Tartan Technology: Scottish Firms Refine Their Internet Plans

In an office at a run-down, desolate industrial estate on the outskirts of the Scottish town of Paisley, Brian McMillan, the CEO of Internet service provider Colloquium, relates how a funeral director approached him recently about doing business on the Web. "It was stupid. I mean, death comes as a surprise to most people, so they're hardly likely to be surfing the Web looking for bargain coffins."

The idea is far out, indeed. But it serves as a potent indication that the Internet is alive and kicking in Scotland. This should come as no surprise. After all, Silicon Glen, an area centered around Glasgow, has the highest concentration of high-tech companies outside of Silicon Valley and, as such, has one of the world's largest pools of trained information technology workers.

Scottish Enterprise, an economic development agency, found Scotland ranked seventh out of ten benchmark countries and regions that the British government uses in its Connectivity Indicator, which measures the frequent usage of external networking applications. In fact, Scotland's largest companies actually outranked those in the U.K. and the U.S.

How Scotland Stacks Up Against the Rest The ICT Connectivity Indicator

Source: Spectrum Strategy Consultants/Scottish Enterprise

Scottish Enterprise and the Internet Society Scotland, the representative body of the Scottish software industry, are pushing for the establishment of an Internet exchange, allowing its various partners, such as telcos, to swap data, thereby making delivery of the Internet faster, cheaper and more reliable.

And Internet Society Scotland is also bidding to host the large IT and Internet conference INET2001 in Glasgow (INET1999 is being held in San Diego). There are hopes somewhere down the line to obtain a Scottish domain like co.sc to replace today's all-encompassing co.uk.

Yet making money from the Web is proving as elusive to companies in Scotland as it is to businesses elsewhere in the world.

Giving It Away

Scottish Internet service providers are all suffering from the wave of subscription-free ISPs that have appeared in the U.K. over the past nine months. These subscription-free ISPs rely instead on revenue from e-commerce, advertising and a slice of the metered-call charge users must pay in the U.K. to use the Internet.

Forty-five percent of people who connect to the Internet, according to a report this month by the U.K. consultancy Fletcher Research, now use either electronics retailer Dixon Group's Freeserve or British Telecom's (BTY Quote - Cramer on BTY - Stock Picks) ClickFree, both of which are subscription-free ISPs. Subscription-based ISPs such as Demon, purchased by Scottish Telecom last year for $107 million, have seen their shares of the market slump to a miserable 5%.

However, McMillan of Colloquium, a subscription-based ISP, claims all is not lost for firms like his. The advent of the subscription-free ISPs has allowed Colloquium to ditch small customers and concentrate on offering a fuller and better service to his high-value customers such as Premier Oil and British Polythene Industries.

Brian McMillan
The CEO of Colloquium is seeing the fortune smile on his company.
Credit: Nick Watson

With Dixon Group announcing its plans to float next month a minority stake of around 10% in Freeserve, which is being valued at $2.5 to $4 billion, questions have inevitably been raised about whether its business model would be viable in an environment of unmetered access to the Internet.

Already, some ISPs are offering some unmetered access to the Internet, for example on weekends, and some sources have told TSC that Scottish Telecom is exploring such an option. Investors in Freeserve may find "the emperor has no clothes," warns McMillan.

Scottish companies involved in the development and hosting of Web-based information systems for companies, such as Buchanan International, NXYS and Calligrafix, have all seen their businesses expand as the Internet takes root in Scotland. Yet the survey commissioned by Scottish Enterprise about Internet usage reveals some uncomfortable truths.

According to the Connectivity Indicator, small Scottish companies (10 to 99 employees) are on a par with Italy, the worst ranked country in the index. Frank Binnie, the chief executive of Internet Society Scotland, genuinely believes that Scottish business in general is pushing ahead with the Internet, but admits his warnings that "companies need to be part of the Internet snowball or they will get crushed by it" are still falling on some deaf ears.

The most promising companies in this sphere are inevitably those that have looked beyond their own borders. Buchanan International, for example, has a strategic relationship with U.S. firm Seagate Software (SEG Quote - Cramer on SEG - Stock Picks) and has offices in San Francisco and Kuala Lumpur in Malaysia.

There's No Business Like E-Business

Cybercaskets aside, Scottish financial service providers and businesses do appear to be looking to take advantage of the Web.

Although a survey this month by accountants PricewaterhouseCoopers and the Economist Intelligence Unit found that none of the big banks in the U.K. are fully prepared for the changes to the industry that will result from the Internet, the Royal Bank of Scotland, which announced last week plans to buy UST (USTB Quote - Cramer on USTB - Stock Picks) in the U.S., does offer a full range of online banking services.

Similarly, Bank of Scotland, which saw its planned online banking venture in the U.S. with TV evangelist Pat Robertson dissolve after the preacher called Scotland a "dark place" run by homosexuals, also offers retail banking online.

Standard Life, one of Europe's largest mutual life assurance companies, has found the Web allows it to offer financial products to over 2,500 independent financial advisers, who now account for about 90% of its business.

Scotland has a large number of cottage industries, from knitted sweaters to tartan and cultural goods, that are benefiting hugely from marketing via the Internet. In light of this, Scottish Enterprise has begun an annual awards program called Winners At the Web as a way to get companies more interested in selling over the Internet.

This year's winner for small business is Hullachan Pro, a Glasgow-based company that makes highland and Irish dance shoes. The company launched its Web site last year and now receives over 1,000 emails a week from prospective buyers. Seventy-five percent of its sales are via the Internet with clients in North America, Australia and Ireland. Another award winner, House of Tartan, a retailer of Scottish textiles, said it doubled its revenue in a year of selling over the Internet.

Yet as Colloquium's McMillan points out, there is a danger of pushing all companies, including unsuitable businesses like funeral parlors, onto the Internet and then telling them to be like Amazon.com. "It's about smart business, using the Web smartly," he says.

And Scottish companies are rapidly learning that to ignore the Web will most likely be the death of them.