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.

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