Rogue Missives -- Wednesday, March 5, 1997 -- Is Real-Time in Time?

Rogue Missives

ROGUE ARCHIVES

Wednesday, March 5, 1997

Is Real-Time in Time?
by Jim Surowiecki (Surowiecki)
The real-time financial information market is not one that most individual investors are lucky enough to have any real experience with. Very few of us have Bloomberg boxes perched on our desks, giving us complicated historical comparisons, nor do most individuals have instant trading capabilities at the touch of a button. But for traders and fund managers, real-time financial information is lifeblood. The better and more sophisticated the information a company can deliver, the more likely it is to win people's hearts.
Even though the market for real-time financial information is relatively narrow, the consequences of the current struggle for dominance of the market will have important ramifications for the way all of us get our news. The specter that looms over all the competitors in this market is the specter of the Internet, the specter of information distributed not through closed-architecture systems for which subscribers pay exorbitant fees, but distributed instead over the Net. It's almost certainly true that some version of the Bloomberg box will be here even after the fight is over, but exactly what that box will look like is far from clear.
The real-time market is currently dominated by three very different companies: REUTERS HOLDINGS PLC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RTRSY)") else Response.Write("(NYSE: RTRSY)") end if %>, DOW JONES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DJ)") else Response.Write("(NYSE: DJ)") end if %>, and BLOOMBERG. (The first two companies are public, while Bloomberg remains in the hands of its founder, Michael Bloomberg.) Reuters and Dow Jones are the largest players in the market in terms of their installed base, but Bloomberg has come out of nowhere in the last four years to establish itself as a serious competitor.
Bloomberg was able to expand as rapidly as it did because it invested an enormous amount of money in the creation of a historical database that allowed traders in commodities, bonds, and stocks to make historical comparisons that had previously been impossible. In addition, Bloomberg also offered the possibility of real-time trading and a financial news service that quickly established itself as one of the industry's standards.
Reuters lagged behind Bloomberg in its development of a historical database, but in the last three years it has devoted its resources to precisely that task, investing literally hundreds of millions of dollars in order to set up a system that, if anything, contains more information than Bloomberg's. The crown jewel of Reuters' vision for the future is Reuters 3000, a stand-alone terminal system analogous to the Bloomberg box which went on the market last year. Reuters 3000's growth has been steady, but still relatively slow, although in its last conference call Reuters suggested that the number of terminals installed was in line with expectations.
Reuters 3000 both builds on Reuters' success in the early to mid-1990s and represents a direct challenge to Bloomberg's precipitous growth. Between 1993 and 1995, the number of installed Reuters screens grew 45%, while Bloomberg -- beginning, to be sure, from a much smaller base -- grew 61%. Analysts estimate that the real-time market is going to continue to grow at an 8% annual clip for the next five years. The rewards of market dominance, then, would be immense.
Of course, there is a third player in this market, Dow Jones, and it's a player that believes it has come up with a plan that will enable it to overtake both Reuters and Bloomberg, even if just about everyone else thinks the boat has sailed and Dow Jones wasn't on it.
The Dow Jones service is called Telerate. The company acquired it over a number of years in the late 1980s at a total cost of something like $1.6 billion. At the time of the acquisition, Telerate and Reuters were the dominant presences in the real-time market, and acquiring Telerate was integral to Dow Jones' attempt to challenge Reuters in the financial information sector. In retrospect, though, the decision seems difficult to justify, in no small part because Dow Jones refused to make the kind of investment in the service it needed in order to keep up with its competitors.
"They weren't investing in Telerate," says Michael Kupinski, an analyst at A.G. Edwards. "They were just reaping the rewards from the cash flow, and not looking ahead to what was going to happen three or four years down the road."
Telerate remains strong in certain areas of financial information, including bonds above all. But, it is certainly the least successful part of Dow Jones, though it is also among the largest parts. While revenues from the company's news division were up more than 70% in the last year, Telerate's revenues were close to flat, and its margins have been dropping ever since Dow Jones acquired it in 1990.
The comparative numbers are extraordinary. While Reuters and Bloomberg were investing hundreds of millions of dollars, Dow Jones was putting just $20-$35 million a year into Telerate. And although Telerate's installed base abroad remains sizeable, during that same 1993-1995 period when Reuters and Bloomberg were enjoying explosive growth, Telerate's installed base grew just 8%.
The lessons here seem to be many, including above all the need to stay constantly ahead of the curve, but one lesson that Dow Jones hasn't learned is that it may not have what it takes to compete in the real-time market. On the contrary, a month ago, even as they announced yearly earnings that were essentially flat, Dow Jones execs Peter Kann and Ken Burenga unveiled a $650 million plan to overhaul Telerate completely.
Dow Jones' stock had actually risen four points in the week before the earnings announcement because of an article in Fortune that speculated on what a disgruntled heiress of the Bancroft family, which owns Dow Jones, might do to improve the value of her holdings. But the combination of weak earnings and a possible $650 million bad investment sent the stock plummeting. It rebounded the next week on the news that investor Michael Price and fund manager Jim Cramer (also of The Street fame) had acquired separate stakes in the company, but the doubts about Telerate have not gone away.
Price and Cramer think Dow Jones should either sell Telerate or, potentially, spin it off. (Price has also floated the possibility, based on apparently no evidence, that Reuters might be interested in acquiring Dow Jones.) Cramer, in fact, wrote a letter to "everyone" involved, saying that Telerate did not merit "additional foolhardy funding." "I felt that it was a misallocation of resources," he says today. "Telerate seems to be the number three player, and whether we're talking detergent or we're talking cookies, you have to be number one or two."
Cramer also thinks that the market for closed-architecture systems is getting smaller, not bigger. "Closed-architecture is on its way out," he says. "But I'm a big Net guy and I don't think these guys are big into the Net. But, hey, let's give the players their due. Maybe they have some master plan I don't know anything about."
Strictly speaking, Telerate isn't a closed-architecture system in the way that Bloomberg is, because you can run Telerate on a Windows network. You don't need, in other words, a Telerate box. But you do need a Telerate line. You can't just go to the Telerate site and call up the information you want.
On the other hand, you can't do that with Bloomberg and Reuters, either. And the success that those two corporations have enjoyed over the last half-decade suggests that it may not be as simple as a closed vs. open question. At the same time, it's also true that it was not until 1996 that the Web fully entered the popular consciousness as a reliable source of information. Remember that it was little more than a year ago that Bill Gates was downplaying the importance of the Internet. In that sense, we may have seen a kind of paradigm shift that will quickly make older models of information distribution obsolete.
For Dow Jones, in any case, the problem is complex. Part of what has happened to Telerate is analogous to what happened with Novell, which had a large installed base in the networking market and chose to rest on its laurels rather than continue to push the envelope. In that sense, Kann and Burenga must believe they can make up for years of lost time. But it's also not clear what else they can do. Spinning off or selling Telerate, as Price and Cramer suggest, is much easier said than done.
"The problem with Telerate at this point is that it's damaged goods," says Kupinski. "There are just very few options for what the company can do. There are just a limited number of potential buyers out there. You could say, why not just spin it off, but the shareholder value may not be there either. And it's more than that. If you do sell it, you run the risk of Dow Jones not becoming meaningful on an international basis, because you're not going to see Reuters distributing the Dow Jones Information Service on its terminals."
Other analysts are slightly more sanguine about the prospects of a reversal in Telerate's fortunes. Ed Attorino of Oppenheimer and Co. has long been critical of Telerate's performance, but he suggests that the new presence of Burenga, Dow Jones' president, at the helm of the service may make a difference. He also argues that Burenga and Kann understand the need to make Telerate as technologically sophisticated as possible.
"They're not going in there to do a tune-up," Attorino says."This is going to be a complete engine overhaul, and if anyone can make it work, then Burenga can. He's a hardnosed guy, more nuts-and-bolts. A lot of Dow Jones' management tends to be more intellectual. But he's a guy who can get things done."
If he can, in fact, get things done, it would represent a dramatic turnaround for a company whose stock price has actually not budged from where it was a decade ago. The bull market has run over and past Dow Jones, while the company has stood still. In 1987, Reuters and Dow Jones had about the same market cap. Since then, the market value of Reuters Holdings PLC has increased 600%, while Dow Jones's market cap has risen... well, really not at all. This isn't a case of undervaluation, either. Consider one pair of numbers: in 1986 Dow Jones earned $185 million. In 1996, it earned $189 million.
Earnings will drop for Dow Jones in each of the next two years, since most of the $650 million is going to come straight out of operating income. If the investment works, then the company will have positioned itself as a real media company for the 21st century. The problem is that Telerate is competing not just against Reuters and Bloomberg, but also against the evolution of information distribution. Who, after all, doesn't find it curious that Reuters had to spend hundreds of millions of dollars just to collect historical data? We live in an age in which information seems simultaneously more important and yet more and more difficult to justify paying for. It's possible that the Web will always remain too inefficient for people, like traders, who want everything right now. But in an era when the Internet is becoming the medium of choice, $650 million for an old model of distribution seems like a high price to pay.

-- Jim Surowiecki (Surowiecki)
(c) Copyright 1997, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool.

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ROGUE ARCHIVES

Wednesday, March 5, 1997
Is Real-Time in Time? by Jim Surowiecki (Surowiecki) The real-time financial information market is not one that most individual investors are lucky enough to have any real experience with. Very few of us have Bloomberg boxes perched on our desks, giving us complicated historical comparisons, nor do most individuals have instant trading capabilities at the touch of a button. But for traders and fund managers, real-time financial information is lifeblood. The better and more sophisticated the information a company can deliver, the more likely it is to win people's hearts. Even though the market for real-time financial information is relatively narrow, the consequences of the current struggle for dominance of the market will have important ramifications for the way all of us get our news. The specter that looms over all the competitors in this market is the specter of the Internet, the specter of information distributed not through closed-architecture systems for which subscribers pay exorbitant fees, but distributed instead over the Net. It's almost certainly true that some version of the Bloomberg box will be here even after the fight is over, but exactly what that box will look like is far from clear. The real-time market is currently dominated by three very different companies: REUTERS HOLDINGS PLC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RTRSY)") else Response.Write("(NYSE: RTRSY)") end if %>, DOW JONES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DJ)") else Response.Write("(NYSE: DJ)") end if %>, and BLOOMBERG. (The first two companies are public, while Bloomberg remains in the hands of its founder, Michael Bloomberg.) Reuters and Dow Jones are the largest players in the market in terms of their installed base, but Bloomberg has come out of nowhere in the last four years to establish itself as a serious competitor. Bloomberg was able to expand as rapidly as it did because it invested an enormous amount of money in the creation of a historical database that allowed traders in commodities, bonds, and stocks to make historical comparisons that had previously been impossible. In addition, Bloomberg also offered the possibility of real-time trading and a financial news service that quickly established itself as one of the industry's standards. Reuters lagged behind Bloomberg in its development of a historical database, but in the last three years it has devoted its resources to precisely that task, investing literally hundreds of millions of dollars in order to set up a system that, if anything, contains more information than Bloomberg's. The crown jewel of Reuters' vision for the future is Reuters 3000, a stand-alone terminal system analogous to the Bloomberg box which went on the market last year. Reuters 3000's growth has been steady, but still relatively slow, although in its last conference call Reuters suggested that the number of terminals installed was in line with expectations. Reuters 3000 both builds on Reuters' success in the early to mid-1990s and represents a direct challenge to Bloomberg's precipitous growth. Between 1993 and 1995, the number of installed Reuters screens grew 45%, while Bloomberg -- beginning, to be sure, from a much smaller base -- grew 61%. Analysts estimate that the real-time market is going to continue to grow at an 8% annual clip for the next five years. The rewards of market dominance, then, would be immense. Of course, there is a third player in this market, Dow Jones, and it's a player that believes it has come up with a plan that will enable it to overtake both Reuters and Bloomberg, even if just about everyone else thinks the boat has sailed and Dow Jones wasn't on it. The Dow Jones service is called Telerate. The company acquired it over a number of years in the late 1980s at a total cost of something like $1.6 billion. At the time of the acquisition, Telerate and Reuters were the dominant presences in the real-time market, and acquiring Telerate was integral to Dow Jones' attempt to challenge Reuters in the financial information sector. In retrospect, though, the decision seems difficult to justify, in no small part because Dow Jones refused to make the kind of investment in the service it needed in order to keep up with its competitors. "They weren't investing in Telerate," says Michael Kupinski, an analyst at A.G. Edwards. "They were just reaping the rewards from the cash flow, and not looking ahead to what was going to happen three or four years down the road." Telerate remains strong in certain areas of financial information, including bonds above all. But, it is certainly the least successful part of Dow Jones, though it is also among the largest parts. While revenues from the company's news division were up more than 70% in the last year, Telerate's revenues were close to flat, and its margins have been dropping ever since Dow Jones acquired it in 1990. The comparative numbers are extraordinary. While Reuters and Bloomberg were investing hundreds of millions of dollars, Dow Jones was putting just $20-$35 million a year into Telerate. And although Telerate's installed base abroad remains sizeable, during that same 1993-1995 period when Reuters and Bloomberg were enjoying explosive growth, Telerate's installed base grew just 8%. The lessons here seem to be many, including above all the need to stay constantly ahead of the curve, but one lesson that Dow Jones hasn't learned is that it may not have what it takes to compete in the real-time market. On the contrary, a month ago, even as they announced yearly earnings that were essentially flat, Dow Jones execs Peter Kann and Ken Burenga unveiled a $650 million plan to overhaul Telerate completely. Dow Jones' stock had actually risen four points in the week before the earnings announcement because of an article in Fortune that speculated on what a disgruntled heiress of the Bancroft family, which owns Dow Jones, might do to improve the value of her holdings. But the combination of weak earnings and a possible $650 million bad investment sent the stock plummeting. It rebounded the next week on the news that investor Michael Price and fund manager Jim Cramer (also of The Street fame) had acquired separate stakes in the company, but the doubts about Telerate have not gone away. Price and Cramer think Dow Jones should either sell Telerate or, potentially, spin it off. (Price has also floated the possibility, based on apparently no evidence, that Reuters might be interested in acquiring Dow Jones.) Cramer, in fact, wrote a letter to "everyone" involved, saying that Telerate did not merit "additional foolhardy funding." "I felt that it was a misallocation of resources," he says today. "Telerate seems to be the number three player, and whether we're talking detergent or we're talking cookies, you have to be number one or two." Cramer also thinks that the market for closed-architecture systems is getting smaller, not bigger. "Closed-architecture is on its way out," he says. "But I'm a big Net guy and I don't think these guys are big into the Net. But, hey, let's give the players their due. Maybe they have some master plan I don't know anything about." Strictly speaking, Telerate isn't a closed-architecture system in the way that Bloomberg is, because you can run Telerate on a Windows network. You don't need, in other words, a Telerate box. But you do need a Telerate line. You can't just go to the Telerate site and call up the information you want. On the other hand, you can't do that with Bloomberg and Reuters, either. And the success that those two corporations have enjoyed over the last half-decade suggests that it may not be as simple as a closed vs. open question. At the same time, it's also true that it was not until 1996 that the Web fully entered the popular consciousness as a reliable source of information. Remember that it was little more than a year ago that Bill Gates was downplaying the importance of the Internet. In that sense, we may have seen a kind of paradigm shift that will quickly make older models of information distribution obsolete. For Dow Jones, in any case, the problem is complex. Part of what has happened to Telerate is analogous to what happened with Novell, which had a large installed base in the networking market and chose to rest on its laurels rather than continue to push the envelope. In that sense, Kann and Burenga must believe they can make up for years of lost time. But it's also not clear what else they can do. Spinning off or selling Telerate, as Price and Cramer suggest, is much easier said than done. "The problem with Telerate at this point is that it's damaged goods," says Kupinski. "There are just very few options for what the company can do. There are just a limited number of potential buyers out there. You could say, why not just spin it off, but the shareholder value may not be there either. And it's more than that. If you do sell it, you run the risk of Dow Jones not becoming meaningful on an international basis, because you're not going to see Reuters distributing the Dow Jones Information Service on its terminals." Other analysts are slightly more sanguine about the prospects of a reversal in Telerate's fortunes. Ed Attorino of Oppenheimer and Co. has long been critical of Telerate's performance, but he suggests that the new presence of Burenga, Dow Jones' president, at the helm of the service may make a difference. He also argues that Burenga and Kann understand the need to make Telerate as technologically sophisticated as possible. "They're not going in there to do a tune-up," Attorino says."This is going to be a complete engine overhaul, and if anyone can make it work, then Burenga can. He's a hardnosed guy, more nuts-and-bolts. A lot of Dow Jones' management tends to be more intellectual. But he's a guy who can get things done." If he can, in fact, get things done, it would represent a dramatic turnaround for a company whose stock price has actually not budged from where it was a decade ago. The bull market has run over and past Dow Jones, while the company has stood still. In 1987, Reuters and Dow Jones had about the same market cap. Since then, the market value of Reuters Holdings PLC has increased 600%, while Dow Jones's market cap has risen... well, really not at all. This isn't a case of undervaluation, either. Consider one pair of numbers: in 1986 Dow Jones earned $185 million. In 1996, it earned $189 million. Earnings will drop for Dow Jones in each of the next two years, since most of the $650 million is going to come straight out of operating income. If the investment works, then the company will have positioned itself as a real media company for the 21st century. The problem is that Telerate is competing not just against Reuters and Bloomberg, but also against the evolution of information distribution. Who, after all, doesn't find it curious that Reuters had to spend hundreds of millions of dollars just to collect historical data? We live in an age in which information seems simultaneously more important and yet more and more difficult to justify paying for. It's possible that the Web will always remain too inefficient for people, like traders, who want everything right now. But in an era when the Internet is becoming the medium of choice, $650 million for an old model of distribution seems like a high price to pay. -- Jim Surowiecki (Surowiecki) (c) Copyright 1997, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool.