LING'S GHOSTLY THOUGHT

Breaking News
Bloomberg, Reuters Face Competition in Data Delivery

 
February 28, 2003

By Kay Larsen
Dow Jones Newswires

LONDON -- Are Reuters Group PLC (RTRSY) and Bloomberg LP heading the same way as the now-defunct telex machine?

That's the claim of upstart rivals that are taking on these two giants at providing fast news and financial data to traders, analysts and other finance professionals who cannot wait for tomorrow's newspapers to find out what's happening today.

That Reuters is under attack isn't news. The United Kingdom-based company has had a difficult few years as the slump in the financial sector diminishes its customer base. On top of that, Reuters has been losing market share. Its key rival, Bloomberg, has largely been seen as the source of its woes.

But a new threat is emerging that could threaten the future of Reuters and Bloomberg. A new breed of companies are developing extremely low-cost systems that use the Internet to deliver data.

The implication for both companies is that problems will outlast the market decline that began in early 2000. When, or if, recovery sets in, Reuters and Bloomberg may struggle to win customers in the new environment.

"In the longer term you have to start asking: Why is what [Bloomberg and Reuters] do needed at all, given that companies like us can deliver it so much more efficiently," said Paul Caplin, managing director of privately owned Caplin Systems Ltd., which develops Internet-based data delivery systems.

Caplin and other new-look players believe in the coming decade, the entire data delivery landscape will see a massive shift as organizations recognize the capabilities of the Internet. Some players are already making headway.

Reuters and Bloomberg dominate the $6.8 billion data delivery market, transmitting real-time market information to the financial-services sector over their own systems. These so-called "thick client" services involve the customer housing a large server computer in its own office, while maintenance and upgrades entail a visit from the vendor company's technicians.

Newer players such as Caplin, however, have developed so-called "thin client" services. Customers don't need expensive software and hardware because the data is delivered over the Internet. With nothing more than a password, the user gains access to data from any personal computer anywhere in the world.

More importantly, the systems are far less expensive.

Bloomberg's one-size-fits-all solution costs around $1,350 a month, while Reuters' top-of-the-range 3000Xtra costs about $1,200. By comparison, a product offered by Amsterdam-based company MarketXS costs around $250 a month. The MarketXS system provides around 90% of the information available on Reuters or Bloomberg terminals -- often more than enough for financial professionals like fund managers and analysts. But the cost is much lower.

Reuters and Bloomberg, along with many of the smaller providers now in the market, distribute Dow Jones Newswires' news on their systems.

The established players don't acknowledge a threat to their business.

Reuters argues that smaller competitors will never be a major threat, especially now that Reuters is moving toward integrating its products onto one delivery platform, a strategy announced with its full-year earnings last week.

"Reuters' scale is the ultimate advantage against these small competitors," said Chief Executive Tom Glocer last week.

Privately owned Bloomberg declined to comment.

Thomson Financial, owned by Thomson Corp. (TOC) and the third-largest player in the global financial-data sector, says it's unlikely to feel any impact as the company operates an open platform for its Thomson One data terminal.

"What we try to be is a solution provider that addresses not only the data requirements but also the technology requirements of the client, whether it's in a Web-browser -- or thin-client application -- or a thick-client workstation application or in a digital feed of data," said Jim Malkin, managing director and chief executive of Thomson Financial Europe.

But upstart competitors believe the proprietary data delivery systems offered by the big players will ultimately be replaced by far cheaper Web-based applications.

At its heart, the argument is about the benefits of integration.

When an industry is immature, companies like Reuters or Bloomberg ensure customers get what they need by creating the total package themselves. But the newcomers argue that as an industry matures, it's far better for companies to focus on the skills they excel at.

Some believe Reuters and Bloomberg have been hit by the Innovator's Dilemma -- a classic piece of 1990s management theory devised by Harvard Business School Professor Clayton M. Christensen. The Innovator's Dilemma arises when a big company is dissuaded by customers from introducing new-technology products because they are happy with the existing lineup and see no need for change.

One day, however, the established player discovers it is losing market share as customers that shunned its suggestions for new products start switching to new lower-cost applications offered by new entrants to the marketplace.

While conventional wisdom is that a company's problems stem from listening too little to its customers, a company can in this instance find itself in trouble because it listened too much.

Some point to parallels between Reuters and Bloomberg's current situation and the fate of the Telex machine. Once the fax machine was invented, nobody needed the Telex private network and the technology disappeared.

In the same way, the massive technology shift brought by the Internet means data no longer needs to be transmitted over proprietary data delivery systems owned by the likes of Reuters and Bloomberg.

                      The New Players 

Dozens of new players are keen to grab a piece of this nascent market.

U.K.-based Caplin, for example, has for some time developed back-end data delivery systems. In January it launched a front-end application called Mongoose that allows users to view Reuters data via a Web browser. Mongoose replicates Reuters' own Kobra data display application used in its top-of-the-range 3000X terminal. Reuters still provides the data, but the cost of delivery is cut in half, said Paul Caplin.

By doing this, Caplin says, Reuters is at least getting some revenue if customers switch to the new-look players. For Bloomberg, however, Caplin says that its strategy of selling data and other services as a complete package at a single price makes deals like this impossible.

"As the number of trading positions are scaled back coupled with the decline in volumes, banks have no alternative other than to seriously consider low-cost, high functionality alternatives such as Caplin," said Ravi Chauhan of financial-services technology consultant Datamonitor.

Financial institutions want to cut their market data bill, and are taking on the MarketXS terminal to replace Reuters and Bloomberg terminals completely or reduce the number required, said Marc Visser, chief operating officer at MarketXS.

MarketXS' business has tripled annually since the company was set up in 1999, with clients including ABN Amro, ING and large private Dutch brokers, he said.

Knowledge Technology Solutions PLC targets fund managers and analysts with its QuoteTerminal product. The company delivers data on equities, foreign exchange, fixed income and derivatives and news from five newswires, including the Regulatory News Service and Dow Jones. The QuoteTerminal domestic U.K. product costs 90 pounds ($142) a month, said CEO Dr. Marc Pinter-Krainer.

Proquote, another product specializing in U.K. domestic equities, was acquired by London Stock Exchange PLC in January. The move suggests organizations that generate financial data will increasingly seek ways to distribute information directly to the customer.

"More and more financial information is being provided in a kind of Web model which doesn't need the aggregation hub that Reuters provides," said Mr. Caplin.

As newcomers make inroads in the data-delivery market, some industry professionals argue that Reuters needs to fundamentally reexamine its core business functions.

"Reuters is primarily a news agency," said Steve Allen, a director at financial-data consultancy DataContent. "In the past 30 years, we have seen Reuters trying to deliver service across the entire financial-services industry. Reuters is now a technology company, a software developer, a systems integrator, an electronic broker, a consultancy firm, a telco provider and, in the past, has even been a hardware manufacturer and TV station."

This diversification has entailed huge costs and left Reuters as "Jack of trades, master of none," said Mr. Allen, adding it was inevitable that smaller, niche suppliers would emerge with narrow product sets targeting the weakest parts of Reuters' arsenal.

Bloomberg's business model raises the question of whether it will eventually suffer the same fate as Reuters.

"Bloomberg does everything so well that it's going to continue with that model for a while longer -- but eventually that model will have to retreat into a higher and higher market niche," warned Mr. Caplin.

(Dow Jones & Co., publisher of Dow Jones Newswires, is a partner with Reuters in data-retrieval service Factiva; Dow Jones Newswires competes with both Bloomberg and Reuters in providing news and financial information.)

-Kay Larsen, Dow Jones Newswires; 44-20-7842-9285; kay.larsen@dowjones.com

(END) Dow Jones Newswires