Magnates who dismissed the Internet as a mirage jump on the bandwagon

Date: 16/03/2000

By Tim Jones

ONCE upon a time, there were two powerful information magnates who were convinced that the Internet was a mirage that would leach away their profits for little long-term gain.

Microsoft's Bill Gates and News Corporation's Rupert Murdoch kept out of the Web in the belief that it was too big and too disparate for them to tap for profits growth. Like all late conversions, theirs have been zealous and have quickly fed through into the meteoric rise of the mobile communications market.

Gates redirected Microsoft's efforts into building infrastructure for surfing the Net and having a presence - some would say dominance - right along the information chain. This meant creating and marketing the Internet Explorer browser, which allows people to make sense of what they see on the Web, buying the free e-mail service Hotmail, and driving content through the MSNBC network.

Microsoft's most recent move is perhaps the most significant. In December, the company announced a deal to form a 'strategic partnership' with Swedish mobile-phone manufacturer Ericsson "to develop and market mobile e-mail solutions for network operators". By gaining access to Ericsson's Wireless Application Protocol (WAP) technology, Microsoft will be able to tailor its Mobile Explorer for the next generation of smart phones.

Murdoch too has always liked to create a market and control - to some extent - access to it. His satellite and then digital television company British Sky Broadcasting did just that with its proprietory dishes and set-top boxes. But only last month, Murdoch announced that BSkyB would be sinking €400 million into an aggressive Internet strategy.

In the space of a year, he moved from dismissing the Internet as "destroying more businesses than it creates" to announcing that most of News Corporation's value would be "Internet-related".

The scale of the investment is huge. BSkyB is betting on the convergence of technologies. "In the future," said Sky chief Tony Ball when he announced the investment, "Sky will sit as happily whether it is on the PC, the mobile or the television."

Murdoch's move comes hard on the heels of a similar €750-million commitment from news and information giant Reuters, which had also dismissed the Internet as a brand- and profits-diluter, and a €390-million push by Financial Times publisher Pearson. Murdoch is now in talks with Microsoft and search-engine Yahoo! to allow both to take minority stakes in News Corporation's new €35-billion digital satellite company.

This intense redirection of resources and strategy into the new information technologies is changing the face of corporate Europe. Indeed, the value of European technology mergers and acquisitions (M&A) activity last year totalled more than the combined tally of every other year of the decade, according to a new report from bank Broadview International.

Measured by value, Europe's share of global technology M&A accounted for 38% of a total €1.2- trillion worth of deals struck in 1999, compared with 16.5% share a year earlier. Unlike the US, however, most of the top mergers involved wireless communications rather than Internet businesses. The European telecoms sector accounted for a third of all global technology deals last year.

The biggest and most ground-breaking of these was the gargantuan €175-billion take-over of German telecoms-to-engineering conglomerate Mannesmann by British mobile operator Vodafone AirTouch - the first successful hostile cross-border bid for a big German company.

For all the apparent fuss which surrounded the deal, it is more surprising that it did not encounter the political and trade union flak most commentators had predicted. Chancellor Gerhard Schröder voiced concern about the long-term impact of hostile bids but did nothing to stop the take-over and Mannesman workers' representatives took a fatalistic stance.

The fact that Mannesmann was the target of the first hostile bid from abroad since Italian tyre-maker Pirelli's abortive grab for rival Continental nine years ago just serves to show how much Germany has changed. Mannesmann was not a typical German champion: 60% of its shares were held abroad and it only became a target for Vodafone because it over-stepped the mark and bid for rival British mobile operator Orange.

Vodafone was already a huge company, with major footprints in the US and UK and shareholdings across Europe. However, much of this presence on the continent was based on an alliance - which the company was keen to deepen - with Mannesmann. Once Mannesmann chief Klaus Esser stitched up the Orange deal, Vodafone boss Chris Gent felt he had to pounce as his European strategy collapsed around him.

As the year unfolds, it is certain that Vodafone/Mannesmann and AOL/Time Warner will not be the last of these deals.

Article forms part of a survey on the Information Society.