Who knows internet business?
So if a corporate goal is to maximise profits, this will suggest that companies would move their investments out of unprofitable areas into profitable ones, regardless of whether they had any history in that industry. Take for example the FII Group, a British shoe maker. In February last year the company decided to change tack. The shoe business was slow, it had lost its main retail outlet, and it was wondering what to do.
The solution: to get into the business of providing infrastructure for mobile Internet data services (a decade earlier it had tried to make money in the blood testing market). If this sounds odd, it is. The mobile internet data services area isn't just new, it hasn't actually happened yet. Telecommunications companies (telcos) across Europe have invested hundreds of billions of dollars betting that in some years time it will be possible to make money out of these services using third generation or 3G mobile networks.
These telcos, including BT and Vodafone are some of the biggest companies in the world. Yet the amount of money they had to borrow to buy 3G licenses has sent panic through both the telecommunications and banking industries. Their credit ratings are collapsing amid fears that they will simply lose most of the money they borrowed.
Not surprisingly, FII Group has nothing like the resources of these large corporations, and in addition it knows nothing about Internet data services, except that it expected to make lots of money. For a brief moment it was right. Shares climbed to an all-time high within a few weeks of the decision, around the time that the entire internet business area was about to collapse last March.
Actually there is a link between hi-tech investments and shoes. When US multi-billionaire Warren Buffet was warning investors to get out of the Internet area (shortly before the bubble burst), he showed his resolve by investing in a US boot manufacturer. The comparison is interesting. Those companies that have the flexibility to pull out of one business and move immediately into another are mainly in the financial sector.
Corporations that actually make money by producing something (like newspapers, shoes or groceries) have a much harder time. In general the reason they have survived producing things, when most profits are in financial speculation, is because they have a particular edge. This could be technology patents, a monopoly of production, industry know-how or special relationships to politicians. Moving into a non-related sector loses these benefits, and companies also have to fight with the existing players for space.
That is why the internet was so attractive. By and large it was vacant land. Any company moving in would be in much the same position as any other. Unfortunately for most of these companies, the bubble has burst, sending the financial speculators off in other directions. While FII Group admits its internet mobile data investment has problems, it has also decided to get out of the shoe business and focus on speculating in other investments.
Financial speculation on technological, medical and other fads may be risky but its more profitable than actually producing something.
BY GREG HARRIS
(<gregharris_greenleft@hotmail.com>)