Psion rides out the bumps: The computer firm has lessons for market newcomers, Tom Stevenson reports

OF LATE the stock market seems to have developed a taste for technology shares not seen since the early 1980s.

Yet although the newcomers have been welcomed with sky-high ratings and institutional enthusiasm, the white-knuckle ride enjoyed by one of their older peers suggests that they may live to regret embracing the City.

David Potter, chairman and founder of Psion, one of the most innovative and successful British computer companies, opted for public ownership in 1988. He now has mixed feelings about that decision. A glance at Psion's share-price performance suggests why.

It has been a roller-coaster ride over the past five years. Floated at 97p, Psion's shares soared to a peak of 374p within a year, before collapsing to 40p two years later. Partly to blame is the ebb and flow of the City's enthusiasm for high-tech stocks, but Psion's patchy profits record is also responsible.

Things started well after Psion's flotation, as profits rose smartly from pounds 1.9m in 1987 to pounds 3.4m two years later. An enthusiastic band of followers pushed the shares higher and higher. The following year, however, profits slumped to pounds 550,000 and in 1991 a loss of more than pounds 2m was recorded.

Psion's problem is a familiar one for small, research-driven companies. If ideas and design quality were enough, Psion would be streets ahead of the pack. But in the cut-throat world of consumer electronics, brainpower and flair can be worthless without the cash and marketing power to back them.

Like pharmaceuticals companies, small electronics businesses are judged not only on the products and profits they are producing but on expectations of what lurks in the development pipeline. For much of the 1980s, Psion managed to keep one step ahead, launching new products just as sales of their predecessors began to falter.

Seeing the prospects for its first success, computer games software, slipping away, the company jumped neatly sideways and developed an innovative pocket computer that has sold almost a million units.

The Organiser was a hit with City yuppies who wanted a high-tech version of their Filofaxes and with big companies like Marks and Spencer, which used the hand-held devices for collecting data in their shops.

In 1986 a souped-up Organiser was launched, sales of which are only just fading. For a while the company seemed to be locked into a virtuous cycle, using cash flow from sales to research its next generation of products.

Then came the glitch in 1989 when Psion tried to lead the computer world into notebooks, the first genuinely portable machines. Although well-received critically, the product suffered from a lack of peripheral equipment and business software. Psion had underestimated the resources needed for such an innovation.

By the time the company had caught up, the Japanese electronics giants had jumped onto the notebook bandwagon, reading the market better and racing past Psion in the process.

It was not the first time Psion had come a cropper in the struggle with the Japanese. For two years after 1986 Psion had the US market for electronic organisers to itself. But once again lack of resources let Sharp in on the act and the Japanese company now dominates the American market.

Sharp poured dollars 20m into creating a distribution network for its organisers and lost money for years. Mr Potter says of Psion's decision not to invest: 'Perhaps we should have done the same. But as a public company you have to keep coming up with the profits.'

The market is currently pinning its hopes on the Series 3, the latest version of the Organiser. Combining word-processing, database management and spreadsheet functions, the Series 3 is more than just an electronic Filofax. The size of a glasses case, and retailing for less than pounds 200, it is an impressive piece of technology.

But, according to David Potter, the Series 3 is just the beginning. The future, he thinks, offers endless opportunities brought about by massive increases in the amount of memory available at ever-lower prices.

In the next year or so the two- megabyte solid-state discs that slot into Psion organisers will be replaced with discs capable of storing four times as much information. Those, says Mr Potter, will be able to hold such things as timetables for every airline in Europe for a year, or details of every street in Holland.

By the year 2000, muses Mr Potter, the same discs could hold up to a gigabyte of memory, 500 times the current capacity. That means the discs could include the contents of a library of more than 2,000 books.

But, having stumbled twice, and despite its fiercely guarded independence, Psion is beginning to accept that taking advantage of that world will require relationships with larger companies with more financial clout.

One of Psion's most impressive new products is a modem the size of a credit card. Modems, the pieces of hardware that connect computers to telephone lines so that they can talk to each other, have traditionally been no smaller than a cigarette packet.

It is a stunning piece of miniaturisation that makes computing on the move a much more viable option. Still more exciting is the deal Psion is negotiating with the former enemy, a Japanese notebook computer maker that wants to include the modems when it sells its machines.

In a similar development, Psion recently tied up a deal with Motorola, the American electronics group. The idea is to develop a hand-held computer that allows workers to keep in touch with their mainframe computers when they are out in the field, using radio technology.

With 40 per cent of the workforce spending most of its time outside the office, the market is huge. BT, for example, has 50,000 service engineers on the move all day. Profits are expected to start to flow from next year.

If the future of information technology lies in the breakdown of traditional barriers between telecommunications and computing, Psion is well placed to benefit but arguably too small to capitalise on its own.

David Potter disagrees, convinced that Psion has a viable future on its own: 'I'm not worried by the big Japanese players because traditionally they have been very weak at software and with hardware no longer the limiting factor, that is where the future lies.

'Also, if you look at the history of the computer industry, new innovations have always come from small companies. The good ones - Microsoft, Digital - grow into big companies. There is no reason why we can't be a dollars 1bn sales company within a few years.'

Shareholders who have ridden the roller-coaster for the past five years will hope he is right. Investors in the new wave of high-tech hopefuls should be warned, however, that their ride is likely to be just as bumpy.

(Photograph omitted)