It’s been a gruesome week in the mobile phone market. The almost embarrassing dominance of Apple (ideas for spending $90bn of spare cash, anyone?) provided a cruel contrast to the desperate plight of the opposition. The maker of Blackberrys ditched its founders. Nokia, the one-time rubber-boot manufacturer, tried to stay positive, boasting that it had sold a million Windows-based Lumia phones in the last three months. During that time Apple shipped 37m iPhones. It has sold 315m of them worldwide.
The eclipse of Nokia is one of the wonders of the age, providing fodder for business school studies for decades to come. At the turn of the century, its position in the burgeoning mobile phone market seemed unassailable. Its combination of market dominance and mouth-watering margins meant that it could outspend and out-develop any competitor who came up with a better product. It sold its billionth phone in 2005, and in late 2007, deemed the world’s fifth most valuable brand, the business was valued at €100bn.
It’s worth €13bn today, less than four months’ (declining) sales. Its products are still good, but Apple has changed the game utterly. The business school study might ask why Nokia didn’t see the Blackberry eating its lunch, and why both companies then failed to notice until Apple’s apps got past the 100,000 mark.
The story is also a parable for today’s winner-takes-all capitalism. Established businesses which considered they were serving their local markets well are being blown away by globalisation. It is not sufficient to be the best in Finland, or even in Europe, if there’s a better competitor in America or China. You won’t merely finish second, you may be completely finished. Nokia is not just struggling to compete, it is struggling to stay alive.
Even if it doesn’t do for Nokia, the combination of globalisation and the mobile internet will be lethal for a wide swathe of businesses. Any activity that does not need physical delivery of a product is potentially vulnerable to being turned into a mobile app. Right now, Apple looks like the master of the universe, but perhaps the terrible example of Nokia explains why the shares in what is currently (alongside Exxon) the world’s most valuable company, are selling on just 10 times earnings.
…and losers get punished
It’s also been a bad week for Andrew Osborne, a broker who until late last year worked for the snappily-named Bank of America Merrill Lynch. He could face an assault on his bank balance from the FSA, as a result of its inquiry into the curious affair of the Punch Taverns rescue share issue.
In the early months of 2009, as overleveraged structures were tottering everywhere, it became increasingly clear that the financial engineering at Punch was in danger of collapse. In April it tried to stay cheerful but warned that it might be forced to consider “alternative methods of financing.”
A looming redemption date for a Punch convertible meant there was no realistic alternative to an emergency share issue, and over the next two months, the so-called “dash for trash” gave Punch’s bankers a window of opportunity. In June Goldman Sachs raised £350m at 100p a share. It was an impressive example of the investment banker’s black art. After a brief bounce in the summer of 2009, the shares fell below the placing price and never recovered.
Before such a massive capital raise, it would be odd, at least, not to have consulted with the largest shareholders, and Greenlight Capital, the hedge fund run by David Einhorn, controlled 13.3% of Punch’s stock. Osborne duly made the call, and invited Einhorn “over the wall”, slang for making him an insider. When Einhorn declined, Osborne’s position was impossible. Although he hadn’t given away any information, the fact that he had asked the question would have been enough to alert a professional trader that something serious was afoot. It was not going to be good news.
Einhorn might have been technically ignorant of inside information, but the FSA is surely right to jump hard on those involved in executing his decision to dump as much Punch stock as he could after the phone call. Whether legitimate or not, the sales simply didn’t pass the smell test, and both Greenlight’s compliance officer and the trader at JP Morgan Cazenove should have realised this. They all should have known better, but at least they are still in employment. As for Osborne, he’s currently jobless with the FSA breathing down his neck. Rough justice, indeed.
How life assurance works
So, you’re coming up to your 65th birthday. That policy which you took out with Aviva, years ago when it had the perfectly sensible name of Norwich Union, and which you wondered whether you’d ever live to see, is finally maturing. It promises an end to the gobbledegook of the annual statement, a tax-free lump sum and an income for life.
Last month Aviva sent me the last annual statement for my pension plan. The value of my protected rights fund was a splendidly-precise £60,310.35. As the rules insist, Aviva had included the transfer value at 15 December. After subtracting the “market value reduction”, it was £59,241. With my 65th birthday just five weeks away, there was clearly no point in transferring for a lower figure. Just in case I was considering it, the statement added that I didn’t have to do so.
Then a nice man from Aviva came round, and we agreed that I should take the maximum lump sum and buy a pension for Mrs Collins and me with the balance. I’d taken the precaution of checking the Hargreaves Lansdown website, and Aviva’s annuity was pretty competitive. The transfer value question didn’t arise.
My 65th birthday passed, with a reverse birthday present from Aviva. The same nice man phoned to say that thanks to new sums on the final bonus, the sum available has shrunk to £58,197. In five weeks, including two when the markets were effectively closed, the with-profit fund had apparently lost £2,103. That meant it had fallen below the transfer value, despite its “market value reduction”. Sorry about that, said the nice man.
I phoned the press office. It opened a file. A Customer Relations Manager sent me a holding letter. The Director of Propositions (sic) then phoned to explain what I already knew. Aviva reviews its bonuses every six months, and it was just bad luck that the statement came out in December, while the policy matured in January. The company has done nothing wrong (it has serried ranks of compliance, review, policyholders’ reps and Lord knows what else to keep it in line) but it doesn’t look good.
Had I been really on the ball, I might have anticipated the cut, given the rocky markets of the last six months. Had the nice man been on the ball, he might have suggested I consider transferring the £59,241 ahead of the December 31 review. But that might have been construed as giving investment advice, and landed him in all sorts of trouble. So he’s compliant, and I’m poorer.