Profile: David Potter: Go on, give us a tax rise

Microsoft will eat him alive, warn the bears. But Psion's chief says his innovations will flourish with a weaker pound. Peter Koenig reports

DAVID POTTER looks like a City solicitor but he talks like a counter- culture California computer freak: "The language used by the new, dynamic, knowledge-based companies in America includes words and phrases like 'product space', 'crossing the chasm', 'displacing the old paradigm', 'virtual operation', 'inside the tornado', 'object-link-embedding', 'mice in free space' and 'hyper-competitive marketing'."

And business language in Britain? "Do you know that our Department of Trade and Industry classifies 'Tanning' as one of the 10 major business sectors in Britain? This is mad."

Psion, Potter's company, a maker of organisers and other microcomputing devices, is a successful niche player in the trillion-dollar-a-year global information technology industry. But the boss works out of a building off London's scruffy Edgware Road that could be a water cooling depot.

Potter belongs to no political party. "I am a radical," he says. But he has strong advice for Gordon Brown as the Chancellor prepares to unveil his Tuesday Budget.

Potter wants the Government to raise taxes. This is self-serving. Two weeks ago Psion reported its 1997 results. They were bad. Pre-tax profits were down 29 per cent to pounds 11.4m on sales of pounds 142m, up 14 per cent on a year earlier. Psion's shares plummeted 22 per cent after the announcement. Analysts are predicting that the company will now go the way of Amstrad or Apple.

On 8 March Credit Lyonnais Laing issued a sell note, warning investors that Psion's new series of palmtops face withering competition from Microsoft.

Merrill Lynch analyst Keith Woolcock goes further: "Anyone who's bullish on Psion is off their head. The company is too small, the markets it is in are too big. Potter's going to be blown away in a blitz of innovation."

Potter is equally emphatic. The bears in the City are not sophisticated enough to foresee the shape of the IT sector, he says. The big problem Psion faced in 1997 was the strong pound. If the sterling exchange rate had ended 1997 where it began, Potter says, Psion would have reported an increase in profits, not a decrease. He therefore wants the Government to raise taxes. Higher taxes, he says, equal lower interest rates, which equal a weaker pound, which equals better performance by Psion.

Potter is not wholly self-interested in calling for higher taxes. The former physicist turned entrepreneur (and husband of journalist Elaine Potter, at work on a biography of Rupert Murdoch) believes British industry could be burnt to a crisp in the firestorm of the digital revolution. Only through extraordinary investment, mainly in education, can Britain hope to maintain, let alone improve, its standard of living. "We're more aware than we were in the 1980s," he says. "But we still have a long way to go."

Here the professor in Potter comes out. "The raw material for the digital revolution is the integrated circuit," he says. "The benchmark for progress has been Moore's Law, coined by Gordon Moore, founder of Intel. In 1965, Moore observed that the number of circuits on any given area of a silicon chip would double every year or 18 months. His projection suggested that computer power would improve a thousandfold every 10 years.

"And it gets better. The dynamics of the semi-conductor industry dictate that in the 18 months it takes for processing power or memory to double, the price-performance ratio halves. In effect, the same processing power or memory can be bought at the end of any given 18-month period for half the price that it commanded at the beginning.

"Better yet, this has been going on for the last 30 years. And even better still, it is likely to continue for another 20 years."

Grabbing hold of this concept early on, Potter quit academia and, with pounds 60,000 made on the stock market, started Psion in 1980. First came computer games - Flight Simulator and others. "In the autumn of 1982 I found myself sitting in a Greek restaurant with one of my colleagues, Charles Davies, who had been my brightest doctoral student. We began to sketch out on napkins a hole in the market and a hardware product to fill it."

The product was the organiser - a handheld device using computer power to store names, phone numbers, diary dates - introduced in 1984. In 1988 Psion went public. It had 80 employees, a turnover of pounds 11m, and was attracting heavy-duty competitors like flies. In 1991 the company introduced its Series 3 palmtop - a cross between an organiser and a mini laptop computer. The company lost money that year but between 1992 and 1996 grew at a 42 per cent annual compound rate.

Now the question is: what happens next? Potter sees Psion pausing before a further leap forward. Lapsing into California mode, he notes that his firm is not a computer company but "an innovation company". Three or four years from now, he predicts, Psion will have a profitable segment at the top of the increasingly mass market for palmtops. It will have subsidiary businesses like the "cards" allowing computer-toting travelling businessmen to plug their road warrior gear into hotel room phone sockets. The company's core business, however, will be the guts of "smart" phones - mobile phones leveraged with Psion-like microcomputers. In this vision, Psion software for smart phones will be like Intel's fantastically profitable microprocessors which constitute the brains of desktop computers.

Psion bears chortle at this vision. They note that the Psion 5 Series introduced in the US last year, and selling for about $500 (pounds 300) , is facing stiff competition from 3Com's Pilot Palmtop. They also note that Psion's market capitalisation, at pounds 250m, is some 400 times smaller than Microsoft's capitalisation. "When Bill Gates says he has to own the market for which Potter is aiming, that makes me pessimistic," says Merrill's Woolcock. The bears predict that Microsoft will ultimately dictate the standard for smart phones and other handheld devices in the way that Microsoft Windows now sets the standard for desktop software.

Nonsense, replies Potter. Microsoft (which did not respond to a request for an interview) is not an invincible behemoth. The US Justice Department's anti-trust division is looking for ways to trim its horns. Psion has made a maiden move into the smart phone market, via an agreement to supply the guts of the device made by a joint venture between Philips of the Netherlands and Lucent Technologies of the US. Psion has a second licensing agreement still under wraps.

Not everyone in the City is bearish on Psion. "I think its Series 5 product will claim a good segment of the handheld market," says Judith Allen, an analyst at ABN Amro. "I think the company's licensing opportunities in the smart phone field are real."

For all his sang-froid, though, Potter appears less than at perfect ease. After 18 years of hairpin turns, his company has skidded on to a slippery patch of road. Virtually alone, too. "I wish there were more British companies like Psion, but there aren't," he says. "If I could wave a magic wand, I would excite all the young people in Britain about the opportunities of the digital revolution."