1) Corporation tax. I greatly welcome the reduction in corporation taxes; 22% to 20% for the profits under £300k, 28% down by 1% per year to 24% in 4 years. The stated intent was to boost the attractiveness of business in the UK. Also, speaking for myself, less tax will enable us to invest more in Memset, growing the business faster and creating more jobs. However, these reductions in corporation tax will largely be offset by changes to capital allowances.

2) Depreciation & capital allowances (AIA). The limit on deprecation for tax purposes has been changed from 20% to 18% (5 years to 5.5 years). Given that IT equipment depreciates at more like >33% in real terms this is a bit of blow since capital-intensive IT companies will end have to pay more tax up front, which will further reduce our growth rates.

Therefore, while a little esoteric, this is certainly bad news for British managed hosting and cloud computing providers like Memset. It will also makes it harder for us to compete on the world stage, especially when the weak pound and the fact that all computer hardware is imported is taken into account. Our international competitors are allowed to depreciate their equipment at realistic rates and pay less for it. Unfortunately, IT seen as a service sector by government, and they do not appreciate that we are an industry with plant machinery that has a very limited shelf life.

Also, the Annual Investment Allowance (AIA) on investment in equipment has been slashed from £100k to just £25k which will especially hurt small IT and manufacturing companies. It was only increased from £50k to £100k in April, however, so in reality it is only a halving of what was already a pretty small allowance. From my perspective as an Infrastructure as a Service (IaaS) provider, this will probably discourage people from owning their own hardware so not necessarily bad news for us!

3) Loans for small businesses. The Enterprise Finance Guarantee scheme (EFG), which guarantees small business loans to mitigate the risk to banks, is being extended from £200m to £700m. However, the EFG as it stands is broken. It was supposed to help banks lend to entrepreneurs without requiring large personal guarantees, but the banks are not honouring that and still will not share any of the risk. The EFG needs fixing before it gets extended, but there may be a silver lining in the form of a vague promise to lean on banks to lend more to smaller companies.

The newly announced “Growth Capital Fund”, also supposedly intended to fill the growth capital gap, seems far too small a measure to be generally useful at only £25m.

4) Entrepreneur’s relief. As you would expect, I am pleased that the £2m entrepreneur relief being extended to £5m gains over a lifetime. Entrepreneur’s relief is a Capital Gains Tax (CGT) concession, limiting it to 10% when selling a company, up to a certain value over a lifetime, which replaced the old CGT taper relief scheme. Since CGT is being raised from 18% to 28% this is especially pertinent.

Although I’m not looking for an exit any time soon, this scheme is important to encourage new entrepreneurs and investors. To attract bright, talented people away from more normal, safe careers the allowance needed to be in that higher range – the old taper relief scheme was one of my motivators for starting Memset. It is worth noting that entrepreneur’s relief only applies where you own more than 5% of the business.

5) VAT. On a more personal note, I also welcome the VAT increase to 20%. Taxation at the point of spending is one of the fairest taxing methods since people can choose. Most essentials (food, rent, kid’s clothes) are already VAT free, and it is only 5% on gas and electricity. Essentially it is a tax on buying luxuries, and if you want to be a saver you don’t have to pay it.

Also, as we saw with the VAT reduction, a change of 2.5% in the headline price of consumer goods has little impact on consumer spending. It will not affect most businesses significantly either since we can pass is straight through. As for the admin burden of a change, having done it twice recently means we are well-practiced so it should not be an issue.

6) Government carbon commitment. Finally, snuck into the document is a commitment to cut government’s CO2 emissions by 10% between May 2010 and May 2011. I think this is great news; it is about time our government started leading by example. Also, I believe this could be a great opportunity for the IT sector as we enable many carbon-saving technologies (eg. teleworking for car transport avoidance).

Overall, I am pleased with this budget. It was tough enough to hopefully get us out of our enormous national debt, does not dramatically cut back on the public services from which we all (as opposed to just those supported by the state) benefit. It also supports businesses small and large, giving us a real chance to be the engine that will lift us out of financial troubles.

1) Pushing RBS and Lloyds to lend to small businesses. Despite a healthy, profitable and growing business, we have not been able to get borrowing from any banks under the EFG without providing personal director’s guarantees. We need banks to be willing to share at least a tiny portion of the risk, otherwise we may as well just extend our mortgages even more. As a cloud computing provider we are very capital intensive – our growth rate is limited by cash availability more than anything else. Without borrowing our growth rate is capped at what we, the directors, can afford to leave in the business.

2) Tax breaks for entrepreneurs. I’m pleased to see the increase in tax allowances, however the only significant of those is the freeze on capital gains (we feared it would return to 40%). Doubling the entrepreneur’s allowance to £2m is pretty feeble (Labour capped the old taper relief scheme at £1m, and it was one of the main reasons I started a business – it was a way to avoid 40% tax). The investment allowance doubling to £100k is also only really going to help micro-businesses. The increase in R&D enhanced allowance from 150% to 175% is also helpful, but pretty minor. However, overall the set of allowances means it financial sense for me to keep investing most of my personal wealth back into my business to help it grow as fast as possible rather than sticking it in BASIC countries.

3) More STEM places. I’m pleased to see that they are hearing our (high-tech sector’s) desperate need for science & maths graduates, but that must not come at the expense of university-based “blue sky” research! At present the budget states an intention to create 20,000 new STEM (science, tech, engineering & maths) places, but it looks like most of the money for that will have to come from further cuts to already-overstretched university budgets.

4) Tax breaks for the games industry. It is fantastic to see support for our computer games industry. I have long been frustrated with how much of our top computer programmer and design talent gets poached by foreign companies operating in friendlier environments. Online entertainment is undoubtedly one of the big industries of the future, and among a number of high-tech areas of growth like those identified in Intellect’s Making Britain GreaIT Again publication. It is vital that we support this technical-creative hybrid sector.

5) £6/yeay levy on phones towards superfast broadband. Nice concept, but no where near enough. Only 70% of British homes have broadband at present, and to get high-speed broadband to the majority of homes will cost in the region of £15-25bn pounds according to the likes of BT and the broadband stakeholder group. A fast digital infrastructure is vital to enable turn Britain into a innovation haven, supporting out high-tech industry

6) 15% increase in government contracts to SMEs. This is good news, especially since government contracts all too often are dominated by a small number of very large providers who deliver debatable value for money! However, government procurement processes are vastly over complex and often prohibitively expensive for smaller companies, which is often why the public sector end up paying a premium to the usual suspects. A change to this, at least in the ICT world, is the G-Cloud programme. It should enable smaller, more agile companies to interface with government and provide their services without the usual massive sales-admin burdens (I hope!).

In short, I was fearing that the baby would be thrown out with the bath water in this budget, with a drive to increase taxes and cut costs accidentally crushing the one area on which we are likely to depend for innovating our way out of national debt (high-tech SMEs). Given the likelihood of a hung parliament that was all the more important, so overall I think we can breath something of a sigh of relief.

An impressive amount for a technology startup with no clear means of generating revenue, so I thought I would do some calculations of my own:

Twitter has about 18-20 million users in the US, according to Mashable

Earnings, earnings, earnings

There are 300m people in the US and 750m in Europe. Let’s assume that the ratios are the same for Twitter users. Therefore, the total number of Western Twitter users (ie. people who would potentially pay for anything) in 2010 is:

(20m / 300 ) * (750 + 300) = 70m users

To justify a $1bn (£625m) valuation they need to be able to realistically generate at least 5% of that as profit (20x earnings multiple, which is basically unheard of outside blue chip corporates) ie. at least $50m/year.

Therefore, in round numbers, they need to be able to realistically expect (in future) to generate earnings (profits) of $0.70/year from each user.

So far, perhaps not unreasonable; once micro-payment systems start working properly one could imagine users paying a notional $0.10/month to use Twitter, or advertisers paying that per user, at least so long as Twitter is the only one of its kind.

Twitter ain’t so special

That is where we realise the valuation’s big flaw: Twitter is not doing anything special. To build another system that replicates their functionality would, in my opinion, take 2 good coders, 2 good system administrators and one good web designer 6 months, tops. Add in some management and marketing capability for operational running and if you are a generous employer your wage bill might be £500k/year ($800k).

What about hosting costs? Well what it boils down to is a large and very active database:

Assuming 100m users
100 reads & 10 writes per user per day
= 10 billion reads & 1 billion writes per day

Squeeze into 16 active hours (just looking at the West)
= 120,000 read & 12,000 write transactions per second

To host a system which is capable of those transaction levels you would need at most 100 1U quad-core machines loaded with RAM (eg 24GB), costing £200/month each, or £240k/year ($385k).

So, I reckon that Twitter’s operational costs should be under $1m/year. But what do I know, right? I’ve only been designing, building and hosting massively automated online business systems for a decade, not to mention being one of the UK’s leading tech entrepreneurs.

A more rational valuation

So why are Twitter’s investors valuing such an easily-and-cheaply replicable business so highly? I suppose that they are banking on a land-grab effect and user stickiness, but we have seen what is happening to MySpace’s diluted popularity faced by new competitors.

When faced with such valuations I fall back on common sense and base the valuation on a cost-plus revenue model, ie. “what would it cost to provide the service, plus a modest profit margin”? All businesses and markets eventually commoditise down to that price point after all, and such commoditisation can happen very rapidly in the online world.

Viewed from that perspective I estimate that Twitter’s services are probably worth about 1.4 cents per user per year at present (estimated $1m/y running costs divided by 70m users). Lets be really generous and assume that they are able to generate 50% profits on that (first-mover advantage etc), so we get $500k/year profit, which at our mentalistic 20x valuation ration would give a valuation of a whopping $10m (£6.25). Hmm.

But that can’t be right?

I admit, I am taking an extremist point of view, and commoditisation of this very new and innovative sort of service is almost certainly several years away. However, defaulting to a cost-plus business model does demonstrate the likely value of such services when the competition have all caught up, and in Twitter’s case it is not a terribly exciting outlook.

Further, the valuation is being extrapolated from a $50 million purchase for a minority share holding. That investment was possibly more about getting a seat on the board than about a real valuation of the company.

Finally, and call me a cynic, but most investors are in the business of making a large return on a high-risk investment with a short time-horizon. One of the ways that happens all-too-often in the technology sector is less about yields and more about a business’s price getting hyped as high as possible before the savvy investors get out. Some some poor sap is then left holding the baby when commoditisation or better-competition comes to bite, exposing the lack of substance behind the valuation and causing the valuation to tumble.

Eye of Google

That is Twitter’s fundamental problem, to repeat myself: It is nothing special. Google (for example) deserves its outrageous share capitalisations because they have a unique technology which gives them an indomitable lead in the market place. Twitter is little more than a non-realtime Web-based chat room, and its technology would be trivial to replicate. Expectedly, the behemoth that is Google has indeed turned its lidless eye on chat-like status-updates in the form of Buzz.

To my eyes, their strangle-hold on the consumer Web-services market remains unchallenged by the likes of Twitter. The only interesting thing I’ve seen, however, is that their master-plan to crush Microsoft by making the browser the new platform was perhaps hiccoughed by Twitter in the form of software like TweetDeck – an example of Web services reverting to local software clients. Perhaps the browser is not quite ready for everything we want to do just yet after all, but I doubt that will save Twitter from eventual relegation to the Web-stars twilight world along with the likes of friends reunited.

The panel session was lively, and I raised a few eyebrows with my predictions that the Big Corps in software & broadcast were under major threat. I was particularly pleased when I managed to astound Mr. Paxman with some stats on women in technology – here is an excerpt from the Intellect blog on the conference:

In the final panel session, Jeremy Paxman (probably for the first time in his career) was stuck for words when Kate Craig-Wood, MD of Memset, indicated that there was a 23% gender pay gap in the IT industry. Paxman expressed a little scepticism over the statistic, but rest assured the figure is one oft quoted by Intellect and comes from an equalities and human rights commission report.

http://google.co.uk/search?q=the+definition+of+cloud+computing

Lets face it, Google is near omniscient (and probably already has a band of worshipers preparing for the birth of its sentience) so I must know my stuff! </gloat>

Ahem, anyway, when you get down to it, there are only really three differences between Cloud Computing and traditional IT infrastructure outsourcing:

1. Shorter contracts: Hours, days or weeks (at most one month) rather than months or years (usually at least 6 months for traditional outsourcing).
2. On demand: Near-instant scaling / adding of resources.
3. No up-front costs: The CapEx and installation is absorbed into the rental charges.

Modern “managed hosting” providers like my company are largely synonymous with “Cloud Computing” or “Utility Computing” providers; companies like mine will give customers anything from a virtual machine to a large dedicated cluster with a contract of one month and no setup fees. We are blurring the line between traditional IT infrastructure outsourcing (eg. EDS / HP at the big end, Rackspace at the small end) and “pure” Cloud providers like Amazon EC2.

Cloud Computing has been enabled by the ubiquity of Internet connectivity, since companies are no longer tied to owning their own data centre with hard-lines back to offices. Instead, the infrastructure can be pretty much anywhere, although usually you want it in the same country as your main operations.

So what becomes of the old-school big-corp IT outsourcers?

As for the impact on IT outsourcing businesses, that is simple: Cloud Computing is exposing the true cost of computer / server resources, which thanks to Moore’s Law is tiny. Cloud / Utility Computing providers are driving the comoditisation of compute & storage resource, thus eviscerating the outrageous profit margins enjoyed by the old-guard of IT outsourcing providers.

The Cloud movement has the potential to finally deliver on IT’s long-oversold promise of shared services and cheap, highly scalable process automation. In doing so, Cloud also threatens the livelihoods of the big IT consultancies / Systems Intergrators who have become better at selling their highly-paid peoples’ time than actual IT services.

The proof are the likes of Google, Xero online accounting and Zimbra Desktop (Outlook- & Google docs-like functionality, but open source and Web-based): They are delivering most of the IT services that businesses need at an extremely low price, thus demonstrating that:

1. Most of us want the same, simple things in terms of IT services.
2. IT resources are actually really, really cheap.

Sorry chaps, but it looks like the jig is up.

They announced it as a “Small Settings Update” – pasted below:

Small Settings Update

We’ve updated the Notices section of Settings to better reflect how folks are using Twitter regarding replies. Based on usage patterns and feedback, we’ve learned most people want to see when someone they follow replies to another person they follow—it’s a good way to stay in the loop. However, receiving one-sided fragments via replies sent to folks you don’t follow in your timeline is undesirable. Today’s update removes this undesirable and confusing option.

The Importance of Discovery

Spotting new folks in tweets is an interesting way to check out new profiles and find new people to follow. Despite this update, you’ll still see mentions or references linking to people you don’t follow. For example, you’ll continue to see, “Ev meeting with @biz about work stuff” even if you don’t follow @biz. We’ll be introducing better ways to discover and follow interesting accounts as we release more features in this space.

The beauty of Twitter has always been that it is like a chat room where you are not necessarily listening to the same people who you are talking to. That may seem a bit odd at first, but when you think about it it can be rather cool. Take me for instance; without sounding too egotistical, I have time to follow about 100 people, but more than that are interested in what I have to say. Some of those people might mainly use Twitter to talk about personal issues that are not relevant to me, so I don’t follow them.

Equally, I like hearing replies from people I do follow to people that I do not. That way I can “listen in” to conversations of the people I follow and if it sounds interesting I can link through and look at the other side of the convo, but I don;t have to have the other person in my feed / timeline.

@monkchips is a good example; he is a great Twitterer and a strong voice in the IT community. He follows about 800 people, and is followed by >5,000. I like hearing his side of conversations directed at people I do not follow, since then I can cherry-pick interesting sounding ones. I follow him because he is interesting, not because he is a personal friend or we share friends.

In effect, this change is turning Twitter into a ‘normal’ chat room just like the ones I was using 13 years ago at University. We used a system called Internet Relay Chat.. or IRC as it is commonly known. Such a shame to see a great innovation in online comms take a massive leap backwards.

So the first thing to address had better be “what is it?”. Well it is actually a somewhat complex concept with lots of (I think) good stuff about free redistribution and openness, but from a users perspective it all boils down to this: open source applications are free software which is built, maintained and supported by a community of developers and users. It is, in my limited awareness, the only functional example of communism at work. If you want a fuller definition have a look at the open source initiative’s official version.

At one end of the spectrum, most small businesses could save quite a lot of money per-head by switching to some open source solutions. I’m not advocating going totally Linux at a user-level; I think that is still only appropriate for hard-core techies and large scale installations where the users are not allowed much flexibility – the Munich city council recently “went Linux” for example. Personally, I think that it is important for users, especially valued employees, to be able to customise and fiddle with their working environments. You would not expect people to have a pre-defined desk layout after all, would you? That is changing, but for now I think the retraining burden for small businesses would eliminate the benefits of going totally Linux in any event.

I am a case in point, and bear in mind that I am a serious professional and my laptop’s environment is critical to my work. To the right is a piccy of my desktop – I am running Windows XP which means things like Nokia PC suite, various games and all Sony’s strange hardware “just work”, but that is where my payments for software end. I do not have Microsoft Office, instead I use Mozilla Thunderbird for e-mail, calendar and contacts management (Evolution is even-more like Outlook if you prefer), OpenOffice for word processing, spreadsheets and presentations, and I use Opera* instead of Internet Explorer to name just a few of my favorite free applications.

My and others’ choice of an alternative Web browser to Internet Explorer is not about always cost (IE comes with Windows after all). The huge rise in popularity (usage share now at roughly 12%) of the open source browser Mozilla Firebird is an example of why open source software can be better; people use it on Windows because of improved functionality and usability rather than cost, after all it is built and developed by the users for the users.

At the other end of the spectrum, enterprise-level applications can benefit from open source software, and this is one area where I certainly would advocate the use of a Linux operating system. Take hosting an e-commerce site for example; why use Windows server software, IIS and MS SQL (perhaps costing £130/server/month extra) when Linux, Apache and MySQL will be cheaper and, in our experience, more reliable? Not only do we tend to find Linux operating systems (Debian for example) to be more resilient, but also easier to administer. Windows is a very opaque operating system for all users, expert or otherwise, whereas Linux gives systems administrators the option to “poke around under the bonnet”, often making troubleshooting and general admin a great deal easier. The upshot is that the administrators can spend less time managing the system (which saves even more money) and if there is an issue it can be resolved more swiftly.

I have no vested interest in promoting Linux & open source over Windows (as a company we offer both – we do not restrict customer choice), but in our experience it is cheaper, better and it makes our lives’ easier, and I think that improving awareness of open source solutions could save UK businesses a lot of money and consequently make us more competitive. After all, the UK government thinks its good enough for them, so why shouldn’t you?

* Opera is not open source, as pointed out in the comment below – it is free but proprietary software and there is an important distinction.

Up until recently I had been using a massive Dell Inspiron 9100, which is a great laptop as long as you don’t actually put it on your lap or try to lug it around on the tube. I have also been a faithful Palm user for many years, but trying to do anything useful on a PDA, even with a bluetooth keyboard, is painful thanks to slow & limited applications, terrible reliability issues and poor battery life.

So, I recently splashed out on a gorgeous little Sony Vaio VGN-TX2HP (see right). Not only is it perhaps the ultimate geek-girl fashion accessory (and great for starting conversations on the train!), but it is so small that it fits in my handbag, so light that it is a breeze to carry, and has a battery life that puts the energizer bunny to shame (4-7 hours!)! It comes in-and-out of standby mode really fast too, making it so convenient to use that I will often put it to sleep while changing lines on the underground and just wake it back up for another 10 mins work tube-hop.

My other problem was mobile connectivity. I was using 3G on my hopelessly slow, chunky and unreliably Nokia 6680, which not only had major issues handing over between cells causing the connection to bounce irritatingly when on the move, but was also limited to 112Kbps thanks to the bluetooth connection. Therefore I recently gave in to temptation and bought one of Vodafone’s new high speed mobile data cards. I went with their more expensive £25/mo, 250MB/mo one rather than the popular £17/mo, 2,000MB/mo T-mobile for three reasons: i) I trust Vodafone’s network more ii) Vodafone don’t filter the traffic – T-mobile block things like VOIP and even MSN apparently, & iii) Vodafone’s can do up to 1.8Mbps when the new HSDPA system is fully rolled out. I have been seriously impressed so far; I get a persistent link almost all the way from Guildford to Waterloo, and the connection speeds are truly broadband-like. Even the latency is better – I can happily use PuTTY/SSH without a painful lag.

This sort of true anywhere-connectivity gives a whole raft of new options as well. Already, all my email is stored centrally on a remote IMAP server, along with most of my critical documents, diary and so forth. I am only a few steps away from having everything important centrally stored with my laptop acting as little more then a client application terminal, and when I have managed that the days of fretting about backups will be gone. I am not alone either; we are seeing an ever increasing demand for online business applications from IMAP email to CRM solutions and centrally hosted groupware.

Anyway, you may be saying “that’s all very well, but those are not cheap toys!”, and you’d be right. However I am quite sure that they have already paid for themselves in terms of my increased productivity. Money well spent I say (and come on, they’re so cool! ).

At a really crude level, we buy in hardware, mostly Dell and Sun servers, setup their OS and applications, plug them into a rack with some electricity and network connectivity, and then rent the package to our client, along with various monitoring, security & management services. We are not actually selling anything physical though – just a service, yet we are providing something physical in a sense.

What is a little different is that, like a mobile phone provider, we don’t want to charge you for the hardware up front – we are just interested in the rentals. That is a growing trend in recent decades it seems; everyone wants repeat-revenues. The days of the hard-won monthly sales target and a need to constantly win new business to survive are waning somewhat – perhaps that is indicative of our nation’s move away from manufacturing and towards services, or perhaps it is just that business owners like me prefer not to have to loose sleep when there is a tough months on the sales front.

Perhaps the most unusual thing about this business, though, is credit – or rather the lack of it. We do not give our clients any credit (Internet Service Providers [ISPs] do not tend to) but our customers seem quite happy with that. We do have some fairly hefty up-front expenditure (one of those servers can easily set us back well over £1,000) which is perhaps why people don’t mind, especially when we tend not to charge setup fees. From a business perspective though, it is wonderful! We don’t have to chase people up and worry about bad debts, our cash flow is nice and positive, and the bank manager loves us!

Overall it does give us significant admin and finance savings, which our customers benefit from in reduced prices. Yes, they are loosing out on a month’s interest at the bank, but that is hardly a large price to pay!

One frustration from my business owner’s perspective though is that we have a big pot of money that is actually our clients; we can use it for things like capital expenditure but it is not countable revenue until we have provided the service that it was paid for, but one can’t complain – I’d far rather have than than a big overdraft.

The last difference is that unlike even most similar rentals-based models such as mobile phone operators, or even many of our own competitors, we do not tie our customers in to long contracts, and why should we? By not doing so we are ensuring that we must maintain our quality of service and not let our customers down, since if we do they will leave. Talking as a consumer for a moment, I would certainly rather more companies had the faith in their own services to rely on our having a good relationship in order to retain my business.

Anyway, enough prattling – I need to get back to trying to predict the future or my board of Directors won’t let me have any biscuits at the next meeting!