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Outlook: After another grim day, shares struggle to find the bottom

Digital Terrestrial TV; Turner's BAE Systems

Thursday 04 July 2002 00:00 BST
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Another grim day in stock markets, sending the Dow crashing through the 9,000 barrier and the FTSE 100 and S&P 500 to below the trough seen in the immediate aftermath of 11 September. Can the outlook really be as bad now as it was then, when all was still smoke, dust, confusion and irrational pessimism?

Well yes, unfortunately it can. The business downturn which began with the bursting of the technology bubble in March 2000 has been on a very long fuse. It is only now that its full force is beginning to be felt in the real economy, and the worst consequences of the bubble are being seen in a spate of giant, and fraudulent, corporate collapses. Nothing is for ever, and one day business and investment confidence will return, but it is hard to see what's going to restore it in the near term. Markets need a reason decisively to change tack and there's nothing on the immediate horizon that looks like providing one.

So far, the public policy response to the downturn and the compounding effect of the 11 September shock, which was to cut interest rates sharply and flood the system with liquidity, has worked well in protecting the wider economy from outright recession. But it has had some unfortunate side effects, such as the housing bubble both here and in parts of the US, and increasingly the long-term consequences of these actions are being questioned.

Fast back to the emerging markets crisis that came to a head in the autumn of 1998 with the near collapse of Long-Term Capital Management, and you begin to see why. Again, the response to the blind panic that then gripped markets and the dire predictions of recession or worse to come was to cut rates sharply and provide more liquidity. Investors and lenders came to see the Fed's actions as tantamount to the arrival of the 11th cavalry, and the boom soon began afresh. Indeed, cheap and easy money ensured that from there on in it positively galloped away, completely out of control.

Investors reasonably took the view that the stock market was in effect underwritten by the Federal Reserve, that whenever the high wire act faltered, the safety net would be drawn across. Up to a point they've been proved right, but in the end, even the great Houdini, Alan Greenspan, has been unable to defy the forces of gravity, or the ancient rule of return to mean. You could argue that it is much better to have the bubble gently deflate, which in essence is what's been happening, than have it explode in one loud bang but, as Japan over the last 12 years has amply demonstrated, the longer the bubble takes to deflate, the longer it is before the economy and the stock market recover.

There's something to be said for the short, sharp, shock, therapy of previous recessions but that's just what the policy makers at the Federal Reserve, the European Central Bank and the Bank of England have been attempting to avoid. In so doing they may have condemned Western economies to years of sluggish growth and sideways trading equity markets. On the once bitten, twice shy principle, the excesses of Enron, WorldCom and the dot.com bubble have in any case ushered in a period of extreme caution in equity and lending markets as well as an era of possibly oppressive regulation in corporate and financial affairs. This is not the stuff of which renewed booms are made.

Digital Terrestrial TV

Unless everyone in the media has got their wires hopelessly crossed, the BBC is heading for victory in the battle for the digital terrestrial television multiplexes (DTT) left vacant by the collapse of ITV Digital. The Independent Television Commission announces the winner first thing this morning. There's always room for surprises, but with Patricia Hodgson, the ITC's chief executive, gunning for the top post at Ofcom, the likelihood is that she will have plumbed for the politically safe and least controversial choice – Auntie.

It's hard to argue that this is unconscionably the wrong decision, since the main opposition, a consortium of ITV, Channel Four and David Chance's pay-TV offering, always looked too much associated with the disaster of ITV Digital to be a credible rival. But there are big drawbacks to the decision none the less. By awarding the platform to the Beeb, the ITC ensures that DTT is forever consigned to being a free-to-air proposition. This suits the BBC and BSkyB very well, but whether it serves the wider public interest is much more questionable.

Without any kind of immediate pay-TV element, there's no incentive to build conditional access technology into DTT set-top boxes and TVs, foreclosing the market for pay-TV for ever. For the 35 per cent of households that cannot get cable, Sky will have an absolute monopoly and for the rest of the country it will enjoy a duopoly with cable. Meanwhile the BBC closes off the possibility of any kind of a subscription-based funding alternative to the licence fee, if only because when the analogue signal is eventually switched off, those reliant on DTT won't be capable of receiving subscription channels. Full marks to the BBC for seizing the moment, but let's not pretend that its free-to-air bid for DTT is anything other than highly defensive.

The Government may not mind very much if British TV ends up dominated by an on message alliance of the BBC and Sky, but the rest of us have good cause to worry.

Turner's BAE Systems

You have to admire the brass neck of Mike Turner, the new chief executive of BAE Systems. In an interview reported in yesterday's Financial Times he makes the preposterous suggestion that Britain's dominant defence manufacturer should be awarded contracts without a competitive tender. He wants to be paid a lot more by the Ministry of Defence as well.

In effect, BAE is asking for a return to the good old days of the cost-plus contract, which brought us expensive fiascos such as the original programme to build Nimrod airborne early warning aircraft. But there is an added twist. Unlike the Nimrod débâcle, which the Government eventually resolved by sacking GEC and awarding the contract to Boeing, the MoD would have no choice but to soldier on with its monopoly supplier. It would not be able to play BAE off against a rival foreign contractor, as it does now.

If this is how the new man at BAE intends to deal with his biggest customer, then bang goes the theory that his predecessor, John Weston, was removed because he rubbed up too many MoD backs the wrong way. Mr Turner argues that it is wrong for French or American companies to get a shot at big prime contractorships such as the £3bn aircraft carrier programme which BAE is currently fighting over with Thales. That way lies Britain's eventual industrial nemesis.

Mr Turner is talking through his hat. The only reason the MoD is obliged to invite foreigners to bid for its business is because BAE has bought up its only serious UK competitor, Marconi Electronic Systems. Thanks to cost savings, the takeover has generated additional profits of £275m a year. It has also given BAE the strength to muscle in on the US arms race and start acquiring American defence companies. Mr Turner and BAE have got to learn to take the rough with the smooth. All businessmen aspire to monopoly, but Mr Turner's proposals would be bad news for his biggest customer and even worse news for the taxpayer.

jeremy.warner@independent.co.uk

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