Jeremy Warner's Outlook: Internet gold rush of price comparison

Alongside social networking, price comparison websites are the latest hot property on the internet, so it is no surprise that a number are scrambling to float. First out of the gates is Moneysupermarket.com, the market leader in the UK and by any measure an impressive entrepreneurial achievement for its co-founder, Simon Nixon.

But is it really worth as much as the £1bn valuation that the mid-point of the 170p to 210p a share pricing range announced yesterday places on it? There's good reason for scepticism. But let's first put the more positive case.

Price comparison websites are already hugely popular and are continuing to grow strongly both in terms of revenue and numbers. In the first quarter of this year, Moneysupermarket saw jaw-dropping growth in revenue of 64 per cent. Some analysts are pencilling in similar rates of growth for at least the next year or two.

Why so bullish? According to Rebecca Jennings, senior analyst at Forrester Research, some 65 per cent of frequent internet users consult price comparison sites, and 30 per cent of them do so at least once a month. The more retailers that offer online shopping, the more popular these sites are likely to become. It is obviously more convenient to have the price comparison site do the search for you than to spend hours surfing the net to make the price comparison yourself.

Forrester also thinks there is likely to be a continued significant shift of the advertising market as a whole online. The click-through advertising allowed by search engines and price comparison sites provides a more direct form of marketing expenditure than the diffuse nature of promotion through many traditional forms of media.

As its name implies, Moneysupermarket started life as a price comparator for financial services, but has branched out into a myriad of other areas of online retailing, from travel to utilities and books. As such it is already the broadest-based of the price comparator sites. So far, so good.

What's more, the valuation, though it looks off the scale relative to "old economy" shares, is broadly in line with what trade buyers have been prepared to pay for similar assets - for instance, last year's purchase of uSwitch by EW Scripps.

At £1bn, Moneysupermarket would be valued at more than 30 times last year's adjusted earnings before interest, tax, depreciation and amortisation (ebitda), yet if growth continues at current levels, this number will be down to the high teens by the end of next year. That's still stretched enough to bring back memories of the dotcom bubble. The difference is that today's internet valuations are at least based on money which is actually being made, as opposed to what analysts thought might be made 10 years out.

Even so, a little of the old madness has returned. The price comparator valuations may be a case in point. The technology may be complicated, but the business model is not, for in essence price comparison sites are no more than the old-fashioned activity of broking, or acting as an intermediary.

As I say, getting the technology right is hardly a stroll in the park, but otherwise barriers to entry are close to non-existent. As a consequence, every man and his dog, from Tesco to the bicycle repair man down the road, are climbing on board the bandwagon. Specialist price comparison sites are springing up like woodland mushrooms. Many of them will prove just as transitory.

Moneysupermarket does at least have something of a "first- mover advantage" - remember that glorious piece of gobbledygook, routinely wheeled out at the height of the dotcom bubble to justify ever more ridiculous valuations - and it is relatively well established as a trusted brand. Yet it is having to spend ever more heavily on wider brand marketing to keep revenues growing, while opportunities for international growth are constrained by the obvious limitations on cross-border retailing. A growing number of product providers also refuse to participate on the price-comparison sites, which may in time undermine their usefulness and integrity.

Despite all these caveats, a massive level of institutional and retail interest in Moneysupermarket is virtually guaranteed, if only because it is the first such business to float in the UK. Stock market conditions allowing, the IPO is almost bound to be a success, as indeed lastminute.com was seven years ago. It's the price further down the line that worries me.

Brown promises mortgage shake-up

The measures announced by the Chancellor yesterday to make it easier for mortgage lenders to finance 20- to 25-year fixed-rate mortgages are no doubt harmless and well-intentioned enough, yet it will do nothing to ease the problem of housing affordability, which has little to do with any supposed lack of finance on reasonable terms, but rather is almost wholly down to Britain's acute shortage of supply.

There were measures yesterday to address this problem too, but it is the mortgage issue I want to examine. Britain's apparent deficit in very long-term, fixed-rate mortgage finance has long been an obsession with the Treasury, so much so that Gordon Brown while Chancellor commissioned a lengthy tome on the matter by Professor David Miles.

The Treasury believed housing finance to be a key structural difference between Britain and the Continent, and therefore one of the reasons we couldn't join the euro until these differences were overcome. The Miles report was notable only for its lack of memorable conclusions, and the general assumption was that it had been quietly binned. It's a bit odd to see it being dusted off now all these years later. Does it mean that, now he's got the keys to No 10, Mr Brown is finally going to take us into the euro? Surely not.

There are a number of legislative reforms that need to be made before a market in long-term mortgages similar to that which exists in the US and some parts of Europe would be possible. But even if these barriers were removed, it is not altogether clear such a market would develop, or whether it would be entirely desirable.

As things stand, there is very little demand for mortgages of such longevity. No doubt there would be much more demand if these mortgages were cheap enough and carried low redemption charges, so that people could easily get out of them to address changed circumstances at low cost.

In Germany, they are in theory readily available but in practice quite difficult to obtain, and carry very high redemption penalties. They are as a consequence one of the key reasons why home-ownership is so under-developed in Germany. The system in the US is better, but one of the reasons why the low-cost prerequisite is maintained is that the organisations which securitise the mortgages for sale as covered bonds are underwritten by the Federal Government, which means they can borrow on near-identical terms. Is the British Government prepared similarly to subsidise the housing sector? I doubt it.

The advantages of long-term mortgages on low, fixed rates are obvious in a period of rising interest rates, but they become very much less so when rates are falling. In the US, homeowners switched out of their long-term mortgages in their millions as rates began to fall from 2000 onwards. With rising rates and a sub-prime lending crisis, they now struggle to remortgage on the old terms.

The Bank of England's job would also become very much more difficult. Caution all you like about Britain's addiction to debt, but it does make the economy very much more sensitive to interest rate changes. Consumption can be turned up and down like a tap, in sharp contrast to Germany, where low interest rates failed for many years to lift the country out of economic stagnation.

Personally, I'd rather have the British system, where mortgage finance is readily available to virtually all and vibrant competition ensures reasonable terms commensurate with market rates. Still, if the markets are indeed capable of providing what Mr Brown is after, why not?

j.warner@independent.co.uk