Beware of jumping on the Internet bandwagon

Marking up shares just because a company launches an Internet project is pushing it

THE TWO new dominant technologies of our age - mobile telephony and the Internet - have this week dominated UK financial market news.

The telephony story concerns One 2 One, the mobile phone company owned by Cable & Wireless and MediaOne. It is to be sold, either by a float or straight sale with a market valuation estimated to be about pounds 8.5bn. The owners invested a lot in it, of course, but it is still only number four in mobile telephony in the UK, and was only founded in 1993. That is a lot of money for a company that did not exist six years ago.

The Internet story concerns a much more venerable company, WH Smith. Its shares shot up by 9 per cent when it announced that it was joining with Microsoft and BT to develop a new free portal, or gateway, to the Internet. There are now five new free Internet access providers - the technology has essentially become a giveaway, or rather a come-on to the user.

So one of these new booming technologies is enormously valuable, a service for which companies can charge a lot, while the other is becoming free. But, as any economist would acknowledge, there is no such thing as a free lunch. WH Smith shares would not leap upwards if the market did not believe there was money in it somewhere. But where? We know there is money in mobile telephony because people are prepared to pay an enormous premium for the mobility, but hardly any of the famous Internet stocks are making money. Loss-making growth, even if the growth is astonishingly rapid, requires the act of faith that at some stage in the future, profits will accrue.

The growth in the Internet has become fairly easy to predict - the number of US users looks set to reach 150 million by the end of next year (see graph), and Europe, in relative terms though not in absolute, is growing faster. There is much more uncertainty about which areas of business will grow fastest.

There are plenty of estimates about the US, one of which, from the World Trade Organisation, is shown in the other graph. There, business-to-business use is expected to be the largest single source of revenues next year, with consumer retail - the area where companies such as have triumphed - being the smallest of categories listed. But note something else: the WTO last year, when those figures were done, was still reckoning on Internet access being a large source of revenue. Well, maybe it will be in the US, but with this recent rise of free access it is hardly likely to be so here.

Besides, it is not clear that US patterns of use of the Internet will prevail in Europe. Not only are patterns of technology use rather different - to generalise, Europe makes greater use of mobile phones, the US greater use of computers - but there are different patterns of retailing too. Mail order accounts for a much larger proportion of US retail sales than it does of European sales. Internet retailing fits more naturally into the US pattern than it does into Europe's.

The market, however, seems to be saying two things, the first of which I think will turn out to be more true than the second. The first is that owning the system that connects people via mobile phones will remain hugely valuable. The second is that if you have the customer list of an Internet portal you also own something that is very valuable.

Once the mobile phone contract is established it tends to stick - or at least it sticks for the best customers. The customers you lose are the ones you don't mind losing. The rates are going to come whizzing down, so that mobile telephony costs little more than fixed-line telephony, but because the technology will race on for at least another 10 or 15 years, the mobile phone will still be able to extract a lot of money from peoples' bank accounts. The next generation of phones, now only two years off, will have a range of services far beyond the present generation, including Internet access, messaging, document and video transmission, banking and so on.

The service companies will also work at developing ways to help people find their way around the options. If you are working on a PC and are familiar with a keyboard and a mouse, Internet-related tasks are quite easy to perform. But if you are using a mobile phone as your point of access and are waiting on a train platform, the tasks become fiddly and awkward. The mobile phone companies will have to find ways of using technology to make things easier to use. The more they can do this, the more they can charge. They will become purveyors of increasingly complex services rather than carriers of signals.

By contrast, I'm not sure how secure a hold a portal will have on Internet users. The glory of the Internet is the freedom it gives users to spin around the world, following the myriad links devised by millions of other people, rather than following a path designed by a large corporation. The bet the providers are making is that once you have free access from one source you'll be unlikely to switch. That's fine if there are only a few free providers. But suppose everyone does it. It is not difficult to create the portal - the problem is getting people to come through it.

It may be that large numbers of commercial institutions will offer free Internet access: these would include your bank, your supermarket or your newspaper, as well as your phone company. It will be difficult for any of these organisations to sustain an advantage in the service they offer and it is unlikely that users will be loyal unless they do succeed in being better than the pack. In mobile telephony there is a natural oligopoly, for even if it were to be completely deregulated, it is not worth more than half a dozen companies trying to establish wireless networks. But in Internet access it is open house. The entry costs, while not negligible, are pretty low.

The market's instincts to put a high value on an established (though relatively small) mobile phone company are almost certainly right, but marking up shares just because a company announces a new Internet-related project is pushing it. A general rule, of commerce as well of life, is that something given away free may not be worth very much. Free Internet access may come into that category.

Kenny Ireland, pictured in 2010.
peopleActor, from House of Cards and Benidorm, was 68
A scene from the video shows students mock rioting
newsEnd-of-year leaver's YouTube film features staging of a playground gun massacre
View from the Llanberis Track to the mountain lake Llyn
Du’r Arddu
environmentA large chunk of Mount Snowdon, in north Wales, is up for sale
A family sit and enjoy a quiet train journey
voicesForcing us to overhear dull phone conversations is an offensive act, says Simon Kelner
i100This Instagram photo does not prove Russian army is in Ukraine
Arts and Entertainment
The cast of The Big Bang Theory in a still from the show
tvBig Bang Theory filming delayed by contract dispute over actors' pay
Morrissey pictured in 2013
England celebrate a wicket for Moeen Ali
sportMoeen Ali stars with five wickets as Cook's men level India series
Life and Style
The director of Wall-E Andrew Stanton with Angus MacLane's Lego model
gadgetsDesign made in Pixar animator’s spare time could get retail release
peopleGuitarist, who played with Aerosmith, Lou Reed and Alice Cooper among others, was 71
Robyn Lawley
ebookA unique anthology of reporting and analysis of a crucial period of history
i100  ... he was into holy war way before it was on trend
Arts and Entertainment
High-flyer: Chris Pratt in 'Guardians of the Galaxy'
filmThe film is surprisingly witty, but could do with taking itself more seriously, says Geoffrey Macnab
Life and Style
food + drinkVegetarians enjoy food as much as anyone else, writes Susan Elkin
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

1st Line Support Technician / Application Support

£20000 - £24000 per annum: Harrington Starr: A leading provider of web based m...

Team Secretary - (Client Development/Sales Team) - Wimbledon

£28000 - £32000 per annum: Ashdown Group: Secretary (Sales Team Support) - Mat...

Accountant / Assistant Management Accountant

Competitive (DOE): Guru Careers: We are looking for an Assistant Management Ac...

Senior Investment Accounting Change Manager

£600 - £700 per day + competitive: Orgtel: Senior Investment Accounting Change...

Day In a Page

Dress the Gaza situation up all you like, but the truth hurts

Robert Fisk on Gaza conflict

Dress the situation up all you like, but the truth hurts
Save the tiger: Tiger, tiger burning less brightly as numbers plummet

Tiger, tiger burning less brightly

When William Blake wrote his famous poem there were probably more than 100,000 tigers in the wild. These days they probably number around 3,200
Former Labour minister Meg Hillier has demanded 'pootling lanes' for women cyclists

Do women cyclists need 'pootling lanes'?

Simon Usborne (who's more of a hurtler) explains why winning the space race is key to happy riding
5 News's Andy Bell retraces his grandfather's steps on the First World War battlefields

In my grandfather's First World War footsteps

5 News's political editor Andy Bell only knows his grandfather from the compelling diary he kept during the war. But when he returned to the killing fields where Edwin Vaughan suffered so much, his ancestor came to life
A tale of two presidents: George W Bush downs his paintbrush to pen father’s life story

A tale of two presidents

George W Bush downs his paintbrush to pen father’s life story
Save the tiger: The day America’s love of backyard tigers led to a horrific bloodbath

The day America’s love of backyard tigers led to a horrific bloodbath

With only six per cent of the US population of these amazing big cats held in zoos, the Zanesville incident in 2011 was inevitable
Samuel Beckett's biographer reveals secrets of the writer's time as a French Resistance spy

How Samuel Beckett became a French Resistance spy

As this year's Samuel Beckett festival opens in Enniskillen, James Knowlson, recalls how the Irish writer risked his life for liberty and narrowly escaped capture by the Gestapo
We will remember them: relatives still honour those who fought in the Great War

We will remember them

Relatives still honour those who fought in the Great War
Star Wars Episode VII is being shot on film - and now Kodak is launching a last-ditch bid to keep celluloid alive

Kodak's last-ditch bid to keep celluloid alive

Director J J Abrams and a few digital refuseniks shoot movies on film. Simon Usborne wonders what the fuss is about
Once stilted and melodramatic, Hollywood is giving acting in video games a makeover

Acting in video games gets a makeover

David Crookes meets two of the genre's most popular voices
Could our smartphones soon be diagnosing diseases via Health Kit and Google Fit?

Could smartphones soon be diagnosing diseases?

Health Kit and Google Fit have been described as "the beginning of a health revolution"
Ryanair has turned on the 'charm offensive' but can we learn to love the cut-price carrier again?

Can we learn to love Ryanair again?

Four recent travellers give their verdicts on the carrier's improved customer service
Billionaire founder of Spanx launches range of jeans that offers

Spanx launches range of jeans

The jeans come in two styles, multiple cuts and three washes and will go on sale in the UK in October
10 best over-ear headphones

Aural pleasure: 10 best over-ear headphones

Listen to your favourite tracks with this selection, offering everything from lambskin earmuffs to stainless steel
Commonwealth Games 2014: David Millar ready to serve up gold for his beloved Scotland in the end

Commonwealth Games

David Millar ready to serve up gold for his beloved Scotland in the end