Deals that spell out what the work we do is really worth

Wealth generation is a complex and unpredictable process, where a handful of talented - or lucky - business leaders have a disproportionate impact on the lives of millions

Share

Making things is a lot less valuable then selling a service. That is one of the harsh lessons to be drawn from the difference between the price of the two great telecom deals this week. A minority share of a US mobile phone service is worth nearly 20 times as much as the manufacturing business of what was until last year the world’s largest manufacturer of handsets.

The valuation of companies is arbitrary, as the huge swings in share prices exemplify. The FTSE 100 share index is 18 per cent higher than it was a year ago but that does not mean the companies are intrinsically more valuable now. The swings in individual companies are, of course, much greater. But what a big deal does is to give a snapshot of perception of value at one moment in time.

Right now Vodafone’s 45 per cent share of Verizon’s mobile business is worth $130bn (£84bn) while Nokia’s handset business, plus its patents, both bought by Microsoft, are worth only $7.2bn.

Lesson one is that people are quite fickle as to what products they buy but quite sticky as to who they choose as service providers. Nokia had nearly half the market of mobile phones five years ago and still has 18 per cent, second to Samsung. But that is not enough. None of the original manufacturers of mobile phones, including Motorola and Ericsson, still operates as a stand-alone producer. Even one key later innovator, BlackBerry, has put itself up for sale. By contrast Apple and Samsung have revolutionised the market.

If, however, you look at mobile phone services, all major developed markets have settled into an oligopoly of a handful of operators. Verizon happens to be the biggest in the US. These major markets are more or less impossible to break into, for while customers can switch they rarely do.

Lesson two flows from this. Market share is clearly little protection because once that starts to slide you are in big trouble. But ownership of a network of users is hugely valuable. That network could be mobile phones, or could be a Google or a Facebook. Or less obviously it could be a global after-sales service: Rolls-Royce is the world’s second largest manufacturer of aircraft engines but earns nearly two-thirds of its engine revenues from spare parts and servicing installed engines rather than selling new ones.

Lesson three is broader: wealth generation is a complex, quirky, unpredictable process, where a handful of talented – or simply lucky – business leaders can have a quite disproportionate impact on the lives of millions of people.

Vodafone was created out of a military communications company called Racal, itself now owned by a French defence company called Thales. Nokia was a Finnish lumber and paper mill firm that had branched into rubber boots and power cables. You can see the connection between battlefield radios and mobile phones, but timber and handsets? Yet a series of decisions by a handful of people turned one into the world’s largest mobile phone company and the other the largest handset producer.

Those key decisions were taken some 30 years ago. The lesson for us now surely is that we cannot hope to see which bits of our economy will bring in the bacon over the next 30 years but what we can do is foster the conditions whereby people who want to create a new global giant are as likely to do so here as anywhere else. Many of us intuitively feel that only in the US could anyone create a Facebook or a Twitter. One task of our political and economic leadership is to prove that wrong.

Let’s not get too excited... 

Now that Labor Day in the States is past, there is a back-to-school feeling in the air – and it is a broadly positive one. In the US, the key issue is the start of “tapering”, the gradual decrease in the monthly purchases of Treasury securities by the Fed. Already the 10-year bond yield has risen to nearly 2.9 per cent – a month ago it was 2.6 per cent and a year ago 1.5 per cent. So policy is tightening ahead of anything the Fed does and the end of the purchases by next summer is now quite accepted. Couple this monetary move with the sharp tightening of fiscal policy and you could say things are moving back towards some sort of normality.

Here in the UK there is a quite different mood from the spring, with good news from retailers and manufacturers this week. Monetary policy is also de facto tightening, notwithstanding our new Governor at the Bank of England: 10-year gilts are yielding nearly 2.9 per cent too. My own concern is that just as many people here were unreasonably gloomy in the spring, maybe they are too positive now. Economic recoveries rarely move in straight paths, and the obvious disruptive influence might come from Europe after the German elections.

The other great imponderable is the slowdown in Asia. That is undoubtedly happening and question is whether this is a net negative or positive for the West. Lower Asian demand cuts our exports to the region but it also will reduce commodity and energy prices, which would help Europe in particular.

But all-in-all not a bad autumn looms, which makes a change, doesn’t it?

h.mccrae@independent.co.uk

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Recruitment Genius: Bookkeeper / Office Co-ordinator

£9 per hour: Recruitment Genius: This role is based within a small family run ...

Recruitment Genius: Designer - Print & Digital

£28000 - £32000 per annum: Recruitment Genius: This Design and marketing agenc...

Recruitment Genius: Quantity Surveyor

£46000 per annum: Recruitment Genius: This property investment firm are lookin...

Recruitment Genius: Telesales / Telemarketing Executive - OTE £30k / £35k plus

£18000 - £35000 per annum: Recruitment Genius: This company specialises provid...

Day In a Page

Read Next
 

Errors & Omissions: When is a baroness not a baroness? Titles still cause confusion

Guy Keleny
 

CPAC 2015: What I learnt from the US — and what the US could learn from Ukip

Nigel Farage
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn
Yvette Cooper: We can't lose the election. There's too much on the line

Yvette Cooper: We can't lose the election. There's too much on the line

The shadow Home Secretary on fighting radical Islam, protecting children, and why anyone in Labour who's thinking beyond May must 'sort themselves out'
A bad week for the Greens: Leader Natalie Bennett's 'car crash' radio interview is followed by Brighton council's failure to set a budget due to infighting

It's not easy being Green

After a bad week in which its leader had a public meltdown and its only city council couldn't agree on a budget vote, what next for the alternative party? It's over to Caroline Lucas to find out
Gorillas nearly missed: BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter

Gorillas nearly missed

BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
Downton Abbey effect sees impoverished Italian nobles inspired to open their doors to paying guests for up to €650 a night

The Downton Abbey effect

Impoverished Italian nobles are opening their doors to paying guests, inspired by the TV drama
China's wild panda numbers have increased by 17% since 2003, new census reveals

China's wild panda numbers on the up

New census reveals 17% since 2003
Barbara Woodward: Britain's first female ambassador to China intends to forge strong links with the growing economic superpower

Our woman in Beijing builds a new relationship

Britain's first female ambassador to China intends to forge strong links with growing economic power
Courage is rare. True humility is even rarer. But the only British soldier to be awarded the Victoria Cross in Afghanistan has both

Courage is rare. True humility is even rarer

Beware of imitations, but the words of the soldier awarded the Victoria Cross were the real thing, says DJ Taylor
Alexander McQueen: The catwalk was a stage for the designer's astonishing and troubling vision

Alexander McQueen's astonishing vision

Ahead of a major retrospective, Alexander Fury talks to the collaborators who helped create the late designer's notorious spectacle
New BBC series savours half a century of food in Britain, from Vesta curries to nouvelle cuisine

Dinner through the decades

A new BBC series challenged Brandon Robshaw and his family to eat their way from the 1950s to the 1990s
Philippa Perry interview: The psychotherapist on McDonald's, fancy specs and meeting Grayson Perry on an evening course

Philippa Perry interview

The psychotherapist on McDonald's, fancy specs and meeting Grayson Perry on an evening course
Bill Granger recipes: Our chef recreates the exoticism of the Indonesian stir-fry

Bill Granger's Indonesian stir-fry recipes

Our chef was inspired by the south-east Asian cuisine he encountered as a teenager
Chelsea vs Tottenham: Harry Kane was at Wembley to see Spurs beat the Blues and win the Capital One Cup - now he's their great hope

Harry Kane interview

The striker was at Wembley to see Spurs beat the Blues and win the Capital One Cup - now he's their great hope
The Last Word: For the good of the game: why on earth don’t we leave Fifa?

Michael Calvin's Last Word

For the good of the game: why on earth don’t we leave Fifa?
HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

Scientists hail daily pill that protects against HIV infection

Breakthrough in battle against global scourge – but will the NHS pay for it?