Whatever
the hype about the Internet and its attendant valuations,
it will meaningfully change (and indeed is already changing)
the way that consultancies and financial institutions operate
their businesses, and how their legions of analysts disseminate
their advice. DSGAsia
sees the following implications.
First, information is becoming ever cheaper and commoditised
unless it is of extremely high quality and can be restricted
to a limited amount of users. In effect there are two models
for selling information - the 'MacDonalds' and the 'Cartier'
models. The former involves putting reports, comments and
data on a web page and trying to get as many hits as possible.
First entrant advantage may help to an extent but over time,
margins go to zero (or negative) for the vast majority of
providers. By contrast, the latter model can only be offered
by organisations or individuals with intrinsic brand equity.
These organisations or individuals, in turn, must be extremely
mindful not to undermine the brand by overextending its exposure
and availability.
.
Second, financial market execution, which again is already
an industry of contracting margins, will increasingly take
place off exchange and on an institution to institution basis.
This in turn implies that the pool of secondary market commissions,
which currently covers a significant cost of, and in many
cases, is a major justification for the research effort of
investment banks, will shrink further. The universal institutions
have garnered an increasing share of this at best stagnant
revenue pool in recent years by offering high-quality, all-round
service and gaining market share in a rapidly consolidating
industry. However, going forward, revenues will likely have
to be driven more and more from primary sources.
.
What do the above imply for research?
Unfortunately, the vast majority of analysts are more (very
expensive) MacDonalds than Cartier. They produce copious amounts
of 'maintenance' research - instant comments on almost every
conceivable data release and event - and provide very little
in the way of value added. Such research is increasingly being
used more and more as a loss leader by the major institutions
as part of their broader, universal service. Ultimately, much
of it will be given away for free - indeed, in many cases
it already is! Meanwhile, the Cartier analysts will still
be in heavy demand from the clients but with revenue focus
being skewed more and more towards the primary book, their
ability to offer independent advice will be increasingly compromised.
More so as consolidation in the industry continues. In sum,
institutions will pay less and less for generic research over
time but the limited number of high value added analysts who
they are willing to pay for will be ever more constrained
in what they can do, write and say.
DSGAsia
reaches a number of conclusions from the above.
First, the large investment banks are going to have to continue
to provide a wide range of research as they do now but getting
paid for it will be ever more difficult. The problem for many
clients will be the sheer amount of information available,
and salesmen will have to reinvent themselves as filtration
devices. Second, as the integrity of research is diminished
further, institutions are going to continue to build their
own in-house research teams rather than rely exclusively on
external providers. Finally, a niche is opening up for Cartier
analysts who do not wish to be slaves to the primary book
and can offer insightful, independent comment. As analysts
who have never liked being told what to do or say, DSGAsia
personnel have decided to pursue this final route - whether
we are genuine Cartier or paste remains for you to decide!
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