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Return of the hi-tec hunger

The life cycles of corporations vary widely. Most companies that start in a garage swiftly end up being carried out with the entrepreneurial garbage. One, though, became Microsoft, says Edmond Warner

Some businesses evolve over several managerial generations and exhibit a recognisable seam of cultural, operational and organisational continuity. Others morph repeatedly to the tune of a more rapid heartbeat.

The pressures of technological and financial development, however, are shortening the time frames over which all businesses are measured - both from within and without. Where once a 20 year-old corporation might be considered to have just come of age, now it might as easily be facing a midlife crisis, or even suggestions that it be put out to grass. Blockbuster, renter of videos to the masses, is a prime example.

Founded in 1985, the Dallas-based group now generates $6bn (£3.3bn) of revenues a year from renting films across the United States and internationally. Floated on the New York Stock Exchange in 1999, just as the last bull mania was upon us, its shares have more recently been strangled by the Internet revolution that was prematurely celebrated by investors during that time of stock market madness.

Last week Blockbuster announced losses for the second quarter of 2005 that sharply exceeded analysts' expectations. Its shares tumbled to a level 75% below their peak of three years ago.

The company had some grumbles about Hollywood's failure to come up with sufficient winners for the home box office, but its fundamental problem is the rise of the Internet movie rental industry. Why drive to the shops for a DVD and a bucket of fried chicken when you can order the first by mouse and the second by phone?

The first wave of dotcom mania carried shares in start-up enterprises into the stratosphere. Disappointments followed swiftly thereafter. The second wave was, in some respects, more discriminating: investors seeking out "clicks and mortar" opportunities. These were conventional businesses with the ability to combine their existing operations with the power of the new technologies to see off the start-ups. Brand recognition and trust were perceived to be major potential advantages.

Blockbuster is running hard now to prove the worth of the "clicks and mortar" model. Its latest results do not simply show the scars of competition from online providers, they also reflect the costs of establishing the company as a leading player in the online world itself.

An optimistic reading might be that Blockbuster is at the worst stage of this transition, bearing the costs of both its legacy and new distribution channels. The pessimist might argue that Blockbuster will never be able to achieve a competitively low cost base given the burden of its physical past.

Five years on from the stock market peak, when investors were prepared to see the good in all Internet ambitions, precious few "bricks and mortar" businesses have managed to effect a successful transition - especially those in the retail sector. For many firms, changing through technology has been a prerequisite for survival in a low-inflation world, but the tech revolution has not transformed their profitability.

Memories of the pain of the 2000 dotcom crash have now receded sufficiently for tech stocks to return to favour.

The start of the new tech investment cycle was probably marked by last year's flotation of Google - which, at the time, confounded many pessimists, including me. Since then Google shares have not collapsed but more than trebled in value, creating an environment ripe for a new wave of tech fever.

At first, this renewed hunger for technology investments focused on the demonstrably successful. Now, however, there are signs that investors' risk appetite is increasing and that, once again, businesses fresh from the entrepreneurial womb are being backed to grow into the industrial giants of tomorrow.

The latest example is China's version of Google,, which listed on America's Nasdaq market earlier this month. Its shares more than quadrupled on their first day of trading to value a business with very little revenue at more than $4bn.

It may be, of course, that shares are cheap. After underestimating Google, what do I know? It is a safe bet, however, that investors will be wary of imposing Internet dreams on traditional businesses - even those only 20 years old - for a long time to come.

Edmond Warner is chief executive of IFX Group.

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