from: news.ft.com
Three steps to heaven
By Andrew Hill
Published: April 17 2000 01:08GMT | Last Updated: April 17 2000 01:10GMT
So, if US telecommunications, media and technology stocks are no longer the glittering stars of world equity markets, where should investors look for similar returns?
Europe and Asia are supposedly six to 12 months behind the US in the development of the internet; growth forecasts for the euro-zone have been upgraded; Japan may be poised for recovery. So maybe it would be smart to consider betting on the potential growth of their "new economies".
Or maybe not. Before taking the plunge, investors should consider this: the internet is a US-centric phenomenon and likely to remain so; some of the world's largest communications markets - Japan, Germany and France - have obstructed internet growth or are simply unfriendly to the new economy.
These are some of the conclusions of a provocative report by Rudy Baca of Legg Mason, a Baltimore-based financial services group.*
Mr Baca's view on the new economy is unashamedly broad. That will be a disappointment for desperate day traders looking for tips as the battered markets open today, but it might just provide a foundation for longer-term investors trying to build a global technology, media and telecoms (TMT) portfolio.
Mr Baca, a former senior attorney in the international division of the Federal Communications Commission, the US telecoms regulator, has prepared a checklist of questions about the regulatory structure, technical preparedness and operational capability of 30 countries.
The theory is winningly simple: if a country cannot satisfy the criteria for investment in telecoms, it will not be able to support a thriving internet economy. If it cannot satisfy the criteria for an internet economy, it will have difficulty fostering the growth of e-commerce.
Mr Baca pictures these as three steps, with encouragement to telecoms investment as the foundation, or lower step, and internet and e-commerce built on top.
Within each step, there is a hierarchy of questions. The report assumes that a negative response to question one of step one - is the [telecoms] regulatory authority independent? - casts doubt over the entire new economy project in that country even if the government pays lip-service to the grand idea.
It is hardly a surprise that China and Russia fall at this first hurdle.
If you are American, British, Irish or Canadian, you can pat yourself on the back for being part of what Mr Baca terms "the broadband four".
These are the countries that "talk the talk of communications growth and walk the walk by putting in place all. . .the foundations and building blocks for growth in the new economy".
However, for the rest of the world, there is plenty to argue about - and some of the conclusions will particularly stick in the craw of the French and Germans.
They are lumped together with South Korea, India and Greece as countries that are "actively hostile" to communications growth.
Substantial licensing fees and interconnection roadblocks are holding up Germany, says Mr Baca, while France "persistently raises previously undefined 'cultural' issues to impose new obligations that hinder growth".
US hegemony over the internet is inevitable for the foreseeable future, Mr Baca concludes, because most internet hosts are in the US. In addition, bandwidth is relatively cheap and there is more of it.
What is more, "English is and will continue to be the language of the internet".
Mr Baca recognises this is an unpalatable message for many, particularly in Europe, where individual countries and the European Union are making a concerted effort to co-ordinate an internet policy.
Indeed, he warns that a regulatory backlash could result as the laggards in the internet race urge bodies such as the International Telecommunication Union to assert their jurisdiction over the web in the interest of harmonisation.
That's the bad news. The good news, at least for those investors reviewing their exposure to US technology stocks in the wake of last week's turbulence, is that the relative growth prospects of the US should still draw in capital, domestic and foreign. *Rudy Baca, Legg Mason Precursor Group, (+001) 202 778 1972, rlbaca@leggmason.com andrew.hill@ft.com
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