Hi-tech dreams begin to fade

British firms are still trailing the American giants despite hopes that Labour would kick-start the sector. Peter Koenig reports

FACT FILE

US Giant v UK Guerrilla

A snapshot of the gap to be closed

INTEL INC:

Based in Santa Clara, California

Founded 1968

Market capitalisation: pounds 219bn

1998 sales: pounds 16bn

1998 after-tax profit: pounds 3.7bn

Intel is the world's leading maker of microprocessors, the brains of computers. It has 85 per cent of the world market. The company was founded to develop a new technology for silicon-based chips. When, in 1981, Intel's 8088 chip was chosen for IBM's PC, Intel's place as the microprocessor standards supplier was secured.

Intel gravitated from IBM into a close relationship with Microsoft, the world's leading software company, ensuring its continued dominance of the market.

RAGE SOFTWARE PLC:

Based in Liverpool, England

Founded 1989

Market capitalisation: pounds 37.2m

1998 sales: pounds 3.3m

1998 pre-tax profit: pounds 860,000

Rage Software publishes and develops computer games compatible with PCs, Sony Playstations and N 64 Nintendos. Its bestseller is Strike, a football game. Its shares jumped on 8 and 25 January on City rumours that Sony wanted to buy it, and then on a solid distribution deal with Microsoft.

To hear it described by John Woodget, Intel's European technical director, the information revolution is historically unique: it's producing all winners and no losers. Intel - with 85 per cent of the world market for microprocessors (the brains of computers) wins, of course. With a market capitalisation of $213bn (pounds 133bn), it had $6.1bn in after-tax income on sales of $26.3bn in 1998. But consumers and other firms contributing to the revolution also win, including UK firms with which Intel does business.

"The cost of computers around the world is coming down," Woodget said on Thursday at the London launch of Intel's Pentium III processor, chaired by the BBC's Radio 4 Today presenter, John Humphreys. Yes, Woodget went on, the Pentium III chip costs more than the Pentium II, while overall prices on computers are falling. But, he insisted, Intel is not winning at the expense of other companies.

Peter Mandelson - the former Secretary of State for Trade and Industry - would probably have gone along with Woodget. He visited Silicon Valley last autumn "to see how the UK could create its own Intels and Microsofts," as an aide put it. Mandelson distilled his thoughts in December's White Paper on competitiveness. It's the Government's battle plan to help UK Plc cut itself in on the IT revolution. Intel estimates that from a base of 350 million to 400 million computers now in use worldwide, the market will grow to1 billion by 2002. But Intel believes that the action will be on the internet - with virtually all the world's computers connected. It estimates that in five years, $1,000bn worth of business will be transacted over it in the US alone.

Next month, Mandelson's successor at the DTI, Stephen Byers, will begin "implementing" the White Paper, an aide said. There will, inevitably, be much talk of building hi-tech "clusters" along the Western corridor of the Home Countries and near Edinburgh. There will also be talk about Intel's Oxford Project through which it and Oxford academics are developing what Intel calls "high quality interactive educational content".

But a snapshot of the UK hi-tech scene taken last week suggests that - as with Harold Wilson's "white heat of the tech- nological revolution" - Labour government rhetoric is outrunning reality. The country's software, telecoms, and entertain- ment industries seem set to remain sub-contractors to the US giants - with exceptions such as BT, Vodafone and Psion.

Big money is being made in the UK as a result of the information revolution. But, on balance, the shape of the UK economy seems obdurately resistant to change. There is an emerging, if tiny, band of British IT revolution entrepreneurs. They are getting rich. The City has turned its attention to the hi-tech sector. The service sector, led by property companies, is doing a roaring trade catering to the mainly US multinationals taking corporate "campus" sites outside London.

But Byers and the Government will be hard pressed to develop policies that boost economic growth as a result of the hi-tech revolution - to help foster British rivals to Intel.

"Look, I'm a businessman and I don't really want to get into this," said Paul Mountford, the Briton overseeing US internet equipment company Cisco's UK operations. "But the obstacles are cultural. I'm not sure what the Government can do."

Mountford described a recent reception at St James' Palace hosted by Prince Philip as Chancellor of Cambridge: "He's holding these to help Cambridge raise money from the business community. I went along out of curiosity and got talking to a don. He asked me what I did and I could see his eyes glaze over. Then I asked him what he did, and I got two hours on polymers. Actually, I'm quite interested in polymers. But two hours? You have to ask: who's buying and who's selling?"

Intel is buying in the UK - picking and choosing from among the country's rich intellectual property. To launch the Pentium III chip, it doled out advance versions, technical support, and an undisclosed sum of money to several dozen UK software houses. This was part of a global effort to showcase the capabilities of the new chip - particularly with reference to the internet. All told, Intel enlisted the assistance of 200 computer companies worldwide.

Companies benefiting included Rage Software, the publicly quoted, Liverpool- based maker of video and computer games: earlier this month Rage signed a deal with Microsoft under which Bill Gates pays a royalty to be sole distributor of the computer version of Rage's Striker football game.

Also benefiting were the website development agencies Superscape, Trustmarque, and Domino Systems. Based in Hook, Hampshire, Domino was rung up by Intel weeks ago.

"There's an e-commerce company called Last Minute Auctions," said Domino's technical director Nick Mayhew. "It runs internet auctions for holiday packages, that sort of thing."

The Pentium III chip lets Last Minute Auctions show videos of holiday sites, but the company needed help to sharpen its website. And Domino provided that help, Mayhew said.

Domino, which now has a payroll of 38, was founded in 1995. Its breakthrough came two years later when it won the contract to handle the European website for the American direct-sales computer giant Dell, which now sells $14m worth of computers over the internet daily - $4m in Europe. On the back of this, Domino has since won contracts to develop websites for Lloyds TSB, Churchill Insurance and units of Unilever. It is in the top 10 of about 300 website agencies in the UK. But, says Mayhew, "Dell is now taking some of its European website business back in-house."

Besides bankrolling quasi-marketing efforts for the Pentium III chip, meanwhile, Intel is stepping up its programme to directly invest in interesting UK hi-tech companies. Worldwide, Intel has sunk more than $2bn in this programme.

One UK beneficiary is the privately held, Gloucestershire-based Bookham Technologies. Cisco also holds a stake in Bookham. The company has caught the attention of the American giants because, according to Intel's European investment director, Nigel Grierson, it has reduced a crucial part of the process for manufacturing internet equipment "by a factor of 16".

Grierson says Intel typically invests in the UK in conjunction with City venture capitalists. But at the Pentium III London launch, Intel's European director of government affairs, Keith Chapple, was dismissive of this part of the City.

"They don't like to make small investments in high-risk companies," he said.

The City last week, indeed, appeared to be backing away from the information revolution. On Thursday, it marked down 10 per cent the shares of Colt Telecom, a British company at the centre of the IT revolution. Colt reported 1998 turnover of pounds 215m, up 164 per cent on the previous year. Gross profit was pounds 42m, 185 per cent up. But the City was selling Colt shares because the company surprised investors with a call to raise pounds 500m in new capital. It needs this money to stay ahead of American telecoms start-ups like Level 3 and QWest in the ferociously competitive European business sector of the global telecoms market.

"There is a revolution under way," said a senior City merchant banker last week. "We're trying to work out how to get local funds to local entrepreneurs in this sector. But you go one step back - to the fund managers - and the money they're allocating to genuine venture capital is laughable."

While UK's emergent hi-tech companies do deals with US partners, and the City tries to call a temporary stop to the hot global telecoms market, UK property companies are busy letting space to the UK units of American and continental European hi-tech companies. Last week, CB Hillier Parker reported that the hi-tech sector accounted for almost two-thirds of the space transacted in the letting market in the Western Corridor in 1998.

"The UK's IT sector is currently the fastest growing in Europe," said CB Hillier Parker's research chief Nick Axford.

There was one positive note struck last week. Patrick Spink, the manager of BT's satellite phone business, said his unit was growing 40 per cent a year and had a 28 per cent share of the global satellite phone market. "Our annual turnover is now $200m," he added.

Satellite telecoms are a technology of the future because they will help link mobile telephones to the internet. Spink sees BT at the heart of this part of the information revolution. BT, he suggests, has the scale to compete with companies such as Intel. BT Satellite could soon start taking equity stakes in local hi-tech ventures, Spink said - creating an opening for UK capital to help develop UK intellectual property.

Still, Cisco's Mountford sounded doubtful.

"I went along to some of those meetings at the DTI when the White Paper was being drafted," he said. "Some of the ideas Mandelson and his people were generating were good. But they were vague, hug-the-treeish. Now the author of those already vague ideas is gone, and we don't know where the White Paper goes from here."