Ambitious goal in days of the dotcom wreck

By CHRIS BARTON

The biggest surprise of 2002 for Ian Taylor was being invited by the Government to sit on the information and communications technology (ICT) taskforce.

"It was like doing an MBA in five days - there was a lot of experience there."

The taskforce's goal is for New Zealand to have 100 new ICT companies, each earning over $100 million in sales a year, by 2012.

For Taylor, who manages Dunedin-based Animation Research and TaylorMade Media as well as having a stake in the former state-owned enterprise Terralink, the question is not whether it is achievable, but whether the Government is serious about growth.

"First, do you want to get back to the top half of the OECD? Second, do you believe the ICT industry is capable of playing an important role in getting us there? Third, is it worth mucking around with it unless it is contributing at least 10 per cent of GDP?"

The ICT taskforce was born out of the Government's Growth and Innovation Framework, Growing An Innovative New Zealand, released in February, which targeted ICT with biotechnology and the creative industries as key sectors to promote long-term prosperity.

Its draft report wants the industry to increase from contributing 4.3 per cent ($4.8 billion) of GDP to 10 per cent in 10 years.

The size of the task is highlighted by the fact just 16 companies have annual sales exceeding $100 million and half of them are the New Zealand arms of multinationals.

ICT export sales, which were $900 million in 2001, will have to grow exponentially too - in the order of $16 billion by 2012. That is a big ask, especially in software where exports in 2001 fell 14 per cent to $97 million.

"Yes, we have set a bold target, and equally we accept that it is a target that will be unattainable if we continue to do things the way we currently do them. In the report we have identified a number of barriers that we need to break through or remove if we are to reach our goal."

Barriers such as access to capital, tax issues that affect the ability to grow, regulatory issues that hinder rather than promote growth and an ominous downward trend in the number of young people studying maths and the sciences were all highlighted.

Among the recommendations that the Government will have most difficulty taking on board are calls for changes to R&D tax rules to allow full deductibility in the year of expenditure of ICT product development costs.

The taskforce also wants tax-neutral investment vehicles. At present, if an individual invests in a company long term, any gain when the shares are sold is treated as a capital gain and is therefore tax-free. The same investment undertaken by a company established to make such investments, or a unit trust, is taxed at the corporate rate of 33c.

Taylor would also like to see the Government, as a major buyer of ICT, adopting a more active role in buying New Zealand-made.

The relaunch of www.govt.nz in November using local web developer Copeland Wilson & Associates, local system integrator gen-i for the portal architecture and local services company Datacom for hosting is a promising sign.

But the barrier to growth given special attention by the taskforce, and the one that got Taylor really thinking, is the lack of management expertise to take a company to the $100 million in sales mark.

"I realised having fun playing around the edges is okay, and when I look at what we've developed, it's quite feasible to reach that target. But the problem is I run the place a bit like a corner dairy."

HIS challenge is keep the essential creative atmosphere of Animation Research, but also adjust the company structure and its links with associated companies for rapid growth and the development of global partnerships.

Not that Animation Research has not seen some of what is involved. Its shareholding in Virtual Spectator, the company that provides live 3D animations of the America's Cup yacht races via the net, came to an abrupt halt in May.

That was when Neville Jordan of Endeavour Capital galloped in and bought the business for something well under $1 million, leaving a pile of debt behind to be mopped up by liquidators.

In its brief, three-year existence, Virtual Spectator managed to lose about $13 million. The good news is that under Jordan's hard-nosed tutelage the company survives - albeit scaled back to internet coverage of the America's Cup and some TV graphics for the World Rally championship.

The bad news is that the business is now fragmented, with Animation Research handling the TV graphics for the America's Cup and Virtual Spectator the internet. Animation Research has also gone its separate way with its 3D graphics for other sports events, including international golf tournaments and New Zealand cricket matches.

It is a familiar post dotcom crash story. Scattered wrecks of listed IT companies litter the New Zealand landscape. Some, such as IT Capital, Newcall, Advantage and Commsoft, are desperately trying to reinvent - or rediscover - their business. Others like eVentures and ePhone have called it quits.

Taylor is philosophical: "The split allowed us to get back to our roots."

As well as providing 3D graphics for sporting events, that has meant developing a new eMap business with Terralink combining aerial photographs and land information and providing access via the internet.

In December, Animation Research also unveiled an extraordinary project for Whale Watch that combined 3D animations of sealife inhabiting the Kaikoura canyon and real-time tracking of the Whale Watch boats.

The project was also a showcase for the work of Auckland company SeaNet, which provided a wireless network to track the boats. Such networks sprang up all over New Zealand last year - RoamAD in Auckland, CafeNet in Wellington and Rural Networks in South Waikato, to name a few.

The technology features large in chip giant Intel's "silicon radio" plans - the integration of the innards of mobile phone and wireless technologies, including the antenna, on to one or two chips.

Other wireless technologies also caused a stir - in particular the IP Wireless technology deployed as a trial in the Auckland CBD by Walker Wireless and Vodafone. The same technology, which provides high-speed internet through the air and independent of Telecom's wireline monopoly to New Zealand homes, also won the tender to provide "whole of community" telecommunications to the Southland region.

Southland is the most advanced of the 15 regions comprising the Government's $30 million Probe project designed to provide high-speed internet to all schools and promote broadband competition.

Others close to selecting tenders include the Far North and the Wairarapa where UCC, Telecom/BCL and Walker Wireless/Vodafone are all contenders.

Taylor felt first hand the effects of another monopoly in the IT market - that of software giant Microsoft when it raised its software licensing prices. For Animation Research and its associated companies, locked in to using Microsoft software, there was little choice but to comply.

It was particularly galling because Taylor has witnessed in the space of two years a dramatic reduction in the cost of hardware. In 2000 the company was using SGI equipment costing about $300,000 to run the TV animations for the America's Cup. Today the graphics run on PCs costing about $4000.

BUT Microsoft's Software Assurance scheme, which introduced annual subscription charges paid in advance for all business software, so riled Craig Horrocks of law firm Clendon Feeney that he laid a complaint with the Commerce Commission in May. Predictably, the commission, after a cursory investigation, dismissed the claim.

The cost reduction trend is partly responsible for the 18-month recession in the IT industry that looks likely to continue this year. All over the world, businesses continue to say, "Like the product, it would be good for us, but, sorry, we're not buying anything right now," when the IT vendor comes knocking.

Particularly hard hit have been PC sales as companies adopt a "wait until it breaks" strategy for replacement.

But the good thing about the IT industry is that if one area is weak, another will be strong. For 2002, security products surged as companies invested to keep their networks running and virus-free - and keep sensitive business and customer data protected.

The local story of the year was email security firm Marshal Software's selling for US$23 million ($45.8 million) to Nasdaq-listed American firm NetIQ.

But while the news was great for Marshal's founders, who began the company in 1997, it is a shame another New Zealand company has fallen into foreign hands.

Marshal could have been one of the taskforce's $100 million companies, having reached $12 million in sales last year and being poised to make it big in the US market.