UK: Lords of the new economy.

UK: Lords of the new economy. - There are big bucks in IT. There are also big pounds. But will British entrepreneurs ever earn their place on the world stage?

by Jack Schofield.
Last Updated: 31 Aug 2010

There are big bucks in IT. There are also big pounds. But will British entrepreneurs ever earn their place on the world stage?

Revolutions create and destroy fortunes, and today, we're in the middle of an information revolution that is creating more wealth than anything in business history. Three of the world's 10 richest men - Bill Gates, Paul Allen and Steve Ballmer - owe their billions to shareholdings in a single software house, Microsoft, which isn't even part of California's famed Silicon Valley. The tremendous growth in the value of information technology companies has become the stuff of legend and has created many other billionaires. There are many examples, including Gordon Moore (Intel), Larry Ellison (Oracle) and Michael Dell (Dell Computer). Meanwhile, multimillionaires are created on a monthly basis, either by takeovers or through the miracle of the Initial Public Offering (IPO), which can make start-ups like Netscape, Yahoo, and Broadcast.com worth billions.

These American successes raise questions about Britain's place in an IT revolution that, 50 years ago, it helped pioneer. Where are the UK equivalents of Cisco and Intel, Microsoft and Oracle, or even Compaq and Dell? And where are the British entrepreneurs who play a part on the world stage? Sad to say, there are not yet any UK-based IT companies that can match the scale of the American giants, and almost no entrepreneurs who have similar standing in global terms. The handful of exceptions probably include Hermann Hauser, a co-founder of Acorn in Cambridge and now a venture capitalist, David Potter from Psion, a pioneer of hand-held computers, Robin Saxby from Advanced Risk Machines (ARM), an Acorn spin-off that designs microprocessor chips, and Ian Livingstone from Eidos, the games company best known for Lara Croft, the buxom and lusty heroine of the Tomb Raider games.

Luckily you don't have to be a world player to make a fortune in IT. Potter points out that the PC industry is based on segmentation and specialisation: Microsoft writes operating systems and applications programs, Intel produces microprocessors, other firms make hard drives, sound cards and so on. 'That technology goes all round the world and is used by almost everyone,' says Potter. However, the piece parts have to be assembled, sold and supported on a local level by what are, in effect, systems integrators. 'Each country has its own companies that are doing that, and either succeeding or failing,' says Potter, 'and in Britain we have lots of companies like that.'

The global influence of people like Bill Gates and Intel's Andy Grove reflects the fact that their companies own one of the piece parts on which most other suppliers depend. The UK doesn't have any equivalents, though there's no logical reason why it shouldn't. We do, however, have at least two contenders - the ARM processor and Psion's EPOC (emergency point of care) operating system software - which accounts for the relative importance of Potter and Saxby.

Both the ARM chip and EPOC are used in a new category of WIDs, or 'wireless information devices', such as electronic organisers and mobile phones. Within a few years, both of these accessories could be selling in tens of millions, becoming far more popular than personal computers. If the British parts are adopted, untold riches could follow. Even so, entrenched suppliers like Intel and Microsoft, or Japanese giants like Hitachi, could still triumph in the long run. ARM's processor has been licensed round the world and the company's potential was reflected in its flotation in April. On the opening day, its shares jumped from 575p to £10 before settling at 780p, placing the value of the company at £350 million. In June, when Psion put EPOC into a new software company called Symbian, with the backing of mobile phone giants Motorola, Ericsson and Nokia, its share price trebled in a couple of days.

As of mid-August the share price stood at around 615p.

But these are exceptions. The majority of Britain's IT multimillionaires have built their fortunes locally, where execution counts for more than intellectual property rights. Examples include Rod Aldridge, who founded the Capita consultancy; Clay Brendish, who founded Admiral, a computer services company; John Britten, who set up the Morse computer retail chain, which developed into a systems integrator; Gordon Crawford, the founder of London Bridge, a financial software company; Peter Dawe, who founded Unipalm, a software house, and launched Pipex, the internet service provider; Philip Hughes, founder of Logica; Philip Hume and Peter Ogden, who were co-founders of Computercenter, the largest suppliers of PCs to UK businesses; David Goldman and Graham Wylie, who set up Sage Software in 1981; and Cliff Sanford, who founded Demon Internet and sold out to Scottish Telecom.

Some British companies have expanded overseas, and Admiral, for example, now does about a third of its business abroad. However, executive chairman Clay Brendish says it's a mistake to assume you can do business overseas the same way you do in the UK: 'You have to behave locally, with an understanding of local need and priorities, but with a global reach.'

Building overseas sales takes time and money, and British entrepreneurs often cash in by selling out to the Americans or the Japanese. According to Potter, there's the 'rather endearing British trait of saying "OK, we've made a few million, let's go off and be landed gentry with a golden retriever and some horses," and that's it. Americans are much more ambitious: "Gee, we've made a million dollars, now let's go for a billion!"'

Anthony Ross, a director of 3i, the UK's largest venture capital backer of IT businesses, says: 'In most cases they've made the right decision to maximise shareholder value.

It might look depressing, but actually it might be fine - if it works! The debate is: is the UK model sustainable? I think that if the UK is going to be the force in IT that we all want it to be, there have to be more international businesses based here, not just a series of successful businesses that sell out to large US corporations.' Hermann Hauser, who has been involved with around two dozen start-up companies, argues that you can't have really big IT companies unless you also have lots of small ones. He believes we ought to adopt the Silicon Valley model where spin-offs abound and the ready availability of venture capital helps entrepreneurs to thrive.

It's a situation he's committed to and is helping to create in Cambridge (see box, page 73).

If the UK is indeed capable of building global IT companies it ought to be in computer gaming, given that about a third of the world's games are written in the UK. Again, however, the tendency is to sell out. Examples include Fergus McGovern's Probe Entertainment, and Peter Molyneux's Bullfrog, which was taken over by the American giant, Electronic Arts. Psygnosis, a games developer based in Liverpool, was taken over by Sony. Molyneux - who has since set up a new company, Lionheart - believes the games industry is a perfect example of the fact that the British are good at creating things but not at exploiting them. 'We could have had an Electronic Arts, a Learning Company, an Activision in the UK ... it's a shame they're not British.'

But when the games market was forming, it was hard to get investment backing. 'Five years ago you'd have been lucky to get £100 from the bank,' says Molyneux. 'We wooed our bank manager and luckily his son played computer games, or the only way we could have got any money was by busking in the street.'

Molyneux cites Eidos as one example of a British success story, but the firm was created more or less by accident. The company chairman, Ian Livingstone, had founded of the Games Workshop chain of shops, and only became involved because he'd invested in an earlier software house, Domark, with which Eidos combined. They signed up Core Design, which created Lara Croft, and the first two Tomb Raider games shifted seven million copies, with a third title and a Paramount film on the way. If the average retail price of a game is £40, Lara has pulled in £280 million. Livingstone modestly says the firm's success is a team effort. Charles Cornwall, the chief executive, was an investment banker and he understands corporate finance; 'my role is to determine the product strategy, and to talk with games developers on equal terms. A lot of credit must go to developers like Core: without these great people, Eidos could not succeed,' he says.

Of course, many companies fail, but as Potter points out, that's true of most IT start-ups, even in America. 'For every Bill Gates you get to read about, there are a million has-beens. It's a vicious jungle,' he says.

Indeed, this may be the most striking difference between the two countries.

As Hermann Hauser says: 'in America, failure is an opportunity to learn.

In Europe, it is all too often a matter of great shame, and once you've failed, you shouldn't be allowed to try again.

It gives you a brand mark for the rest of your life.' No wonder so many of our IT entrepreneurs cash in while they're ahead, rather than go on to fight bigger and better-funded American and Japanese companies on the global stage.

THE MAN FROM ACORN HELPING TO GROW GREAT OAKS IN CAMBRIDGE

It's almost impossible not to like Hermann Hauser: he's handsome, gregarious, super-intelligent and very rich. He's also a tremendous gift to journalists: he expresses his technological optimism in such engaging, down-to-earth prose that all you have to do is write it down and print it. Whatever he's selling - and he's always selling something, even if it's only a great idea - you really want to buy it. Alas, implementing ideas is harder than thinking them up. Hauser has had more spectacular failures than notable successes, but at least you could never accuse him of two traditional British business failings: lack of imagination, and lack of ambition.

Hauser - though he travels the world as Mr Cambridge, England - was actually born in the Austrian Tyrol, where his father was in the wine business.

After visiting Cambridge in his youth, he moved to the city in the 1970s to study for a PhD at the Cavendish Laboratories. He soon became part of the emerging microcomputer scene, setting up Acorn Computer - a version of Apple Computer - with Chris Curry, who had worked for Sir Clive Sinclair's company, Science of Cambridge. Acorn had a huge hit with its BBC Microcomputer, but even with the BBC providing free publicity and the government subsidising purchases by schools, the company struggled, and in 1984 it was rescued by Olivetti, from Italy.

Hauser became Olivetti's vice president in charge of research, but soon left to create a visionary hand-held computer with a pen input system, the Active Book. It was a great idea but the wrong product at the wrong time. Indeed, it sometimes seems as though real world clocks run five or 10 years behind Hauser's imagination, but sometimes his vision is vindicated.

One example is the ARM chip, developed for use in the Acorn Archimedes computer, launched in 1987. The ARM was spun off into a separate company in 1990, when Apple adopted the chip for its Newton hand-held computer.

This year, when the tiny company was floated, it was worth more than $500 million. Virata - another of Hauser's start-ups, and a spin-off from Olivetti's Cambridge research lab - could ultimately do even better. Meanwhile Hauser has done the logical thing and become a venture capitalist, investing in IT start-ups and helping Cambridge to follow the example of Silicon Valley.

THIS MAN'S FUTURE IS IN YOUR HANDS

If you had to sum up David Potter in a word, it would be 'underestimated'.

Seemingly diffident and somewhat aloof, he's an easy man to overlook.

In this case, however, first impressions are deceptive. Potter, now aged 55, has an extremely sharp mind, a wide range of skills - he understands both computing and marketing - and an interesting past.

He was born in Cape Town, South Africa, and brought up mainly by his grandmother, after his father died when he was two. He moved to Rhodesia (Zimbabwe) when his mother remarried, then came to England to read physics at Trinity College, Cambridge. Academic success launched Potter on an academic career, which included taking a PhD at Imperial College, London, and writing a book on computational physics.

He also played the stock market, and in 1980, set up his own company, Psion (which reputedly stands for Potter's Scientific Instruments Or Nothing).

Its first product was a set of software utilities for the Acorn Atom, a home computer. In the early 1980s, Psion also produced games for the nasty but very affordable machines sold by Sir Clive Sinclair. Potter got into the hardware business with his first electronic organiser in 1985, and later versions became popular for both business and consumer use, culminating in the launch of the Series 5 just over a year ago. Not all the company's products have been successful: Potter also tried his hand with a range of notebook computers, the MC range, which flopped.

However, Psion has managed to keep growing in the hand-held computer market despite competition from global giants such as Sharp, Casio, and Hewlett-Packard.

The question now is whether Psion can continue to compete in a hand-held computer market that Microsoft is trying to rationalise in favour of its own operating system, Windows CE (originally, Consumer Electronics). CE has already been adopted by a wide range of firms including Casio, Compaq, Hewlett-Packard, Phillips, and Sony.

Could Psion become the hand-held market's equivalent of Apple: a pioneering company with nice products and enthusiastic users but, ultimately, irrelevant?

To try to avoid that, Psion has recently spun off its EPOC operating system software into a separate company that will be owned jointly by Psion and the heavy-hitters from the mobile telephony market: Ericsson, Motorola and Nokia. It's a good strategy, and if it's a year overdue, Psion has at least not emulated Apple in leaving it a decade too late.

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