Thursday, 27 September 2012

Why the US Election is already over... (and how to arbitrage it)

A quick post today, which isn't really about technology (hmmm, do trading systems count?) but just something that I thought up this week which you might find interesting. After all, isn't a risk-free arbitrage the holy grail of investing?

The US election is already over

US politics is the world's greatest spectator sport. Big money, a year-round season and you never get lockups. Plus you get the final result in one night, rather than having to wait around for the finalists to slug it out for a seven-game series.

That's the only way I can rationalise the fact that the US takes eighteen months and $6bn to arrive at essentially the same decision that the UK manages for $49m. Given there's no public benefit to be gained from an addition $5,951m of electoral friction cost (unless you are political lobbyist), it must be some hideous example of bread and circuses.

But its a funny sport, because even though the season end is more than a month away, we already know the result.

Barack Obama will be re-elected (probably by a shellacking) on 20th November.

Can we move along now and talk about more important things? (like the fiscal cliff?)

So how are you so sure?

If you want to know why, you just to check the market.

I've been an avid follower of the Iowa Electronic Markets for over ten years. Run by the University of Iowa, its one of the world's longest-running real-money prediction markets. They make markets (For purely research purposes of course!) in a select number of political events - largely US elections and nominations.

So not vastly useful if you're a tech investor, but if you follow the soap opera of American politics its gripping stuff. And its amazingly ahead of the curve. In every US election I can remember its called the winner and called them early (2000, 2004 and 2008). In contested nominations too it showed Barack pulling away from Hillary and Romney sailing away from this year's field long before the Bubblevision experts would admit it. Partly this is actually psychological - if you're a journalist a) you don't want to risk being wrong and b) you want to string the story out as long as possible. In contrast for an investor being wrong's not a problem - as long as you're right more often than you're wrong.

So what's the story this year?

This chart shows the price (in cents) for a futures contrast that pays out $1 if Obama (blue) or Romney (red) wins.

In a nutshell, Romney's toast. And has been toast since, to be honest, around the start of August.

If you see a Bubblevision expert tonight telling you next week's debates are a game changer they're wrong. It's game over.

But here's the cool bit

So prediction markets exist and I think they work. But that's not what's cool.

What's cool (as I found out reading last Friday's FT - yes it takes me that long to write things up) that there are other prediction markets, particularly the one run by Intrade, and they give you different odds on the same event.

The latest price on the IEM for an Obama contract is 79.1c, for Romney 20.2c. After this is, give or take rounding errors, a zero sum gain; either Obama wins or Romney wins (or something so bad happens that the election is called off).

But on Intrade you can buy a contract on Obama for $7.51 and Romney for $2.54, paying out $10 if your man wins.

So you basically have two different markets, making different prices on the same asset!

So here's what you have to do!
  • Buy an InTrade contract on Obama for $7.51.
  • Buy 10 IEM contracts on Romney for $2.02. Total trading cost - $9.53
  • Wait until November 6th.
  • When Obama wins you collect $10 on the Intrade contract. Oh and if an act of God occurs and Romney wins you make $10 in the IEM contracts.
  • I make that a guaranteed 4.9% gain (55.2% annualised).
Now there's a couple of catches here. Unfortunately IEM imposes a $500 trading limit (it is purely for research purposes after all) so you can't just blow all of grannys inheritance on this one. Plus there is a $5 sign-up fee for the IEM (full details here). Intrade also charges a $4.99 monthly fee (the fee is charged on the 1st of the month, so sign up next Tuesday to minimise your trading costs).

But its still $14.45 of free money!

Assumes you can get current prices on 2nd November when the next Intrade fee cycle starts.

What we have is an lovely example of an inefficient market, where either a lack of liquidity or an inability to quantify value means that an asset is inefficiently priced. What is cute though is that inefficient prices are readily accessible on two separate, consumer-facing markets.

That's all. Now go off and watch Bill Clinton's 2012 Convention Speech. Whatever your political views, its a masterclass in how to make a complex, serious argument in a simple and humourous (but sharp-elbowed) manner.

And it's great entertainment. That's the point isn't it?

Monday, 24 September 2012

What's wrong with Apple Maps (and when they will fix it)

Anatomy of a problem

Since the release of iOS6 last Wednesday it's been a case of Schadenfreude all round. However I've seen little analysis of what exactly is wrong with Apple's mapping apps. What people are missing is it isn't just a case of "Maps is crap", but rather a number of separate issues, some avoidable but others not.

Having covered TomTom and Tele Atlas an an equity analyst on and off since 2005, I think I can offer an informed view on these issues. So what I've done in this post is to simply lay out the problems, identify what's gone wrong and think about what Apple can do next to fix it.

IssueImpact of issueDifficulty to fixTime to fixHow to fixExample
Poor road detail (TomTom data)xxxxxGet new data from TomTomTickhill
Poor road detail (non-TomTom data)xxxxxxxRevert to local sourcesLack of Tokyo detailGrand Cayman land shapeSanto Domingo road names
PoIs in wrong locationxxxxxxSource improved PoI dataHelsinki parkStadium in wrong placeStarbucks in wrong place
Lack of categoriesxxxxxxxSource improved PoI dataStratford CBD labelled a park
Local businesses not listedxxxxxxxCrowdsource data, more listings dealsBurger King in churchIBM sock picture
Use old namesxxxxxxRevert to more recent dataValley Forge State Park nameHoly Ghost HospitalAldwych tube
TyposxxxxxCrowdsource dataDoncaster named DuncasterFlorence Cathedral typo
Weird 3D artefactsxxxxxxxxHand edit data, get better meshBrooklyn Bridge (OK on Nokia Maps)Severn bridge bad 3D modelEnd of Oxford Street 3D data
Missing texturesxxxxxxxGet more textures85 Walmgate, York, England
Low res texturesxxxxxGet newer texturesYork, England
Non-matching texturesxxxxxxManually grade/match texturesYork, England
Clouded satellite imagesxxxxxxGet newer texturesColchester
Poor routingxxxxxxxImprove / acquire bette algosDirections to San Jose runways
Poor searchxxxxxxxCrowdsource more searches, improve engineAntwerp searchStreet name gives wrong searchMan Utd FC wrong search

Note: More xxx = Biggest impact / harder to fix / will take longer to fix

What's wrong with Apple's maps? (and where did they go wrong)

As you can see from the table above Apple doesn't just have one issue with maps, it has a number of issues. I've broken these down into three rough categories.

1) Data issues

  • Poor road/land data data: Apple maps features a number of cases where roads are non-existent (e.g. the example of Tickill in the UK, flagged in this BBC News article). This also affects coastlines and geographical features (e.g. the shape of Grand Cayman here).
  • Missing or inaccurate Points of Interest: PoI is map-speak for a specific location, normally denoting a place of business someone might want to visit. There's a bunch of different problems here. Either they are in the wrong location, wrongly categorised or not there are all.
  • Typos in place names: Sometimes Apple seems to fall back on outdated data for place names. Other times there are straight (and embarassing) typos.
I think there are a number of different issues here. For some of the problems with roads Apple seems to simply have poor quality data (for a full list of their sources see this page). This is particularly surprising in developed countries like the UK as they are using TomTom mapping data which should have highly accurate road data. My theory is that they have overlaid data from other local sources (e.g. in the UK they cite the Ordnance Survey as another source) which is less accurate.

In less developed countries the opposite is true. Here they appear to have used TomTom data, not realising that they do not have complete coverage and only include major trunk roads. For example Belgrade in Serbia is missing only has major trunk roads. If you zoom to the city in TomTom's data set you see a similar issue.

Missing or inaccurate Points of Interest comes down to one things - either their business directories (sourced from Acxiom) aren't accurate enough. You can argue about whether this was always going to be the case and they could only crowdsource the data once they were live, or whether they should have gone to more local organisations and get the data. Either way the data either isn't there or hasn't been cleaned up enough.

Typos in names are a subset of this. Like with the first category of road data, I suspect they have been overlaying older less accurate sources onto the TomTom data (which is generally pretty good).

2) Texture/imaging issues

  • 3D artefacts: Apple's 3D view, involves overlaying satellite imagery over a 3D mesh. Unfortunately for some objects, particularly for man-made structures like bridges, which leads to some weird 3G artefacting (e.g. on the Brooklyn Bridge). Also where the highest level of 3D coverage (including buildings) ends there is an obvious disconnect.
  • Missing textures: For the Hybrid and Satellite views Apple relies on data from Digitalglobe. Unfortunately there are a number of issues with this, in particular missing textures at high levels of zoom, lo-res textures, non-matching areas where different photos are stitched together. Also some textures are obscured by clouds entirely.
Apple's highest-res 3D coverage (which leads to the worst artefacting issues) was acquired with C3, a Swedish company which was also behind Nokia's great 3D city maps. The problem is that the mesh they are using doesn't look high enough resolution to capture man-made objects like bridges, or hasn't been tidied up enough. It is interesting to note that the image of the Brooklyn Bridge shown above the Nokia Maps engine (based on an earlier version of the same tech) renders the bridge correctly - I suspect Nokia's model was tidied up by hand whereas Apple didn't apply that final bit of finish.

The issue with 3D coverage ending is, to be honest, something of a non-issue. C3 coverage is very limited (and I think will always remain so given the requirement to fly over with a plane rather than use generic satellite imagery, and the need to tidy up images by hand). This means there will always be a cutoff.

Missing textures, like missing PoIs, looks again like a straight failure to get adequate imagery. This should be a commodity - I remember viewing top-down imagery on Multimap back in in 2000. There is no excuse for low resolution, missing or clouded textures - either the vendor or Apple screwed up here.

Non-matching areas where photos are stitched together is more forgivable. This is an issue which Google used to have on Google Maps and Google Earth all the time (IIRC they only updated color-graded textures to get round this a year or so ago). Largely a non-issue.

3) Software issues

  • Poor routing: Turn by turn driving instructions sometimes take people to the wrong destination (or not quite the right destination - e.g. the runways of San Jose airport).
  • Poor search: Searching for an address can give incorrect results. Searching for a fuzzier PoI even more so.
In some ways poor routing algorithms in a v1 product are forgivable. Google has similar problems when its turn-by-turn was first released in 2009. In other ways though this is again something Apple could have nailed from the outset - a quick glance at the number of different turn-by-turn apps (from TomTom to Navteq to Navigon to Sygic) shows that even relatively small companies can get this right. With Apple's resources (and given they were apparently working on iOS maps for many years) you would have thought they could have got this one right.

Similarly getting search right from the off wasn't a given, and this will obviously improve once Apple starts to get a decent amount of user data to work with. But the current algorithm does look particularly crude (whilst searching for Christchurch, Mayfair (London) whilst standing in the Church building I get the Mayfair park in Christchurch New Zealand - surely a simple bit of GPS would have figured out I was searching in London?).

How does Apple fix this?

Just as the problem is really a bunch of different issues, so are the solutions (which I summarised in the table at the start of this post). The good news is there are some easy wins, particularly being smarter with the map data Apple already had. The problem is there are other steps which are harder or will take time. I think its unlikely that Apple Maps will be fit for purpose until well into the New Year. I think some of the bigger problems may not even be fixed until iOS7 hits next year.

  1. Be smarter with the assets you have: For the basical map data issues a lot can be improved by being smarter with what they have. The most obvious fix will be to flip to the TomTom data in countries where is is good (basically the US and Western Europe) and prioritise local data vendors elsewhere.
  2. Get better assets: As I said stuff like textures and PoIs should have been better on day 1. First thing they need to do is get their chequebook out and secure some higher quality imagery. Similarly with Points of Interest - its clear that Acxiom and Yelp are not enough.
  3. Wait the wisdom of crowds: Another obvious route to improvement is to wait for the crowd-sourced data to come in. This will help both underlying data quality and search quality. Apple should act to accelerate this process, for example by making the report-a-problem button a bit more prominent (maybe rename "suggest an improvement") or give it a cooler rebranding (like TomTom MapShare). The problem is this takes time to kick in (although hopefully small business owners will have the sense to register their corner shops ASAP), and Apple will need at least some manual vetting of the data before it goes live.
  4. Build bridges: What people often don't realise is that the hardest thing about building a digital map isn't driving all the roads. In fact most digital mapping wasn't originally done with cars (far too expensive) - rather it was done by building relationships with thousands, utility companies, transportation companies and government agencies to get their data. Apple has tried to shortcut this process by going to the existing mapping providers but either the data is not up to scratch or they have failed to integrate it properly. Therefore a longer-term solution will be to go straight to the source. This doesn't mean they have to build their own map from scratch - but rather they need to build those crucial partnerships so they can get the data that matters from all the other stakeholders to build on what they have already.
  5. Acquire more mapping assets: Apple need to get better and it needs to get better fast. Now M&A is not (as investment bankers would suggest) the solution to every problem, but it could help Apple here. Jason Perlow at CNet put up a very good post over the weekend outlining some avenues for investment. For my part I would add that TomTom is an obvious fit because it brings Apple the bridges it so desperately needs, and a top-notch turn-by-turn routing engine into the bargain. Yes they currently licence the data but owning it and having deeper access could make a big different to the quality of Apple's offering.

The ball is now in Google's court

After spending a good few weeks getting their head kicked in over the Samsung, trial, Google would have enjoyed the last week.

For them the near-term issue is over what to do with their iOS Google Maps (they obviously have a working app - at worst, the old iOS5 one). To keep it off the iPhone would be fun, but long-term stupid as its clearly in their interests to have the iOS user base going past their web properties and not Apple. My hunch is they let iOS6 users stew for a couple more weeks to appreciate how bad the current version of Maps is, and then release it before Apple has had a chance to make major improvements. That way they get the best of all worlds - they keep the installed base, and leave users with a profoundly negative impression of the Apple's app.

The longer term issue is how to keep iOS users installing Google Apps and using Google Services. I suspect this means they have to start bringing at least some of the features Android users have enjoyed (turn-by-turn, vector-based maps, offline caching) to their iOS app. By finally opening up Google's iOS map to competition, it will force it to improve.

So ironically Apple's failure with Maps may actually help iOS users - by giving them a better Google app.

Thursday, 20 September 2012

Bloomberg eats the world

Quick Edit (3rd Oct): As a coda to this series I've put up a more detailed valuation analysis of Bloomberg (if you want the short answer, its $46bn with a wide corridor of uncertainty). For more details check it our here!

Stop. Read. This is important.

Over the past week I've been writing a series on Bloomberg, probably the largest cloud company in the world (and definitely the largest cloud company you've never heard of). If you haven't read them it's worth doing so - if you care about finance, tech and cloud computing you will almost certainly find something in there that will surprise you:

In the last post I want to outline where Bloomberg is going to go next. It's increasingly clear they want to move beyond being "just" a terminal provider. That has serious implications for the industry.

For anyone who works in an investment bank, Bloomberg might be about to become your biggest competitor.

Mr Bloomberg has a problem

Overall Bloomberg has had a good crisis. As my analysis of their financials shows, they seem to have been able to grow revenues consistently through the downturn. Even in their worst year (2009) it looks like revenues grew 1%, and terminal volumes were only down 2% (albeit helped by some M&A - stripping out the BusinessWeek acqn presumably revenues would have declined 2009). That's doubly impressive given their business model is almost entirely exposed to Wall Street headcount. By pursuing an aggressive overseas expansion strategy, it looks like they have been able to ride out the worst of the turmoil in their home markets.

Nonetheless compared to competitor Reuters, the trend is impressive. The chart to the right shows Bloomberg's group revenues ($mn) vs. Reuters' Markets Division (NB 2008 is proforma for the Thomson-Reuters merger). While the businesses are not wholly comparable (e.g. Reuters does not operate Bloomberg's physical terminal leasing model), it looks like Bloomberg has taken advantage of the crisis to leapfrog its biggest rival. As a private company Bloomberg has had the luxury of being able to invest heavily into the downturn, at a time when most of its listed competitors are having to cut back in order to hit market earnings targets.

However at the same time the crisis has presented a fundamental challenge to Bloomberg's model. I would characterise Bloomberg's historic model as "money for old rope". Although its terminals supplied a vast array of complex analytic capabilities, in my experience the majority of its users simply used it for 1) news, 2) stock quotes and 3) instant messaging. At the time this was great business for Bloomberg because customers were happy to stump up over $20,000 a year for the privilege. In effect they were buying a Cadillac and then using it to drive to the corner shop.

Of course in a downturn customers get meaner and keener. Volumes naturally fall as they shed staff (Lehman brothers alone used 3,500 Bloomberg terminals), and despite Bloomberg's moats they might - quelle horreur - even consider cut-price alternatives like S&P Capital IQ. If all they are using is news, quotes and messaging, they might be willing to take the competitive hit of moving off the Bloomberg platform in favour of saving a few pennies.

The solution for Bloomberg is obvious. They need to drive deeper into the customer, and get them using deeper functionality which a cut-price competitor like Capital IQ cannot provide. In effect they need to enter new (but adjacent) markets.

The problem is these markets are inhabited by some of Bloomberg's biggest customers.

Bloomberg's solution is to dig deeper

In fact Bloomberg has been pursuing a two-pronged approach to driving revenues. It has been trying to go both deeper and wider into its customers.

  • Wider: Attack entirely new markets/verticals, in particular legal research (through its $990m acquisition of legal research house BNA) and government (through the launch of its Bloomberg Government subscription service).
  • Deeper: Provide more services in its native finance vertical, such as industry research, corporate access and trading.

This post is less concerned with Bloomberg's move to go wider. That is not to say its unimportant - the BNA move was probably its biggest acquisition ever, and put it into a head-to-head fight with incumbents LexisNexis (owned by Reed Elsevier) and WestLaw (owned by Thomson Reuters). The government move is also fascinating - I am always bemused by the vast sums of money spent on elections in the US (here in the UK we can do a perfectly free and fair general election for thirty million quid). And despite the vast spending the whole Beltway set-up sounds like a bit of a cottage industry (or maybe that's just the West Wing version), presumably a ripe market for a big, data-heavy player like Bloomberg.

However I am more interested in Bloomberg's push to go deeper into the market, as this is where the conflicts are most fascinating (and remember, this blog is all about conflicts). In the past few years I've noticed Bloomberg launching an increasing number of initiatives aimed at increasing its footprint with its financial customers:

  • Bloomberg Industries: Over the past few years Bloomberg has been building up a stealth equity research platform, Bloomberg industries. It provides industry and stock research on a wide range of sectors (more than many bulge-bracket investment banks), and has recently gone global. While they do not provide direct Buy/Sell recommendations (to avoid competing against their customers at brokers), the product looks much closer to broker research than conventional industry research (e.g. by IDC and Gartner in the tech space). As they say themselves, the staff are mainly experience buy and sell-side analysts. If you want more of a flavour of the personnel, just do a quick Linkedin search.
Bloomberg Industries research - isn't this what we have Sellside Analysts for?
  • GLG tie-up: A prototype of the Bloomberg Industries rollout was its earlier tie-up with Gerson Lehman Group, the (in)famous "expert networks" provider. Again this helps provide customers the sort of industry scuttlebutt previously purveyed by research analysts at banks. In fact given the negative publicity over expert networks coming from the Galleon trial I suspect that Bloomberg have more of this field to themselves, with investment banks rethinking their involvement.
  • Corporate access: Corporate access (bringing company management's round on roadshows to current and potential investment) is another staple of the large investment banks, who traditionally act as intermediaries between companies (who are their clients on the investment banking side) and investors (who are their clients on the broking side). Bloomberg are now muscling in on this area. I was particularly interested to see a firm run by an old colleague from Morgan Stanley signing a European alliance with Bloomberg for corporate access.
  • Bloomberg Vault: Given the volume of communications which run through its Instant Messaging platform, an archiving and compliance solution was something of a no-brainer. Lo and behold Bloomberg has launched Bloomberg Vault. Having previously covered Autonomy (which had a thriving archiving business with investment banks) prior to its acquisition by HP, I can say this is definitely a great cloud business. It also has the handy advantage of being counter-cyclical - when things get worse the lawsuits mount up and banks suddenly need to cover their ass on the compliance front!
  • Bloomberg Tradebook: And of course we shouldn't forget Bloomberg's existing broker-dealer business Tradebook. While this isn't anything new (it apparently had $420m of revenues back in 2007). Given Bloomberg's ability to invest in the business through a downturn without having to worry about public earnings expectations, I'm not surprised to see them making an international push with this business at the moment.
Bloomberg's trading floor - sure looks like a bank to me. Hey they even have Bloombergs!
  • Consensus data and financial models: In the last few years as a Bloomberg user I've noticed a marked step-up in the quality of company-specific data which Bloomberg provides. In particularly they moved away from IBES in favour of providing their own consensus estimates. Also the quality of the financial models is much better - they will now give you a spreadsheet where you simply input the ticket of your company and it will download and fully populate a model with full quarterly and annual financial statements. That's invaluable for investment research if you want to do quick-and-dirty analysis on a company you're unfamiliar with - and also short-cuts the normal buyside procedure of pining a friendly broker for their model.
The problem is these moves pit Bloomberg in direct competition against some of its biggest customers.

Bloomberg eat their customers

What's clear about these initiatives is they (with the exception of Bloomberg Vault), they bring Bloomberg into more and more competition with brokers and investment banks.

Note Bloomberg has two breeds of customers. Those on the "Buy-Side" (primarily fund managers) gather assets and invest them. Bloomberg does none of that and doesn't want to. However those on the "Sell-Side" (investment banks and other brokers) exist to provider services to fund managers to facilitate their investment.

Well that's also Bloomberg's job description.

I would imagine Bloomberg's response to this is twofold (and yes I am putting words into their mouth here):

  1. We are not directly competing with brokers - note that their Bloomberg Industries analyst do not give buy/sell recommendations like Wall St analysts do. However in reality much of the value of sellside brokers is not tied to their recommendations. Sure some analysts earn a reputation as stock-pickers, but I've seen other number 1 ranked analysts which have been appalling at calling their stocks, but very good at in-depth industry insight. That is precisely what Bloomberg Industries claims to offer (albeit with a slightly more data-driven bias). Plus there's the simple fact that many functions such as Bloomberg Tradebook, roadshows and generating models do compete with what investment banks offer, fair and square.
  2. Even if they we are coming after you, actually what we are doing is the mundane maintenance stuff (consensus estimates, maintenance research, roadshows). We are actually freeing your hot-shot analysts from tedious jobs so they can write proper differentiated  research. Unfortunately the reality is that for investment banks it is the mundane maintenance stuff which pays the bills. When I was an analyst I could never quite understand why buy-side firms gave so much of their vote to roadshows - it wasn't particularly hard for the analyst to arrange (it was basically a glorified exercise in logistics) and presumably if you were a big enough fund you could ring up the company and set up the meeting yourself. Maybe it was the convenience factor, but anyhow this is clearly a very high margin line of business for a broker. Similarly with maintenance research - every quarter we would do a bog-standard sector earnings preview which seemed to the epitome of commodity research. But when we were a few days late getting it out clients would ring up asking where was the preview. In effect this is "money for old rope" business.

And Bloomberg want a piece of it.

Taking a step back, the great value of the modern investment bank is twofold. First they provide capital (and therefore liquidity). Secondly they provide a network. They know the corporates, they know the investors they should roadshow to. They know who is selling a stock and they know who would like to buy it.

Now it might just be the times we are living in, but there is a shortage of capital out there. This erodes banks previous advantage - they can no longer leverage themselves to buggery in order to facilitate client business (and/or take bets on the side). But the second advantage - the network - is something that Bloomberg can provide. Through their messaging platform they now reach everyone who matters. If a corporate wants to arrange a roadshow Bloomberg can scour their database of holdings and figure out who owns a company's stock. Add in a dose of predictive analytics and they could probably figure out who would like to buy that company's stock.

As I said, Bloomberg eats its customers.

Maybe the customer's baseball bat isn't as big as it looks

Take one step closer and I'll use it I swear!
Of course the customers still have a great big baseball bat they can hold over Bloomberg. The banks are all big customers of Bloomberg, so in theory if Bloomberg started stepping on their toes too dramatically they could take their business elsewhere. That should - in theory - hold Bloomberg in check.

But then again maybe its not that bad.

Its worth thinking about Bloomberg's exposure to the big banks (who I think are the firms most likely to push bank; smaller firms would probably be quite pleased to see Bloomberg taking chunks out of their bulge-bracket competitors). According to the NY Times, Lehman had c3,500 Bloomberg terminals before the crisis and they were a mid-sized global investment bank. I would imagine other banks would have been larger, but then they would have slimmed down since then. Maybe an average of 3,500 terminals today is a decent proxy. If so then that would imply the nine global banks (Goldman, Morgan Stanley, JPM, Citi, Merrill, UBS, CS, Deutsche, BarCap) have roughly 32,000 terminal between then or just over 10% of Bloomberg's total.

Thinking about it that way, the VAR (Value at Risk) doesn't actually look that bad. After all they couldn't completely cut their spending (Bloomberg is too deeply embedded in their customers to that - remember what I said about their moats). And for Bloomberg while revenues from new offerings might not immediately make up for any shortfall, in the long term it gets them into new markets, and makes their revenues stickier so  (i.e. - it improves earnings quality).

In short this epitomises the Innovator's Dilemma. Bloomberg has offerings which potentially cannibalise its existing business. But there is enormous upside if they could disrupt the market and succeed.

Bloomberg could go even deeper

Actually I think Bloomberg's existing offerings only scratch the surface. I think there's a whole bunch of other areas (both for buy-side and sell-side) they could enter or expand their existing offering.

  • CRM: At every bulge bracket I've worked with there's been a clunky, homebrew CRM system where you can click to register you client calls, send voice-mails or blast emails. I've always wondered why everyone doesn't just suck it and move to Anyhow if they do outsource then Bloomberg would be the perfect trusted partner to provide this. Heck the majority of client communications probably go through their messaging already.
  • Content management: Actually Bloomberg are doing this already (most investors pull pdf notes from Bloomberg rather than from broker websites). But there is definitely room for Bloomberg to bulk up the content management side, add analytics and maybe even get embedded in the publishing workflow.
  • Portfolio management and prime brokerage: Offering buyside clients portfolio analysis and risk-managements tools on a SaaS basis is something they do already but could always do more. In particular I was piqued by a story I read this week about Scotiabank expanding into prime brokerage using a third-party IT solution. Prime brokerage (basically outsourced trading, lending, custody for hedge funds) strikes me as precisely the sort of high-margin business Bloomberg would want to get into. With their huge cash resources Bloomberg certainly have the balance sheet to facilitate this, and it sits nicely with their existing broker-dealer business.
  • Equity distribution: This is the blue-sky one. Its frequently been noted that underwriting and distributing IPOs is incredibly profitable business for banks. So long as you get the pricing right, there is very little risk (if the stock won't sell you just pull the offering), and historically only the big banks have had the buyside contacts book to find the buyers. Of course there are certain regulatory hurdles here, but its not as off the wall as you think. In my time I've seen a number of forays by bond or money-market dealers into equities (e.g. ICAP, Cantor Fitzgerald). Normally they peter out because the challenger lacks the resources and resolve to stick with it - not a problem for Bloomberg.

Why this matters for investors

Of course as a common-stock equity investor why should you care? After all Bloomberg is private and has always been private. It doesn't affect you right?

I think the reasons should be obvious.

  • If you are investing in Thomson Reuters, Reed Elsevier or any company which Bloomberg competes in, you should want to know what their biggest competitor is up to.
  • If you are working at an investment bank or at a fund manager you will want to know what Bloomberg is up to, because one day they may be either your biggest supplier or your biggest competitor.
  • If you like buying hot tech IPOs you should be doing your research now, because at some point Bloomberg is going to go public. In particular bear in mind that Michael Bloomberg steps down as NYC mayor at the start of 2014. Assuming he's not going to run for the Presidency (he'll be 74 in 2016 - Reagan was only 69 when he was elected) he seems likely to leave public life. This means his Bloomberg stake becomes unlocked and all bets are off. A mid-2014 IPO would be the obvious option.

In short, you should never underestimate Michael Bloomberg.

Edit: One related thought which occurred on the way to the shops this morning. Bloomberg and Linkedin are a match made in heaven. If Bloomberg's pitch is that it can provider a better network than the banks have, then Linkedin gives them the best network in existence. If their strategy is to broaden into other industries, Linkedin gives them that network in any vertical they can name.

Of course its not going to happen at the moment because a) Bloomberg will believe they already have a damn good net work in the financial world (they do) so why pay a take-out premium to replicate it and b) LNKD has a $13bn market cap so would probably cost >$16bn to take out - much more than Bloomberg's cash reserves. But if the stock ever got bombed out (hey, the P/E's only 1050x at present) it would be a mouth-watering deal.

Capricious Apple

Wrong turn

Hmmm. When I wrote about the risk of Apple looking capricious on Monday and said we'd see this more and more, I wasn't expecting it to see new examples of it until at least iOS7.

Seems I was wrong.

I actually got a hint of it last night. I tried to looked up my church (Christchurch Mayfair) on a freshly-iOS6'ed iPhone. While in the building.

Maps then took me to the car park for the Mayfair Swimming Pools.

In Christchurch.

New Zealand.


Why a "fix" doesn't fix it

Now I'm sure Apple will sort this out over time. Good maps rely on crowd-sourcing for points of interest, so it was always going to be a bit rough at the outset.

But even if Apple "fix" the problem the damage runs deeper than that.

By deliberately downgrading users from the Google Maps to a nakedly inferior offering, Apple have very publically put their corporate interests (get Google off the homescreen) above those of their users (provide them with the best mapping experience).

While that might make excellent business sense, the problem for Apple is their walled garden model is build on an implicit pact with the customer: "I'll let you dictate what I'm allowed to do, because I trust that you are acting my best interests."

Instead Apple are very openly breaking that pact by acting in a cynical and arbitrary manner

In short, they looks capricious.

Wednesday, 19 September 2012

Facebook - What are you doing??


Browsing Facebook late last night, and this was the first thing that splatted up (full sized version here):

Untargeted Advertising

For all Facebook's mis-steps the one thing they should be really good at is targeted advertising. They know more about you then anymore. They know what you like, they know who you like, heck they've even ransacked your address book! (without asking your permission, of course)

Which is why I'm surprised to see them pitching me a Nutri Centre Luxury Goody Bag. Look I'll lay it out straight - I'm an early-thirties middle class male. I like playing video games. I've recently regressed back to childhood and started building model tanks. I'm a (very) occasional roller-hockey player.

I have no idea what the main COLOUR of the label for Wild Rose and Lemon Leaf Deodorant is.

And Facebook know that. But given all that, the best their cutting-edge algorithms can come up with is the fact that a guy I was at uni with over a decade ago likes Tesco (he's a hot-shot PR so he'll probably like anything for a fee), and therefore Tesco should spam me with a generic, utterly untargeted Nutri Centre Luxury Goody Bag?

Now to be fair, it could be Tesco's fault. Maybe they told the Facebook sales rep "Nah we don't want the uber targeted advertising which hits exactly the people who want to buy their products and who live near their stores on the day do their weekly shop. Let's just spam everybody with Nutri-Bags."

And to be fair their ad has good screen coverage (albeit on a low-res 11.6" panel). I calculate that the main ad covers 18.4% of the screen, and the little one on the side covers another 4.6%. In contrast the banner ad at the top of the Daily Telegraph page only covers 6.3% of the screen. But if Facebook's strategy to boost their ARPU is to simply spam four times as much screen real-estate as their competitors, then they have a real problem.

Edit: And my wife also keeps getting adverts for spamming her mobile Facebook. Why Facebook would think a Soil Mechanics PhD student would be interested in a buying an SME-focused SaaS CRM platform is entirely beyond me... #dataminingfail

Facebook's Innovation Gap

But I think its more likely that Facebook simply haven't got their act together. One problem I identified a while back is Facebook seem to have dropped the ball on the innovation front. Their App Platform has stagnated pretty much since Farmville. And I was always bemused why it took them so long to bring out a (not very good) iPad app.

This feels like the same thing - they should have built a killer kick-ass advertising engine. Maybe they're getting there with the launch of Ad Exchange and a new stealth ad network.

But if this is the current State of the Art for the Facebook Platform, I can see why their ARPU is only a fraction of Google's.

Right back to working on Bloomberg!

Tuesday, 18 September 2012

Inside Bloomberg's secret financials

Blind men and elephants

As I'm wrapping up my week-long series on Bloomberg, I just wanted to put up a little bit of analysis on Bloomberg's financials, as I haven't seen anyone else do this before.

As I said in my first post on the subject, Bloomberg are notoriously cagey about their financial data. It's interesting that their official About page tells you lots about what they do, but very little about the company itself.

But occasionally you get little peeks under the Kimono. For one tantalising year Merrill Lynch (at the time a 30% shareholder) disclosed more detailed financials about Bloomberg in their annual report (albeit aggregated with a couple of other equity stakes - see p116). A Fortune article just before the credit crisis got access to revenue numbers (which by and large corroborate with the ML data) and made some guesstimates about profitability. And there were a few more tid-bits in this Vanity Fair piece. More recently revenue numbers (which seem to be quite widely circulated internally) have come out as scuttlebutt in the NY Post (note I do not generally use the Post as a source for investment advice!! But needs must...).

Overall its like blind men feeling the elephant.

Anyhow, here's what the elephant looks like from where I'm sitting:

Note - Table updated 20/09 (see comment below). Original available here.

The small print

Okay so a few obvious disclaimers.

  • A lot of this is based on assumptions and educated guesswork. I can't claim the source data is consistent or, for that matter compliant with Generally Accepted Accounting Principles. (So its basically as reliable as an average Wall St Analysts' estimate then! :-p )
  • Cells highlighted in orange are ones when I have had to plug in a blatant guesstimate - normally revolving around details about profitability. Generally I have tried to interpolate the data I have, or extrapolate from the most recent hard numbers.
  • In contrast cells highlighted in blue are ones where I have reasonable confidence about the source data - either becomes it comes from more official channels or because a couple of different sources triangulate together.
  • As I mentioned, the biggest issue is about figuring out Bloomberg's profitability. As I said they sometimes open the kimono about revenues but have NEVER talked about profitability. The only hard data we have is the ML data for 2005-07. This is cleanest in 2005, partially impacted by the consolidation of a Blackrock stack in Q406 and wholly impacted by this in 2007. I have tried to strip out the impact of this stake. From that I can at least figure out opex /employee and use that to make educated guesses about margins in other years (number of employees is ocassionally disclosed).
  • Most of the data generally looks sensible, with the exception of the jump in revenues between 2007 and 2009. Partly this would be due to the acquisition of Businessweek, but given revenues for this unit were only about $130m that can't make up all of the increase. Maybe there were other acquisitions bulking it up, or maybe there was just a big bounce back in 2009. [EDIT 20/09 - found some more reports talking about Bloomberg's 07/08 revenue growth so I feel more comfortable with these numbers now. Have updated the table to reflect this.]
But even with these issues I think the underlying shape of the beast is clear. You have a $7bn+ revenue company running at an operating margin above (and most likely significantly above) 30%. It employees 15,000 people and has over 310,000 users of its terminals in circulation.

Not bad for a cloud company. Remember cloud poster-child is worth $21bn on a mere $2.2bn of 2011 revenues (albeit growing at a stonking 37%). Salesforce has 8,000 employees and reported zero operating profit (because two thirds of revenues were spend on sales costs to drive that stonking growth). As CEO Marc Benioff wrote in the annual report And I’d like to thank all of you, my fellow stockholders, for your confidence in as we strive to reach our goal of becoming the irst enterprise cloud company to achieve $3 billion in annual revenue.

Someone clearly forgot to tell him that Michael Bloomberg got there eight years ahead of him.

Analyzing Bloomberg

Putting my analyst hat on, a few things occur to me:

  • Customer concentration is a risk. With only 310,000+ individual users at a rev/user of $24,000 its extremely concentrated. Note that when Lehman went down they had over 3,000 Bloomberg terminals, roughly 1% of Bloomberg's entire revenue. Even a Amaranth, a mid-sized hedge fund, had over 200 terminals. And of course the fortunes of all those customers tends to be extremely correlated. Although Bloomberg seems to have grown through the crisis (helped by acquisitions) it certainly must have been dicey at times.
  • But customer concentration also helps margins. However there's also a bright side to that. Sales and marketing costs are normally a significant part of the cost base for enterprise software companies (20% of revenues at SAP, 22% at Oracle and of course a whopping 67% at For someone like Bloomberg however it will be a lot less intensive - the larger customers like investment banks will already be fairly captive, and only need a finite number of S&M resource. In contrast smaller start-up funds will already know that they need a Bloomberg. I would wager there is some cost involved around marketing new services and offerings, but I doubt it will be anything like levels.
  • Bloomberg should be highly profitable. Mature cloud computing companies are some of the most profitable businesses out there. Like transaction processors, one you have dropped the initial capex building the data centre (or renting it from Equinix, as Bloomberg do), the marginal costs of running the business (both in terms of P&L cost and capital intensity) are very low. As one of the more mature cloud vendors out there I don't think Bloomberg will have any problem producing cash margins of over 30%.
  • Bloomberg has a huge cash pile: Even if you assume Bloomberg were paying a full whack 30% tax rate on their profits (its seems to have been lower in the 2005-07 disclosures) they have generated nearly $12bn of cash over the last ten years (if you assume net income = cashflow, which is a reasonable assumption for a software company. Note the last ten years analysis - this is the time in which Michael Bloomberg has been in politics and has had his Bloomberg stake locked up in a blind trust - i.e. he wouldn't have been taking out dividends on that. Less whatever M&A Bloomberg has done, it should all be sitting on the balance sheet. This gives them enormous strategic flexibility.

Valuing Bloomberg

To finish I just want to update the valuation of Bloomberg I put up in my first post.

To recap I'm not doing anything fancy - I thought about using a bunch of carefully picked comps and/or extrapolating the relationship between software company P/E ratios and operating margin. But that's all a bit complicated (remember more complexity can often mean less accuracy not more. Occams Razor FTW!).

I simply assume a Price/Sales multiple of 10x the operating margin (more explanation on that here) and a trailing P/E ratio inline with the S&P 500. I would wager good money that Bloomberg's growth prospects and cash-rich business model makes it a higher quality than the average S&P 500 stock, but lets be conservative. I'm not trying to nail down precisely how much Bloomberg LP is worth, but trying to make the point its worth a helluva lot more than you think and that is why you should be aware of it.

Similar to what I wrote before, Bloomberg is worth something in the region of $27-31bn Enterprise Value. But what I forgot to add in was the value of the net cash sitting on the balance sheet - even assuming a 30% tax rate on historic cash generation that gets us to a total Equity Value of more like $38-42bn.

Interestly Facebook's currently worth $48bn.

So Bloomberg isn't just the biggest cloud company you've never heard of. It's one of the biggest cloud companies - period.

Monday, 17 September 2012

Apple's Innovator's Dilemma

Like the iPhone 5, a more evolutionary note today. Before I plunge back into building my Bloomberg model, I want to expand on some of the points raised at the end of my last post framed through the lens of the Innovator's Dilemma 

Why too many lampreys are a very bad thing

Anyone for the lamprey pie?
Henry I of England memorably died from "a surfeit of lampreys". Apparently he was  of which he was so fond of this medieval delicacy that one Christmas he gorged himself to death on them.

That's a lot like an Innovator's Dilemma - its kind of a nice problem to have, but it could ultimately kill you.

I wonder if Apple is showing some symptoms.

Three challenges facing Apple

1) Apple's installed base restricts how revolutionary they can be.

Now the dust has settled after the iPhone 5 launch, two things are clearly. First the damn thing is going to sell like hotcakes. Second its actually a bit dull.

Now the "meh" factor was partly due to the torrent of leaks we've seen over the past few months. But it was more because this was a clearly evolutionary design. The design language and software are largely unchanged since the iPhone 4 in 2010 - this year's model is just a little bit longer and faster.

Apple's evolutionary approach, interspersed by occasional revolutionary leaps such as the iPad and the original iPhone, is often held up as a virtue. But as its installed base continues to ramp up, it is also becoming a necessity. With and installed base of over 400m iOS devices Apple find it harder to make dramatic jumps (think of it as a "non-burning platform").

I think the new iPhone's screen evolution is a good example of this. Apple clearly had to bump up their screen size this generation, but took the unusual step of making it longer but keeping the same width:

"Do I look skinnier in black?"

Why? Well there's a lot of bullshit bandied around about one-handed operation (I can use my 4" Atrix fine with one hand thank you). I think its actually more to do with installed base inertia.

If they had made it wider they would have either had to sacrifice pixel density, or accept some sort of crappy up-scaling solution for the long-tail of App Store apps which don't update. This is because, unlike Android (which has always pushed for resolution independent apps), Apple devs have historically only coded for 2-3 different screen resolutions.

Keeping the screen width the same but letter-boxing the ends of legacy apps is an elegant solution, but is ultimately a compromise. It means Apple is not playing in the market for 4"+ mobile devices (and believe me there is a market there - just ask Samsung). This is the Innovator's Dilemma in a nutshell - drag from the installed base (ensuring legacy apps look good), restricts Apple's ability to access new markets (big-screen smartphone users).

2) Apple's hardware-led model makes it harder to roll out new features

Building on what I wrote in my last post, Apple's hardware-led model has one great weakness. It is that they need to ruthlessly segment their products to push customers towards newer (and higher-margin) devices over older more commoditised ones. In the absence of significant hardware innovation, this means that the differences are likely to revolve around software features. Siri - originally restricted to the iPhone 4S despite running perfectly well when hacked onto the iPhone 4 - was a good example of this.

Free Turn by Turn - Unless you're running a '4!
This year there were more signs of this. In particular devices older than the iPhone 4S will not receive turn by turn navigation. As with Siri there is no hardware rationale behind it (lower-specced Android phones have been running turn-by-turn since 2009). It is a pure business decision.

Now that is good practice in terms of product segmentation if you are a hardware vendor. However it is bad practice if you are a software vendor fighting an eco-system war. For example with the latest price drops the original iPhone 4 could well be Apple's secret weapon attacking the budget market. However stripping it of this feature makes it less competitive versus budget Androids.

Similarly Siri. If Apple really thinks its ready for prime time they could put it into the hands of 400m iOS users at the flick of a switch, but the need to maintain hardware segmentation means they just can't do that.

Again we are seeing the Innovator's Dilemma at work here. Apple is held back from doing things that are good for its future prospects (building a stronger software eco-system), by the need to defend its existing hardware-led business model (making the latest models more desirable).

3) Apple ends up looking capricious

Apple's Innovator's Dilemma has unintended consequences. One obvious one is that they end up looking capricious, destroying goodwill with end users.

I first noticed this when iOS 3 rolled arrived in 2009. One of the useful new features was to show exact battery-life percentage at the top of the homescreen, rather than a craptastically imprecise icon. It was one of the small things that would actually be damn useful on my year-old iPhone 3G. Good on Apple I thought:

Battery indicator... Before and after.

Then I installed the update and found that the percentage meter was iPhone 3GS only. My 3G remained stuck with the craptastic icon. Now there was clearly no technical reason for this - it was an entirely arbitrary decision, presumably made to further the segment the identically-looking 3GS from its predecessor.

At that point Apple looked entirely capricious.

Now that's different from being arbitrary. Often Apple are completely arbitrary because they believe they know what's best for the user. Steve Jobs famously dismissed the user of focus groups because "people don't know what they want until you show it to them". Part of the implicit social contract for an Apple customer is "I'll enter your walled garden and do what you tell me, because I trust that you are acting in my best interests".

In contrast being by capricious Apple is openly acting in their best interests against the consumer. Agency Problem 101.

This is precisely what has happened with Apple not bringing Siri and Turn-by-Turn to older devices. And as tensions between Apple's hardware legacy and software future continue, I think we will see this more and more.

What does this mean for Apple?

  • This quarter? Not much. The iPhone 5 will still sell like hotcakes. Apple will still be able to bulldoze low-balled Street numbers. Full steam ahead.
  • This year? A window of opportunity for Android: If the Innovator's Dilemma makes Apple less able to innovate between its big disruptive cycles, that's good for Android. It creates a window of opportunity for fast-followers like Samsung to catch up (ditto Microsoft in tablets) and overtake Apple. In real terms the iPhone 5 has reaffirmed the status quo, but the problem is the status quo is one of Android bringing out better and better products and piling up market share (although more at the expense of low-end featurephones).
  • Longer term? Risk! The key question is whether the Innovator's Dilemma only affects Apple's ability to evolve products with a category, or if it affects their ability to bring new categories to market. I would like to think Apple are smart enough not to fall into this trap. However you do have to wonder now that the stakes are higher. In 2007, when Apple release the iPhone, iPod revenues (which the iPhone would potentially kill) were 44% of total. In contrast today revenues from iOS devices (and I'm lumping iPhone and iPad together here) are close to 80% of group revenues. You do start to wonder if the fear factor might creep in...
Right, now back to building my financial model of Bloomerg LP!

Thursday, 13 September 2012

Why the new iPhone doesn't matter

Did something happening on the West Coast yesterday?

Yup, last night was the time to break out the popcorn and flip to the liveblogs. It was the annual iPhone announcement/jamboree (oh I do with they would livestream the video so the rest of us could share in the fun!).

As usual better to travel than arrive. The hardware came out bang in line with the leaks (meh), and the two possible wildcards (NFC and TD-SCDMA support for China Mobile) didn't materialise. There wasn't even a spurious feature annoucement (Siri I'm looking at you), although on that note its ironic they finally confirmed that Ping will be killed off on September 30th.

In fact apart from a minor debate about whether the SOC is A9 or A15 (Anandtech seems to have some sort of inside track that its the first A15), it wasn't that big a deal.

Which is sort of the point.

What's become increasingly clear to me over the last few years is that the summer iOS announcement is becoming much more important than the fall iPhone reveal.

Software eats the world

The key thing to remember is that both Apple and Google are not selling you a phone. They are selling you a software ecosystem. As Marc Andreessen pointed out two years ago, software is eating the world.

Sure having a funky new casing and a slightly larger screen will help Apple sell devices, but a lot of that is just keeping up with the Jonses across the Pacific. The secret of Apple's 30% operating margins has always been that it isn't actually in the hardware business. It's in the software business, and the hardware is just the way it monitises the software. (Edit: After posting this someone pointed this Steve Jobs clip out to me, which sums it up better than I ever could)

It's actually remarkably similar to Google's model. Google's revenues come primarily from advertising, but its not an ad company. Its a software company (okay, cloud computing company if you want to be picky), but it just monitises that via its ad engine.

So the point I want to make is that the coming battle isn't about iPhone versus Galaxy or even iPad versus Nexus. Its about platform vs. platform (and yes, that is the whole point of this blog). That is why I increasingly think the iOS update (which Apple give several months ahead of the phone release to give developers time to catch up) is more significant.

The Apple announcement that really matters

Let's look at this year for example. There were two things that jumped out at me.

First was Passbook, Apple's move into ticketing. Like many big Apple innovations its started off very low profile (and is likely to remain low profile for the moment given the lack of NFC in the iPhone 5). But its the next blow into the world of mobile payments (remember the iTunes store is already plugged into your credit card details at the back end - wresting control of that from the mobile operators was one of Apple's great unsung victories). Believe me when you iPhone finally becomes your wallet that massively ramps the stickiness of the platform (remember in the UK we divorce more often than we change out bank account change our bank account less often than we get divorced - not a perfect analogy but you get the picture).

Second was Apple Maps. This was the latest move in Apple's great divorce from Google's cloud services. Or rather the next move in Apples move into cloud services. Having played with the new Maps program on Ben Evan's iOS 6 beta I have to say its impressive (although I continue to think the 3D stuff is a gimmick so long as its hostage to a mobile connection to stream the imagery). Maps are probably the most important app on a smartphone after the browser, and Google's maps are one of its real secret weapons. Its not surprising that ahead of the iPhone launch they've suddenly started lifting the kimono on maps to all and sundry about how cool their maps really are. Apple want to hit 'em where it hurts.

Passbook and Maps: The apps that really matter...
These were two critical blows in the eco-system wars, and to me matter more than another 0.5" of screen size.

Ecological challenges

Thinking about the war of eco-system puts a whole new perspective on things. And raises new challenges.

For Apple their reliance on hardware to monitise the eco-system creates a conflict. On the one hand the best thing for the eco-system is to roll out features as widely as possible (this should be a big advantage given they have a relatively low number of SKUs to support). On the other hand their hardware model needs to segment the latest and greatest product, which means they will want to restrict new features to their newest models.

Siri was a great example of this. There was absolutely no hardware reason why it couldn't run on the iPhone 4 or previous iPod Touch's. All it needs to do is upload a voice sample to Apple's servers and pull down the search results. However because there was little differentiating the 4S from the 4 (a faster CPU doesn't do much when the majority of apps don't take advantage of it), Siri was restricted to the 4S. This means that uptake of Siri is restricted by uptake of the 4S (its interesting that last night's iTouch update finally supports Siri).

Another related challenge is installed base inertia. Because they are now the de-facto standard it restricts their ability to radically change their product. Certainly with iOS gradual change has always been the order of the day. Partly that is Apple's modus operandi (occasionally big leaps like the iPhone and iPad, with gradual evolution in between), but increasingly it is mandated by the installed base. Apple fans praise this as a great merit of Apple, but that is missing the point. It is not that gradual change per se is good. Rather than at some points the evolution of a platform demands gradual change. At other times it needs rapid change (e.g. Android in the Cupcake - Froyo era). At the moment iOS doesn't need dramatic change, but that will not always be the case.

As for Google the big challenge is of course herding the cats of the Android eco-system. They are certainly more willing to make dramatic changes to the look and feel of their OS (generally for the better I might add, but critics might say it was because they didn't get it as right as Apple in the first place). The problem is getting the handset vendors to follow suit.

In short Apple are more able to move their installed base to a new OS version, but less able to implement new features across that base. Google are better at putting new features into the OS, but much slower at moving their installed base to the new version.

What's your poison?

PS And regular readers don't worry; I will return to finish my ongoing series about Bloomberg in my next post!

Wednesday, 12 September 2012

Mr Bloomberg and his extraordinary moats

The Loch Ness Monster of cloud computing...

In the past couple of days I've been writing about Bloomberg LP - the Loch Ness Monster of the cloud computing world. In my first post I introduced it as the $30bn company you've never heard of. Yesterday I talked about its SaaS and PaaS cloud offerings.

Now I want to talk about its extraordinary competitive position.

It comes down to moats.

As I've written before Warren Buffet always stresses why he looks for moats when he invests in a business. By this he means characteristics of a company which give them an enduring competitive advantage over their their competitors. In short this means you have pricing power - customers are prepared to pay up for what you offer, and competitors are unable to tempt them away by offering their goods for cheaper.

Think mobile phones - Samsung or Motorola offer phones with as good or better tech specs than the iPhone for less, but the moats around Apple's eco-system, branding and superior design mean that customers remain unlikely to switch.

Like Apple, Bloomberg has plenty of moats:

The best (worst) user interface in the world

Bloomberg's user interface can politely be described as idiosyncratic. Ironically for a cloud company, it hearks back to the text-only interfaces on a mainframe terminal (as I wrote last week, mainframes were the original cloud computers). You get a bald-looking text interface offering orange-on-black text, a keyboard overlay (you can't get anywhere without keyboard shortcuts) and a quizzically flashing cursor at the top. If your iPhone is the bright center to the universe of minimalist design, then this is the planet that furthest from it.

Not surprisingly, user interface gurus are incredibly sniffy about it. This article sums up the prevailing wisdom, concluding The only valid reason explaining why the Bloomberg design will not change is the behavior of its users. Users who favor complexity and clutter over efficiency and clarity to sustain a fictive status symbol.

What's more amusing though is if you read the comments at the bottom of the article, where a bunch of hardened Bloomberg users rip the author a new asshole when they point out how wrong he is.

In short, the Bloomberg interface is great. For a market professional it gives you everything you want to work with. The keyboard shortcuts mean you can access almost any function in seconds, and when you combine functions and stock tickers in obvious ways you usually get the answer you're looking for. In many ways it reminds me of the classic game Nethack - crappy graphics, learning curve like the Half-Dome but the most incredible depth of gameplay you've ever seen (remember this is a video-game that's been under continuous development for over two decades... much like the Bloomberg).

Nethack - like Bloomberg but with visicious newts.

Sure it takes an hour or two to get to grips with the UI. But given you're using your Bloomberg terminal year-in-year-out that's a paltry price to pay.

But the great thing about this user interface is that it creates a massive competitive moat.

Most of the competition like Reuters 3000 Xtra or S&P Capital IQ use a standard windowed interface. And if everyone was a new user that would be great for them. It might not be as quick and powerful as Bloomberg, but its very easy to pick up for new users.

But the market isn't full of new users. It's full of Bloomberg users. And for them the Bloomberg UI is simply quicker and more powerful (and if you're a trader speed = profit). It reminds me of the execrable Ribbon interface Microsoft introduced in Office 2007 - it was great for new users, but for experienced Office users productivity dropped by 20%.

In short, Bloomberg has a better interface for experienced users. And the market is full of experienced users. QED.

Get the message

The second moat is Bloomberg Messaging, the proprietary instant messaging (IM) system built into every Bloomberg terminal.

Bloomberg Chat - very clever people pay thousands of dollars for this!!

The obvious moat here is the network effect. Just like Blackberry Messaging for tweens, Bloomberg Messaging has got to the point where everyone who matters is on it. Which means that if you're not hitting your clients on BM then you are at a competitive disadvantage, because you're rivals will be. There's no rocket science behind it, its just good old-fashioned first-mover-advantage - competitor platforms have nothing like it.

But as Blackberry's problems are showing us, having an IM network can be transient - who needs Blackberry Messaging when you have iChat or Google Talk on every device which way?

Well there's a second, less obvious moat here.

You need to remember than financial institutions are completely paranoid. Every piece of communication needs to be captured, archived and remain searchable in case the Feds come knocking. But the great thing about Bloomberg is over the last few year's they've learned to play ball with Compliance (notable with their Bloomberg Vault cloud service, which makes sure communications on its platforms are salted away). So even if Reuters or S&P had a viable messaging platform, they would still need to go and have the discussions with clients on the back-end compliance. Bloomberg has done this.

As I said it's a moat. It's something you can't just make up for by discounting by another 10%.

Content is king

The other advantage Bloomberg has is content. Not just stock prices and wire services, but the drive to build their own proprietary content. This Vanity Fair profile (one of the few written about this secretive organisation) gives a good flavour of their efforts. Bloomberg recognised very early that they were reliant on Reuters and Dow Jones (competitors in the market data business) for news feeds, so they have gone all-out to build their own.

Bloomberg TV - HBO for masochists.

But its not just news. News alone just gives them parity with longer-standing competitors. Its also additional content. For example Bloomberg have be quietly building up proprietary industry research over the last few years - a sort of bastard half-child of the industry-sponsored IDC research and the equity research I used to write for large banks. Also their arts and culture service Muse has seen a big ramp-up over recent years. For the record I rate Richard Vines their restaurant guy as one of the most insightful critics in London.

And that's not to forget the bread-and-butter of the business - analytics. This has long been Bloomberg's big advantage over the competition and remains so. And as they build out their PaaS offering and let clients offer customised functions via the API, that will only get stronger.

Now aside from analytics, none of these things - news, industry research, arts coverage - are a deal-maker in their own right. But together they make a content package which competitors struggle to match at any price point. Which is in short, a moat.

Ticking the boxes

Thinking about Bloomberg's moats, it is interesting to go back to the factors I outlined a few weeks ago which will determine who wins in connected TV. There are many parallels between the two situations. Both Bloomberg and Internet TV are about selling an appliance with a bundle of revolutionary content/services - one in the home and one in the office. Often the success factors are very similar:
  • A great user experience: Bloomberg has this and its a massive advantage.
  • A direct relationship with the consumer (and their wallet): The crucial network effect which Bloomberg messaging offers
  • Broadcast Content: Bloomberg has the content, in particular the analytics which traders need.
  • An app ecosystem: Less important in the business world, but Bloomberg has the APIs to allow other vendors to build apps on their platform.
  • A physical presence: A big advantage for Bloomberg with their terminal, and something they will build on with their early moves into mobile apps.
  • The right price point: This is the one difference between the home and the office. For the consumer the right price point is free (or near damn free). For the enterprise (where it isn't a volume-game) the right price point is as high as possible - which Bloomberg does with its unwillingness to discount and stubborn $1600/month+ price point.

So Bloomberg has a great competitive position. But its not all rosy. Let's face it in the current environment there is a dwindling market for $20,000 data terminals, no matter how sexy the offering. So in my next post I want to talk numbers.