E-commerce needs e-reform

Micromuse's network operations center - not in England, but Tenneco, Illinois

By BBC News Online's Kevin Anderson in Washington  

The UK government wants to turn the country into the best place for e-commerce in the world, but high-tech entrepreneurs have warned that reforms must come first.

Patricia Hewitt, Minister for Small Business and E-commerce, recently told an international internet conference in Washington that the technology gap between Europe and the United States that the technology gap is closing fast.

 She highlighted advances in mobile communications and the current auction of the wireless spectrum for third generation mobile phone.

Patricia Hewitt promises that the government will make it easier for e-commerce firms to set up shop

"Third generation mobile will give us internet on the move", she said, adding that everything that we now get from fixed devices such as televisions, computers and voice telephones we will soon receive on mobile phones, PDAs, laptops and palmtops.

She also pointed to interactive digital television as a promising technology for expanding internet access.

"It's only just begun, but we've already seen penetration increase from zero to almost three million in a little over a year. The increase in take-up is even faster than in the Internet itself", she said, arguing that the UK was a world leader in both of these "post-PC" technologies.

More than technology  But technology is not the only key to success in the information age.

The Washington DC area is home to 12,000 technology companies - more than anywhere else in the United States, according to Tom Morr with the Greater Washington Initiative, a business development group for the region.

More than half of all the world's internet traffic flows through the region.

One of the reasons given for the region's growth and vibrant technology sector is the amount of venture capital available.

In 1998, companies in the region secured more than $700m in venture funding. 

Coming to America

Venture capital is the mother's milk of start-ups

The lack of it can choke a company's growth, and in the case of one UK company, the inability to secure funding there did lead them to move to the US.

Stephen Allott says there is not enough venture capital available in the UK

Micromuse started in the UK in 1989 with their flagship product Netcool, a software suite that allows network managers to monitor their systems in real time.

In 1994, the company started looking for venture capital. "People had no sense in 1994 that telecommunications and the internet were going to be big", said Stephen Allott, president of Micromuse and a member of the board of directors.

By 1995, they realised that their best chance to secure funding might be to move to the US, which they did.

"US VCs [venture capitalists] know what to do. They know the market well. They are ten to 100 times better than in the UK", Mr Allott said, adding, "I'm not dashing the UK, but in Silicon Valley it's their business."

With the move, the company received their first round of funding in 1997. They floated on the Nasdaq in 1998, and now the company is worth $5.5bn, with such customers as AOL and UUNet.

Angel investors

But Mrs Hewitt argues that the government is taking a number of steps to improve the venture capital climate in the UK.

The government is working in a public-private partnership with venture funds to encourage capital investment around the UK, she said.

The government also wants to work to encourage so-called angel investors who typically fund smaller ventures, companies too small to attract funding from venture capitalists.

In addition, the government wants to reform the tax code, she added.

Reform still needed

Tax reform is key, Mr Allott said. "The UK has got a couple of things completely wrong, and it is unbelievable that they introduced a tax on stock options", he added.

The US high-tech sector is driven by stock options, he said. In Silicon Valley, stock options are so valued that some businesses accept them in lieu of money.

He pointed to the example of Cisco which has seen its valuation rise $450bn in 12 years. If the company was based in the UK, they would have to pay 12% on every dollar made on stock options. "Cisco would be bankrupt in the UK", he said.

The government also needs to make end user markets more competitive by writing an "anti-trust policy with teeth", he said.

And competitive telecommunications are key to e-commerce, including high-speed access and reasonable rates, Mr Allot believes.

"The UK has the highest local loop phone charges in the world. They need more deregulation to encourage competitive telecommunications."