Outlook: Standard Life finally bows to the inevitable

Resurgent EMI; Ofcom nonsense
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Standard Life's announcement yesterday that it intends to demutualise and float on the stock market is a long overdue admission of the inevitable, yet there's no denying the seismic nature of the Edinburgh stalwart's reversal of position. Standard Life is the last mutual life assurer of any size left standing, and it seemed willing to defend the mutual principal to the last.

So boxed in and rigid in their views did the senior management become that they didn't notice the world outside had changed. Belatedly, they have been forced to a conclusion everyone else had come to years ago - that mutuality, with the company owned by its with profits policyholders, cannot provide the capital needed to thrive in today's infinitely more competitive and demanding savings environment.

The root cause of Standard Life's problem is the dramatic decline in popularity of what was once Britain's core savings product, the with profits policy. Historically, the with profits fund was the company, yet in recent years it has shrunk to little more than a third of assets, and today, with profits account for less than a fifth of Standard Life's new business. The reasons for this shrinkage are many and varied. A history of mis-selling scandals in combination with one of the worst bear markets of the modern age has severely undermined public trust in the product. Others blame the regulator, which by imposing ever more rigid capital constraints has interfered with management's ability to smooth returns in the way they have been in the past. The bottom line is that few financial advisers will nowadays recommend their clients to take out a with profits policy.

It was Standard Life's misjudgment that it failed to recognise these trends as early as others and was consequentially late in making the necessary adjustments. Or rather, it thought that the unpopularity of with profits policies was a passing fad and that they would live on to reign again. The FSA's new solvency requirements, which have forced the company dramatically to cut its exposure to equities, has changed that view.

We are where we are, and the question most policy holders want answered today is how much they are going to get. To which the answer is no one yet knows, but not nearly as much as they would have got had the company floated three or four years ago, when carpet baggers first demanded it. Standard Life's latest with profits balance sheet, drawn up on the new "realistic" basis required by the FSA, lists surplus capital of £4.6bn. The eventual valuation will depend crucially on how much money Standard is making out of its non with profits business and what sort of a dividend it can support.

Other variables include how much new equity the company will need to raise when it floats, and what level of debt capital it will be forced to take on as an interim measure in the meantime. With the float still more than two years away, there's also every chance that Standard will succumb to a trade buyer before it ever reaches the dealers' screens. Sandy Crombie, the chief executive, has had to come an awfully long way in a few short months. To have to go that one step further and surrender the company's independence along with everything else would be almost too much to bear.

Resurgent EMI

Having tried and failed to merge with virtually all major rivals, EMI has been forced to make a virtue out of going solo. The resulting act is - not bad, not bad at all. The headlines continue to look grim, as they must given the way the industry has been stood on its head by the digital revolution, but by remaining ahead of the curve in cutting away the fat of bygone years, EMI has at least positioning itself to survive, and perhaps remarkably, it now looks in better shape than any of its leading rivals.

Alain Levy, EMI's head of recorded music, is aiming to take a further £50m out of annual costs over the next two years by cutting a fifth of his artists and subcontracting his CD and DVD production. Again amazingly, he's able to do this without any significant damage to his top line revenues. As things stand, the company supports a myriad of niche artists which together cost quite a lot to support but contribute little to overall revenues.

Substantially lower costs can also be achieved by outsourcing CD production. The move carries the added bonus of allowing EMI to adapt its fixed overheads to the growing market for digitally downloaded music. To date, most downloaded music has been illegal in nature. Yet EMI reckons online or mobile could be as much as a quarter of legitimate sales within five years. The pirates are still far from beaten, but EMI does at least now have a credible digital strategy to counter them with. Sales delivered either online or through mobile phones is growing almost exponentially at the rate of 25 per cent a month.

Big job cutting programmes are horrid things, but the really encouraging thing about yesterday's raft of initiatives is that EMI seems to be through the stage of sitting around wondering whether it is still going to be here in a few years time, and is instead back in the mind frame of looking forward to a resumption of strong growth. By looking to the future, listening to its customers and reinventing the business model, EMI is already disproving the theory that the music majors are largely history.

EMI is also right to have reconciled itself to staying independent. Even if competition regulators eventually allow another consolidation among the music majors, the trauma and distraction of crunching two alien, creative cultures together in today's fast changing world might prove terminal. EMI, newly refocused and reinvigorated, already looks a much sounder long-term bet that Sony and BMG. Stuck in interminable argument with the regulators about whether they should be allowed to merge, they have become frozen in time. By contrast, EMI looks up with the beat.

Ofcom nonsense

I don't feel at all comfortable arguing the point of view of an incumbent monopolist, but Ofom's Competition Act investigation into whether BT should be allowed to cut its prices defies even the most basic of common sense.

Just to recap, BT announced last week that in response to growing competition from Carrier Pre-Select operators, it would be abolishing the standard rate tariff structure used by the majority of its residential customers and instead migrating them automatically onto cheaper, discounted rates.

Those using the standard rate pay higher call tariffs than those on discounted packages, but they also pay a slightly lower line rental charge. One of the effects of abolishing the standard rate is therefore to increase the rental charge for Carrier Pre-Select customers, thereby undermining some of their competitive advantage. That's an abuse of a dominant market position, complains the Carrier Pre-Select brigade, which demands that the position be changed back to the way it was.

Excuse me, but as one of the inert majority who has never got round to switching either to a discounted package or a Carrier Pre-Select alternative, I rather like the idea that my telephone bill is going to be automatically cut. Indeed I find it somewhat hard to think of it as an "abuse". The majority of BT customers only stand to gain from last week's initiative, and the idea that they should forgo those benefits for the sake of some airy fairy theory about enhanced competition is frankly ridiculous.

Most, though by no means all, Carrier Pre-Select rivals to BT, aren't proper competitors at all, but merely parasites living on the pig's belly. They use BT lines, they use BT exchanges, and they use the BT network. They exist only because inert customers like me have been cross subsidising them out of our BT call charges. By all means let's have proper real competition to BT. Those that have to go crawling off to the regulator to complain every time the incumbent tries to respond by cutting its prices, don't really fall into that category. They are whingers, not competitors.

jeremy.warner@independent.co.uk

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