Bloomberg’s terminal business has been scrambling to react to the new reality of the coronavirus-impacted institutional investment market. Having indexes drop 30% over the course of a week and then rebound over the next few months brings a lot of viewers and eyeballs to news services, but has also exposed two fundamental weaknesses in the thesis that portfolio managers and analysts will continue to use this mainstay of equity and market research. First, the instantaneous shift to work from home for an entire industry in New York, London, Hong Kong and beyond, and second, the reality of a deep recession forcing us all to reevaluate the long-held idea that using these terminals is just the (high) cost of doing business.
I’ve written previously about the impact of work from home on specific technology stocks, such as Zoom. With the growth of quant-based trading, investment management firms are increasingly known as technology-driven businesses, but the reality is that many of these organizations had been slow to adopt cloud computing technologies that would have allowed them to more easily transition to a remote work environment. If the largest public asset managers are an indicator, a significant number of portfolio managers and analysts suddenly found themselves working from home without the research, collaboration, or communication tools they needed to effectively do their jobs. Samples from recent earnings call transcripts to point to an interesting couple of weeks for those leading these teams.
Why have asset managers struggled to adapt to work from home? Many firms had simply not built any type of contingency plan for adapting processes, human interactions, and technology for remote work. Also, one of the worst-kept secrets in equity research is the sheer number of market data terminals that are shared by 5, 10, even 20 people in an office. Having that many people suddenly lose their terminal access (despite vendors like Bloomberg scramble to open up their “access from anywhere” features) caused a major disruption for investors and corporations alike.
Perhaps the most notable capability lost in this transition is not the data feed at the core of these terminals, but the lack of dynamic collaboration that drives high-quality fundamental research. Fundamental research relies upon analysts and portfolio managers deeply understanding organizations or investments as a team. Without strong collaboration and communication, these teams really struggled to adapt. Arguably one of the most influential Bloomberg terminal features is chat and yet it wasn’t enough to maintain collaboration.
The second impact of the crisis has been on budgets. As nations around the world began shelter in place orders, CFOs, CTOs, and Research Directors began evaluating their research technology stack spend. According to Deloitte research, the banking and securities industry spends a higher percentage of their revenue on technology than any other sector and 52% of that spend goes on operational systems. For asset managers that means a lot of spend on trading and research software. While Q1 2020, according to the FT, has shown a much more favorable return for many funds than expected, the overall shock to the economy is going to deliver a recession, of debatable length and “shape”. And while the forward redemption data cited in that article shows good news for funds, there are signs that 2 to 3+ month redemption requests are on the rise. This means operational and technology budgets are going to be impacted.
This, in turn, is going to mean cost-cutting and a shift to platforms with a deeper set of features and broader value. If you are a CTO of a mid-sized fund spending $24,000 for each of your 20 analysts and PMs, and faced with both a short-term economic hit, and a long-term shift away from active asset management, you are going to look at that cost very closely over the next quarter.
Short- or medium-term crises such as this one tend to accelerate rather than create industry change. An example of this is CBInsights’ report highlighting the fundamental disruption to Bloomberg’s terminal business. The crux of this argument is that the walled garden of the terminal model is being eroded by the commoditization and unbundling of the data in the terminal. The reality that there is a lot of research technology that analysts are using that are outside of their terminal—transcript summarization and sentiment analysis, automated model building, linguistic analysis—that are core to their investment thesis. Capabilities and data that were once unique are now commodities that can be accessed much more easily and at a lower cost. The wall for equity data terminal vendors like Bloomberg is no longer formidable—and the coronavirus crisis is only going to accelerate its erosion.
It is clear that Bloomberg style, legacy terminals have an incredible business and market dominance. But just as these dedicated terminals are not going to disappear from physical or virtual technology stacks at any time soon it is becoming increasingly evident that investors are reducing the number of terminals they have deployed while investing in a wider range of capabilities and data. Machine-assisted research and analysis are going to displace reliance on legacy terminals—it already has—and this crisis is going to accelerate that.