December 14, 2005 | posted by Michael Baxter in Uncategorized | comments (0) |

Given the time of the year it’s a salutary warning. Don’t drink too much! Apparently Asda did. According to its chief executive Andy Bond, the retailer got “drunk on success.” Asda is set to lose its number two slot in the super market league table early next year. Sainsbury’s, which was written off by many a couple of years ago, is about to overtake it. Mr Bond says that the company has twice missed targets set by its parent company WalMart, but now things are set to change.

Mr Bond said, “Asda has always been about being the lowest-priced retail brand and I’m going to be more aggressive next year,”

December 14, 2005 | posted by Michael Baxter in Uncategorized | comments (0) |

US ups the rate of interest as UK inflation dips The gap is now just 0.25%. The Fed upped the US rate of interest yesterday to 4.25%, compared to the UK rate of 4.5%.

For most of last year, the UK rate of interest was three and a quarter percent higher than the US rate.

But the Fed’s run of upping the US cost of borrowing could be drawing to a close. The Federal bank changed its wording slightly yesterday. Okay, the change was subtle, but then that’s the nature of this particular beast.

The measured word is still there. The Fed is still tightening monetary policy in a ‘measured way,’ but this time the word ‘accommodative’ was dropped. Analysts are reading a lot into this omission, suggesting that the Fed believes the US rate of interest is approaching a neutral level, a point where it neither boosts or depresses demand from the trend rate.

Meanwhile, while the Fed ups rates, UK inflation is on the slide. According to the Office of National Statistics, the UK CPI rate has fallen to 2.1%, from 2.3% last month and 2.5% in September.

With UK inflation appearing to be on the march downwards again, the interest rate dove camp is becoming more popular. A growing number of economists are subscribing to the view repeatedly put forward by Capital Economics that the UK rate will see several falls over the next year or so.

It’s inevitable that the US rate of interest will overtake the UK rate in the next few months.

And what are the implications of that? It would seem the most likely side effect of US rates exceeding the UK rate is that Sterling will slide.

Editors note: Fed chairman Alan Greenspan has said he doesn’t like the term neutral rate of interest

December 14, 2005 | posted by Michael Baxter in Uncategorized | comments (0) |

China has overtaken the UK to become the fourth largest economy in the world.

The writing, as it were, has been on the great wall for some time, but the key landmark was reached faster than expected, thanks to a revision in official Chinese statistics.

The Chinese government recently carried its first national census, and the finding? Output had previously been understated by 20%.

Chinese GDP in 2005 is in fact $1.13trillion, compared to the UK’s $1.11 trillion.

The statistical revision also implies good news for ongoing growth stability. Many had feared that Chinese investment was a bubble waiting to burst, and that when this happened, China would slow, pulling the rest of the region down with it, with the ramifications hitting the rest of the world.

But as output is much greater than expected, investment as a percentage of GDP is lower than previously thought, and a crash a lot less likely.

Estimating future growth of the big economies of the future - China, India, Brazil and Russia, seems to be the province of Goldman Sachs, who produced the definitive study in 2003.

The study indicated that India would overtake the UK in 2020, approximately ten years later Russia would pass us, and Brazil would follow on around five years after that.

By 2050, the Goldman Sachs study predicted China would be the largest economy in the world.

Some economists have warned that the loss of economic supremacy by the major economies of today could lead to potential problems - perhaps even conflict. A good example of how the West could react to the growing power of China et al like a jealous child, came yesterday when Frithjof Schmidt, a German Greens MEP, said, whilst discussing the WTO talks, “China’s success has made even strong industrial nations nervous. They are beginning to wonder if they will really be the winners of this game as they expected. These higher than previously revealed GDP figures show us that China is growing much faster than they told us, so those who advocate free trade in Europe are beginning to rethink their strategy.”

If the West reacts to growing competition by erecting barriers and protecting industry, and is even less willing to negotiate in WTO talks of the future, we will all be worse off, and the best the West can hope for is a delay in the inevitable.

On the other hand, western countries who embrace the changes, and see the rise of China, India, Brazil and Russia as an opportunity, are likely to flourish.

December 13, 2005 | posted by Michael Baxter in Uncategorized | comments (0) |

The London Stock Exchange is worth far more to the UK than the total value of its shares. For the City to remain one of the key financial hubs of the world it needs the LSE to be efficient and frankly it needs it to be the top European exchange.

The question is, can Australian investment bank, Macquarie, which has interests in toll roads, wind farms and shopping malls but never ran a stock exchange, possibly be the right purchaser?

Those who have the power to decide the LSE’s fate have a good reason to make certain that its future is secure. Most of the LSE’s shareholders work in the City; their livelihood is dependent on the stock exchange. So this purchase really is about more than the price the bidder is willing to pay.

Round one is over. Macquarie offered $2.7 billion takeover last week, and was turned away with a flea in its ear. With the LSE saying of the offer that it was ‘derisory’ and lacking in ‘any strategic or commercial credibility.’

In total Macquarie offered 580p a share, yet after the offer was made LSE’s main shareholder, Threadneedle Asset Management, bought shares at 615p a go. Why would it do that? Unless it is either trying to resist the purchase or expects the price to go much higher.

Macquarie, which was once owned by British merchant bank Hill Samuel & Co until it was spun off in the mid ’80s, will be back. This time it’s thought the bid will top $3bn.

But it’s by no means certain the LSE will be heading for ownership from down under. Also waiting in the wings is Euronext, which owns Paris, Brussels, Amsterdam, and Lisbon stock exchanges, as well as the London-based International Derivatives Market, and Deutsche Börse, the German exchange.

Meanwhile, the LSE’s chief executive, Clara Furse, is still harbouring hopes of continued independence.

December 13, 2005 | posted by Michael Baxter in Uncategorized | comments (0) |

Today’s the day that the Hong Kong trade talks finally kick off. And it’s difficult to think of anything more important. If the talks are successful, then global poverty will be reduced, and ultimately we will all be better off.

There’s good reason to hurry. The US fast track system of approving trade deals expires in 2007. So concluding a deal before then is vital. And yet…

Perhaps the demonstrations by farmers, largely from Korea, but also from Japan, India, the Philippines and Brazil say it all. While the EU is being blamed for the level of its agriculture and subsidies and tariffs, the demonstrating farmers fear that if markets are opened up - precisely the aim of the trade talks - they will lose their livelihoods. They displayed a coffin with the legend RIP WTO emblazoned on it.

Elsewhere a demonstration organised by Oxfam, led by Mexican actor Gael Garcia Bernal, had demonstrators dressed up as leaders of developed countries including George W and Tony Blair. They displayed a map of Asia and Africa and dumped corn, cotton and rice on it.

Turning to the talks, Brazilian foreign minister Celso Amorim said, “Unless the EU is able to improve substantially its offer on agricultural goods, there will not be a successful round.” But EU, commissioner Peter Mandelson wants to see a move from other countries before he budges any further. A 46% reduction on trade tariffs is on the table, but he now wants to see a corresponding move from developing countries. Mandy said,”Concentrating on agriculture, important as it is, to the exclusion of other areas, will defeat that ambition.”

But while the views being expressed are at polar extremes, there does seem to be a mood of optimism, or perhaps just wishful thinking.

Mr Amorim said the talks are, “doomed to success…Otherwise, the world would be doomed to failure and we can’t afford that. A failure is when you hope for too much and don’t get anything. Here we have to be realistic; this will not be the end of the road.”

Indian Commerce Minister Kamal Nath said, “Cancun was an outburst of a lack of hope. Now countries are hoping.”

December 13, 2005 | posted by Michael Baxter in Uncategorized | comments (0) |

The intentions are good. Even so, the EU has managed to attract a raft of criticisms for it new TV directive styled: Televisions Without Frontiers. And the proposal hasn’t even been released yet.

The idea behind the new regulations is to bring TV advertising up to date, allowing product placement in TV programmes; a practice which is currently banned in the UK, Germany and France, but allowed in the US. The directive is also expected to relax rules on the frequency and length of TV advertising.

And, most controversial of all, the directive will bring TV on the net and on mobile phones into the fold.

Somewhat quirkily, the directive is dividing video content into linear, that’s when the order the content is broadcast is determined by the TV channel, and non linear, in which the viewer can watch video and other content on demand. We say ‘quirkily,’ because in the new digital age, with a plethora of TV channels available to the viewer, the boundaries between linear and non-linear TV are blurring before net and mobile phone TV has even taken off.

Many argue you can’t regulate such a dynamic industry, and any form of regulation could limit growth and cede the advantage to the US.

But the criticisms don’t stop there. Others are still fighting the battle against product placement. The BBC, for example, are arguing that news reports will lose any pretence of objectivity, while Vincent Porter, an advisor for Voice of the Listener & Viewer said, ‘We are moving into an area where television programs are effectively closet advertising vehicles.”

The trouble is, there might be a myriad of criticisms of the directive, but they are largely incompatible with each other. A leading French director, like so many of his countrymen, is riding the protection of industry hobby horse, arguing that the directive will allow US producers improved access to the European market - effectively swamping European culture.

But the directive does have its fans. Some argue that by allowing product placement into programmes and new source of revenue will be introduced bringing with it new vibrancy to the European industry.

And product placement will not be all-pervasive. It will be banned from children’s programmes for example, and since this is the EU, any directive will come will a twist of complexity.

Not everyone believes the Internet should be left un-regulated. By subjecting Internet TV to regulation, it will be possible to have some control over the morality and content of programmes watched by minors, for example.

Media is changing incredibly fast. Before our eyes, the old established regulated forms of mass media are being swallowed up by the anarchic Internet. But if ISPs think this will happen without regulation, they are falling themselves.

December 12, 2005 | posted by Michael Baxter in Uncategorized | comments (0) |

Rightmove does things the other way round from everybody else. Unlike Nationwide and Halifax, the property web site surveys asking prices. Some say this is a more reliable guide to the buoyancy of the housing market, as transaction based indexes can be distorted by what ever type of property is most popular. So if only the only types of housing that are selling are mansions the average house prices will rise.

But Rightmove tends to look at an increase in its index as a sign of bad times ahead, and a fall in its index as good news.

Earlier this year, for example, it heralded a 2.3% rise in its index as a sign that sellers weren’t being realistic. Then this morning it revealed a 0.8% fall in its index for December. But, Rightmove said the average number of unsold properties on estate agents books have fallen from 68 to 65, suggesting activating is picking up. It predicted a better year for prices in 2006.

December 12, 2005 | posted by Michael Baxter in Uncategorized | comments (0) |

Negativity crept into the Sunday papers yesterday. They were talking about the proposed NTL Virgin Mobile merger, and it would appear many in the City fail to see how such a merger can be a good deal.

The Observer quoted media analyst Anthony de Laranaga as saying, “you tend to find choosing a mobile provider is a very personal choice. I am not sure you can bundle it into a package of other services.”

One of the justifications of the deal is that NTL and Telewest have a bad customer service record whereas Virgin is strong in precisely that area. But the Independent reckons this could work the other way, and that since the NTL Telewest company will be re-branded Virgin, Sir Richard’s precious brand name could be seriously damaged by the deal.

One of the benefits of the deal is slated to be the quadruple playing offering that will be created: Cable, broadband, fixed line and mobile telephony. But the Sunday Times quoted Claire Enders from research house Enders Analysis as saying, “The value of quadruple play is much more dubious. We cannot see this as a competitive advantage.”

Elsewhere, it was argued that the Virgin Mobile users tend to have a lower disposable income than other mobile phone users, and are unlikely to take on TV subscription services, while others reminded us that Virgin is just a virtual mobile phone operator, and that without any real infrastructure, they felt that the brand name aside, the merger offered little benefit to NTL. We disagree with the cynics. As TV, Telephony and the Internet converge, content will be the key. And to compete on content you need scale, and the inclusion of a mobile phone service, will ultimately prove to be another outlet for content the company can acquire.

Secondly, the City, as is so often the case, is not thinking ahead. It failed to account for VoIP for many years, even though it has been obvious to the techies that this technology would take off; now it is failing to take into account the migration of VoIP to mobile phones via Wi Max. Virgin scores over other mobile phone companies, because it’s not encumbered by heavy infrastructure investment, which could be made superfluous by new technology.

A Virgin NTL merger does not guarantee success. But standing still and waiting for events to unfold guarantees failure.

Meanwhile, it emerged that Sir Richard Branson stands to gain a lot more than previously realised from the merger.

The Virgin brand name is owned by Virgin Enterprises, which is 100% owned by Sir Richard. And the newly merged company will have to pay Enterprises a percentage of revenue for use of the name. Virgin Mobile pays Enterprises just 0.3% of turnover in royalty, much less than the usual 1% rate, but as Sir Richard owns 72% of the company, it seems unlikely he is crying in his Virgin Cola over that rate.

But with his equity watered down to around 14% of the new merged company, Sir Richard is not likely to be so generous.

So significant is this royalty stream that it was speculated in the FT this morning, that Sir Richard may actually agree to allowing other shareholders in Virgin Mobile to receive a better deal per share for their 28% holding, than he receives for his 72%. That way, NTL can offer a greater incentive to Virgin Mobile minority shareholders to agree the merger, and Sir Richard will be kept happy by the ongoing royalty payments.

Sir Richard will also be the largest single shareholder in the merged company, giving him a rung on the media mogul ladder, just as media is set to be transformed.

December 12, 2005 | posted by Michael Baxter in Uncategorized | comments (0) |

There was a time when Paramount was a giant amongst Hollywood’s giants, with the Godfather and Indiana Jones series amongst its hits. But these days it can only manage a pale reflection of the former glories it beamed out onto the global big screen.

In 2004, Paramount could only manage seventh place at the US Box Office ratings. Abroad, Universal distributes its movies, and the company has had a $100mn limit for the cost of any one film it finances.

Then last year, its owners Viacom realised something had to be done, and appointed Brad Grey to try and turn things around.

Now Mr Grey would appear to be anything but grey. Before joining Paramount, he represented stars such as Brad Pitt and Jennifer Aniston. His mantra seems to be that the key to success lies in hiring top talent, or as he puts it: “the best talent both in front of and behind the camera.”

Enter Dreamworks. If there’s one thing that this company is not short of, it’s talent. Peter Jackson might be breathing down his neck, but Stephen Spielberg remains the top director in Hollywood. With his partners in the Dreamworks venture, leading record producer David Geffen and ex Disney man Jeffrey Katzenberg, the film studio has oodles of talent.

But ability, it would appear, isn’t enough. Despite releasing films including Saving Private Ryan, Gladiator, and American Beauty, the company has struggled under its huge debts. Not even the backing of Bill Gates’ former business partner and co founder of Microsoft, Paul Allen, was enough. The problem, it would appear, is that to be successful in this business you need scale. Not even the dream line of Spielberg, Geffen, Katzenberg and Allen’s money was enough to break through the chicken and egg situation, of needing scale to be successful, and success to generate scale.

So perhaps it’s a marriage made in heaven. Paramount’s owner, Viacom, is forking out $1.6bn. It will then sell the film library, raking in almost $1bn, leaving it with $600 to $700mn down on the deal.

But not all the talent will be coming Paramount’s way. DreamWorks animation - the studio behind Shrek and Madagascar, will remain an independent company, headed by Katzenberg. Paramount will have the distribution rights to DreamWorks back catalogue, and the TV rights to spin off series based on future animations.

David Geffen will become chairman of Paramount Dreamworks, but Stephen Spielberg will be free to hawk his talents elsewhere. Geffen said of the man behind Jaws and ET, “Since we began DreamWorks, other than the sequel to ‘Jurassic Park,’ he has never made a movie for anyone other than DreamWorks and I think that is his intention in the future.”

As to why do the deal, Mr Geffen also said, “Sadly, we were never able to (produce) enough films to make that economically sound…Together, we will be able to distribute our films at a much lower cost per film, so it’s a ‘win-win’ for both of us.”

December 9, 2005 | posted by Michael Baxter in Uncategorized | comments (0) |

You may recall earlier this week we said “the consumer is back.” Now Mintel have joined the orchestra of angels calling a return to spending.

Mintel reckons the British shopper will spend an extra 10% on pressies this festive season. While Footfall recorded a 7.1% rise in shopping numbers last week over last year.

The snag for conventional retail is this. Firstly Tesco, Asda et al are taking up a bigger slice of the cake, and there’s the net. Mintel says that with broadband proving so popular, 38% of Brits will do some of their Christmas shopping online, compared to 22% last year.