Fund has filed a lawsuit in Texas alleging the EDS directors breached their "fiduciary duties" as the takeover agreement prohibits EDS directors from seeking a higher price from alternative bidders and guarantees Hewlett-Packard a USD375m pay-off if EDS does not go through with the sale.

In addition, Joseph Villari has filed a separate lawsuit in Delaware, claiming the agreed price undervalues EDS

Just for once, it has been a rather good month to be an investor in UK IT - particularly Software & Services. The FTSE IT Index was up 4.28% in May 08 but the FTSE SCS Index was up a pretty stunning 6.45% - which puts the FTSE SCS Index pretty much back were it started 2008. Continued bids (and speculation) helped, although share price rises at some of the largest constituents of the index (which is heavily weighted towards the larger companies) - like Aveva (up 22%) and Sage (up 14%) - were the main reason.

NASDAQ also did well (up 4.55% in May) but is still down 4.9% YTD. UK SCS is by far the best performer YTD of all the global indices we follow (see Table below). UK Hardware is the worse - down 22% - although the Euro Telecoms (down 20%) and Euro Tech (down 17%) Indices have done badly too.

The Holway Tech Portfolio is currently down 6.8% YTD. This is far better than Holway's Non Tech Portfolio which is down 16% YTD - mainly as a result of the awful performance of the UK banks.

Best performers in The Holway Tech Portfolio 2008 YTD have been my new investment in RCM Technology Trust (where I am an NED) which is up 8.5% (Not bad eh?), Logica up 4.7% and Blinkx up 1.8%. Worst is BT (down 17.1%) and Misys (down 14.5%). However, as I have said before, I liquidated most of my equity investments last Oct/Nov and have since held over 95% of my liquid assets in cash. Mind you, I still don't like losses - however small they might be in real terms!