Every month I have to write a front-piece to the Daiwa global sector product, and occasionally I get lucky and produce something that doesn't immediately induce sleep. This excerpt is part of a longer piece, which later goes on to examine European telecom analysts' collective hit rate in correctly determining the direction of the Stoxx Telecoms index during a given quarter (under 40% since 1998, on my calculations), as well as to introduce some of the fabulous resources available to investors today in the blogosphere, most of which are probably known to the readers of this blog. (I have assumed a low level of reader awareness of blogging generally.) What follows below is a discussion of the real nub of the issue: in the face of newly developing information flows and alternative sources of market/industry intelligence, the investment banking world had better reshape its telecoms research product to be more immediate, interactive and original, or face marginalization.
"Why traditional telco analysis will go the way of the dodo"
"One turkey votes for Christmas"
In the April edition of our Global Telecom Monthly, I included a short piece on RSS (really simple syndication) and how it might change the world in some very straightforward ways. In that piece, and a subsequent edition of EuroTelcoblog, I speculated that there might be implications for more than just the traditional media, and that brokers’ research efforts might also benefit from RSS and the numerous other advancements being made in real-time information distribution and collaboration technology. My somewhat unorthodox "summer project" for this month is to delve a bit more deeply into precisely what this could mean, and to make a case for why traditional investment banking research is increasingly at risk of being outmoded, if it isn’t already. My ultimate goals here are two-fold: 1) to provide clients with a list of alternative information resources they may not be aware of, and; 2) to stir things up.
The background: Analyst – past, present and future
Back in 2002 a friend on the buy-side sent me a copy of a remarkable Powerpoint presentation from Robert Zielinski, then an Asian banks analyst with UBS Asset Management, entitled "Death of an Analyst." In this extraordinary piece of partially tongue-in-cheek vitriol aimed at investment banking "business-as-usual," Mr. Zielinski makes a case for why sell-side analysis is a broken model, contributing nothing to the investor’s decision-making process. Looking beyond the humor and bitterness evident in his presentation, however, there is one slide which has remained clearly in my mind since then, and it is reproduced below. In it Mr. Zielinski attempts to give a view of analyst characteristics and duties – past, present and future.
Robert Zielinski’s Evolution of Analysts
Use a salesman
What is striking is the list of attributes which make up The Future, and the contrast with the normal way that analysts go about their jobs today. This normally consists of following a relatively small number of companies within a narrowly defined geographic and industry area, producing reports which are then emailed (and, astonishingly, still often physically mailed) to clients, bombarding the same clients with voicemails to alert them to the emailed report, and making marketing trips to reinforce the message face-to-face. This is all well and good, as long as the investor plays along. However, as one buy-side analyst told me not long ago:
"My inbox receives, on average, 15 emails every 30 minutes, and I tend to delete approximately 90% of them as useless, dated, or, even worse, completely superficial."
Numerous other clients I have met have typically described themselves as being "besieged" by broker research, which they find "depressingly undifferentiated." One group of fund managers only half-jokingly expressed a strong interest in some of the call blocking and diverting features available in VoIP services as a way of freeing themselves from broker voicemails. How could this be the case, given the devotion and tireless efforts of thousands of analysts worldwide to maintaining a steady flow of timely, value-added company and industry research?
The answer may lie in the way information flow has changed over the past decade. Ten years ago, the Daiwa research department in London had PCs loaded with Excel and Word, but no internet connection and no email. All research produced by Daiwa was printed and mailed, as well as FAXed, to clients. Company releases made to the London Stock Exchange appeared on a proprietary information system called TOPIC, and otherwise company information was sent to analysts by FAX or post. Reuters Business Briefing and Reuters television services were only launched in 1994. Bloomberg TV also launched in 1994, but the company had only sold something like 35,000 terminals worldwide, and we were still a year away from the launch of Bloomberg.com. Neither Reuters nor Bloomberg systems were available in Daiwa’s research office. Sitting here in 2004 surrounded by "pervasive communication," it is hard to imagine/remember a life of such relative isolation as that experienced by Daiwa analysts in 1994, but their experience was probably pretty well the norm for the time.
The principal difference this technology gap made was that in 1994 analysts were a privileged subset of a group (including financial journalists and some more specialist institutional investors) with timely access to information which was exclusive to them, at least for as long as it took them to disseminate it to a wider audience. Today, and for some time now, companies have been using the web as a tool for information distribution, opening themselves up to the world. The latest set of company results (increasingly including a webcast analyst meeting) can be accessed simultaneously by anyone, whether it be an experienced sector analyst on Wall Street, or an elementary school student in Manila. Commercial transcription services such as Call Street produce conference call transcripts in short order, and later issue more detailed reports on the results and the call. At the same time the financial media have invaded every available real-time distribution channel (TV, radio, internet), meaning that the traditional role of the analyst to break and interpret company news is further diluted. Additionally, over the past decade, fund managers have largely moved from a country-based approach to a sector-specific focus. Today most of Daiwa’s Japanese institutional clients, and virtually all of the fund managers I am in contact with in European institutions, are either sector specialists or work closely with specialist analysts. This was not the case in 1994. In 2004 analysts may now have access to all the modern tools for information retrieval and distribution, but so does everyone else, and investors’knowledge level may be as good or better. Arguably, analysts are using new tools to create and distribute the same product as before, but to an audience which may be less in need of it than ever before.
Returning to Robert Zielinski’s ideas above, it is remarkable the extent to which parts of this description of the future analyst are already applicable to many people outside the broking world, namely the growing ranks of "bloggers" who are writing on telecom/internet/media/technology-related themes, sometimes in great detail and to a very high standard. The description of "data provider" is not correct in this case ("industry expert" is the norm), and "mechanical" and "salarymen" probably aren’t either (though some of the best bloggers have day jobs closely related to what they write about), but the other four elements match up nicely – live online, all companies, interactive, independent. Let us address each in turn:
Live online – The various blogware packages available to create blogs are very straightforward to use. If some significant news breaks, a blogger can publish quickly, while the analyst waits for compliance, editorial, and production teams before the .pdf note can be sent out. Web-based packages like Blogger are not as feature-rich as many others available, but they have the advantage of allowing updates from any internet enabled device capable of text entry.
All companies – This may be a real killer for the telecom analysts. As we have tried very hard to document over the past 20 months or so, the world is moving in ways which make it difficult to even define what a telco is anymore. Retailers, utilities, municipal governments, banks, and even the UK Royal Mail are moving into offering voice, and the global internet giants (AOL, Yahoo!, Apple, Microsoft, and even P2P network Morpheus) are offering quasi-telephony services. Even the geographical definitions which have traditionally governed coverage allocation at the brokers are increasingly open to question, as SIP-based service providers issue numbers not relating to the market where the customer is physically located, and global services like Skype are on the attack. It is no longer enough for the analyst to sit in his silo and write "France Telecom is trading at a 10% discount to DT – buy!" Bloggers typically are not constrained by any coverage allocation issues, and thus can take a wider view.
Interactive – As described in our April piece, a user of an RSS newsreader will receive a discreet notification that something has been added to a site bookmarked in his list, allowing him to decide when to go in and "pull" the item, rather than being confronted with another piece of broker spam "pushed" to his email inbox. There is also a forum for talking back. Most blogs have a comments section where readers may share views, correct inaccuracies, and criticize biased or unfair views. Sometimes these may be more informative and interesting than the original entry. Many blogs will have a trackback capability to allow readers to see where else the entry has been cited, and many blogs will link to other blogs of potential interest to the reader. New applications such as Gush (http://2entwine.com) combine RSS with instant messaging, allowing for direct real-time contact between author and reader (substitute analyst and client), and the developers have also experimented with video and voice chat as one new direction for it.
Independent – This is a potential minefield issue, but to be fair and discrete, the blogger brigade, in my experience, is not constrained by external considerations of remaining polite or shying away from nebulous or difficult issues. Blog entries often focus on sensitive issues such as questionable corporate ethics and poor standards of customer service, but are also likely to address small unlisted companies with unique products/services, or entirely non-corporate developments such as municipal wireless network initiatives. Additionally, we may often find coverage of listed companies which no broking analysts cover (for example, Bloomberg data shows no active coverage of Calypso Wireless, a $135m company with an interesting product set).
Is there really a case for saying that blogging will make traditional analysis obsolete? This is very debatable. What we haven’t seen (yet) is a blogger, for example, dissecting a company balance sheet in detail, making independent financial forecasts, or doing discounted cash flow analysis. That day may come, however, and in the meantime, if we assume that buy-side analysts and fund managers possess those same skills and are working from the same data (which they should be under fair disclosure rules), then it is not difficult to see investors increasingly relying on these less orthodox and more timely sources of market intelligence, and doing the valuation work themselves. We think this is already happening to some extent. The risk in this dynamic is that the sell-side analysts continue to beaver away writing Hold notes on Deutsche Telekom and emailing them to clients, who might not really want them – in fact, might want them less with each passing month.
How can the brokers respond? One idea might be to incorporate the very same tools and approach being used by the blogosphere. If we assume that IM/presence-based applications (including voice/video) are to become an integral part of corporate communications in the next few years, then this enables a level of immediacy and interaction in creating and marketing research. Blogging tools could be just one added feature of that newfound interactivity. This idea is not an alien one to the financial industry. Venture capitalist Tim Draper (a founding investor in Skype) has used his blog for the past two years to solicit ideas from readers for promising new business models and products, and has offered the most interesting candidates a chance to pitch their ideas to him live via a video conference link (http://www.alwayson-network.com/comments.php?id=4121_0_6_0_C). Is it so far-fetched to suggest that some variant of this model could be employed by the brokers in exchanging ideas and information with investors? We certainly think there may be some pent up demand on the part of the beleaguered fund managers/buy-side analysts, who are under ever greater pressure to manage information and news flow. An analyst with a hedge fund recently gave me his views:
"I feel very strongly that the sell-side needs to: (a) improve the originality of their research, and; (b) provide better syndication options via RSS so that I can deal with the countless upgrades/downgrades, notes, etc."
One main issue affecting the rate at which the brokers move is likely to be awareness of technology, and perhaps of the potential of the blogging phenomenon itself, both of which we think may be generally poor. We were intrigued by some data included recently in the first anniversary report from the Muniwireless.com site, which covers the phenomenon of municipally-funded/managed wireless networking projects in an in-depth and authoritative manner. In it, author/site founder Esme Vos lists (by category) the 466 subscribers to a weekly summary newsletter which she distributes via email (multiple subscribers from the same organization are counted only once, so the numbers in the table below do not add up to 466). It is interesting to note that, of the various categories of recipients listed, broking analysts do not appear at all, and neither do institutional investors, apart from venture capitalists. While it is possible that some of the recipients listed as "other" could be analysts/investors receiving the newsletter via a private Hotmail account rather than the company email, we think this is unlikely. We also concede that some analysts/investors may be subscribing via an RSS newsreader, but we think this is even less likely, given the email addiction of the industry as a whole. It is intriguing to ponder why, when the integrators, operators and vendors all seem to see this relatively niche segment of the market as worthy of monitoring, there are no visible analysts or investors on the list?
Recipients of the Muniwireless weekly email newsletter, by category
City and regional governments, 54
Systems integrators and consulting firms, 57
Telcos (fixed line and mobile), 14
Vendors (mostly hardware, a few software), 90
ISPs and VOIP providers, 34
Research firms (the kind that sell analyst reports), 13
PR firms, 10
Community volunteer organizations (e.g., Wireless Amsterdam), 9
Venture capital, 7
Utility companies, 3
Educational institutions (universities/state colleges), 13
Conference organizers, 3
Other (people with email addresses at Hotmail or Netscape), 57
Source: DIR, from from Muniwireless.com anniversary report, June 2004
One other stumbling block to adoption may lie in the attitude the brokers might take to what they perceive as a freer flow of information. The currently highly conservative approach to compliance issues makes for one source of anxiety – how to ensure that readers in the US don’t see or hear something they’re not supposed to? The other would be the legacy of brokers’ research as a closed information loop, theoretically only available to clients, potential clients, or subscribers to research aggregators such as Multex or First Call. In practice, we know that brokers’notes get circulated far more widely than this, but this is the unofficial distribution system that is likely to plague any type of publication. The assumption is that the research product is free, but exclusive to clients or prospective clients on the implicit understanding that access to it involves getting some business out of it at some point. If the brokers take on an open-access approach, how does this model translate? RSS does allow for conditional access, so the brokers could tailor specific content feeds for particular classes of clients (those physically present in the US, those interested only in telecoms), or perhaps move to a chargeable structure with different tiers of access privileges. Adding richer communication tools and comments sections/discussion forums would make for a more interactive experience. This would be a chance to move from brokers’research as a "push" medium, to one based on "push and pull." The key question is probably one of culture and vision more than technology, and we will see who goes for it first. The risks for those left behind might be great.