Take a look at the chart BHP Billiton published with its interim results yesterday, which we reproduce on page 53. This shows that in real terms commodity prices had up until a few years ago been on a steeply declining trend. Indeed by 2001, they had reached their lowest point in more than 200 years.
This was not just because of progressive improvements in technology, allowing for more efficient extraction and the development of new sources of supply. From the early 1980s onwards, developed economies underwent a decisive structural shift, becoming ever more service orientated. As a consequence, they consumed fewer metals, less biomass even less energy. Prospects for the mining industry looked grim.
The new ingredient is China and India. By BHP's reckoning, some 400 million will shift from country to town in China alone over the next 20 years as the country transforms itself from an agrarian to an industrially based economy. The process has already created a vast new source of demand which Mr Goodyear sees as persisting for years to come. He can't predict prices, because they depend on supply and costs of extraction, but he can be confident that the mining industry is again in a long term growth market. Eventually China and India will become like the developed West and their appetite for commodities will decline. Fortunately for Mr Goodyear, this is not a problem likely to trouble him. That will be for his successors to deal with.
Online gaming pioneers cash in again
Another day, another online gaming group comes to market. The latest company to try its hand at the roulette wheel of the London Stock Exchange is Cassava Enterprises, owner of the 888.com online casino and poker site. Like PartyGaming before it, the company is hugely profitable, encouraging its sponsors to believe it can command a valuation of in excess of £700m. This will enrich Cassava's two main shareholders beyond the dreams of avarice, but does it promise to do likewise for stock market investors?
London is fast becoming the listing centre of the world for internet gaming. Four are already quoted here including the market leader in online poker, PartyGaming, and there are at least another three lining up to join them. Unfortunately this has less to do with London's innate attractions as a listing centre, and much more to do with the fact that online gaming is illegal in the United States, where these companies derive the vast bulk of their clients and revenues.
Online gaming may for the time being amount to a licence to print money, but you have to wonder how long it can remain so. As things stand, the US authorities seem to tolerate the existence of these mainly Gibraltar-registered companies, but the danger of a clampdown, say by making it illegal for credit card companies to make payments to online gaming sites, are all too real. Alternatively, US lawmakers may decide to make the activity overtly legal.
This would pose almost as big a threat to the Gibraltar-based upstarts as a regulatory crackdown, since it would reduce barriers to entry to virtually nothing. Even PartyGaming would struggle to survive in the ensuing free for all. To date, regulatory risk has largely kept established gaming and software players, particularly those based in the US, out of the market. Returns would fast be competed down to far less appealing levels if these risks were removed.
Perhaps as significant, the cost of customer acquisition is already rising steeply. Most industry analysts expect the size of the online market to grow exponentially with rising levels of broadband penetration, yet customer retention remains extraordinarily low, with perhaps as little as 5 per cent of customers still returning after six months. This would suggest that most people try the delights of the online gaming rooms once or twice, but then become bored or retire hurt. In other words, this is largely a transitory market likely to reach its high water mark much more quickly than exponents suggest.
With nearly all these online gaming floats the purpose is not to raise more money for expansion, but to allow early investors and founders to get their cash out while the boom lasts. This should always make potential new investors highly suspicious. If prospects are as good as they are painted, why are the founders so keen to flog off the sun-lit upside? PartyGaming shares have risen strongly since they were floated a couple of months back, so there's plainly an appetite for these companies. Yet it's best not to be around when the music stops. As with the candyfloss paper of the dot.coms, you'll be able to pick the shares up for a fraction of the price a couple of years from now.
Now Google attacks the telephone market
Google is stepping up the pressure in the battle of the portals by offering a "free" telephone service for Google users, Google Talk. There's nothing particularly new in this. You can already talk, and indeed video conference, over MSN and Yahoo!. Yet Google plans to take the service, initially launched only in the US, a stage further by making it easier to access and use, and by developing an "open" platform, which allows communication with users of other portals.
What's more, Google hints at making it possible for users to call ordinary land lines and even mobiles. It is hard to see how even a company as ambitious as Google can do this without charging, since nobody has managed it so far. The online telephone service Skype already offers such a facility, but you have to pay for it. No telephone company would connect you to its customers for free. Google hopes to make an awful lot of money from its search functions, but it will surely never make enough to cross subsidise the costs of the world's entire stock of fixed and mobile telephone lines.
The move is none the less another nail in the coffin of traditional, switched telephony. The death knell was sounded with the introduction of internet protocol technology, which by creating almost unlimited capacity has hugely reduced the marginal costs of voice and data communication. Yet it wasn't until broadband became widely available at affordable prices that the full potential of IP could be realised.
In that sense, the idea that these new services are "free" is somewhat misleading. A broadband connection carries a quite high monthly charge. However, it's the "all-you-can-eat" model rather than the selectively ordered from the menu way in which telephone companies have historically charged.
Traditional telephone companies aren't about to be wholly disintermediated; they've just had to find a different way of charging, which is flat rate rather than metered tariffs. Even so, the transformation is quite painful enough. To date, they've largely managed to keep voice telephony out of the broadband space. That's going to become progressively more difficult.
More worrying still, ownership of the customer goes to services like Google, which piggie back off the telephone networks. The more customers Google can persuade to use its "free" telephone service, the more eyeballs there are to sell other services to and the greater the attractions of the site to advertisers, local, national and international.
Since Google floated just over a year ago on what at the time looked an heroic valuation, the price has more than tripled. The stock is undoubtedly mispriced, but the speed with which this company is moving to exploit the myriad of commercial opportunities the internet allows makes it easy to understand why.Reuse content