Journalism and investment research have a lot in common, notes ConvergEx's Nick Colas; after all, both essentially ask the customer to freely part with three scarce resources: time, attention and money. It’s been a tough decade or two for both the newsroom and the research department in that effort, but at least one prominent venture capitalist, Marc Andreessen, thinks there is a future for the news business, however, due to a rising middle class in emerging markets and mobile Internet distribution. While this audience may not (yet/ever) be hankering to read Buy-Sell-Hold reports on their smartphones, Andreessen’s recently published 8-fold strategy for journalism has lessons for investment research as well. The big takeaway: sell-side research needs to change a lot – and quickly - to survive as anything more than an advertising vehicle for brokerage firms.
Via ConvergEx's Nick Colas,
Early on in my sell-side brokerage career – this would have been 1991 – I got a useful piece of advice from the firm’s Machinery analyst. He was a long time veteran of the business and had been on the very first Institutional Investor All-Star Analyst list back in the 1970s. To the best of my knowledge, he never fell off this roster during his 30-year career, a unique achievement in a highly competitive business. When he spoke, all the young pups listened.
“You want your initial company reports to be so thick that when the client gets them in the mail and immediately throws them away, they are so heavy that they push all the other competitors’ reports they’ve discarded down to the bottom of the trashcan.” His message, while disturbing, had the ring of truth. The client was never going to read your report. Not most of them, anyway. But they would remember that you were the analyst who had penned that 100-page report they got, because of its impressive scale and heft. When you rolled by on a marketing trip or a salesperson made your call, they’d think: “Yeah… I remember that analyst’s name… I got his War and Peace report a while back… He must know SOMETHING worthwhile in all that writing.”
Technology and competition have changed the role of the brokerage analyst, not to mention a few self-inflicted wounds along the way. A few points here:
No one prints and mails reports much any more – everything goes by email. Publishing and postage budgets used to run into the millions of dollars at most large brokerage firms in the 1990s.
Clogging up the client’s inbox with a hefty file is actually a big no-no now. Frequency of publication matter more, which is why you get one of these missives +200 days a year.
Analysts stopped being one-stop-shop experts right around the time Reg FD came around, as they lost their unique position in the company-to-investor flow of information. Companies used to call me first when they were going to miss a quarter, and I let the world know. Now, expert networks fill an important piece of the investment mosaic, not to mention satellites for hire, Twitter feed analysis and other tech-enabled content. And companies do their own public pre-releases of quarterly results.
The Internet is a lively agora of investment information, full of entertaining and thought provoking content. And much of it is free. There was no zerohedge back in the day. And if you wanted to see a great CNBC interview, you had to be in front of the TV – there was no Web-enabled video library like today.
Analysts did themselves no favors in the 1990s, putting out recommendations for retail clients at the height of the dot com bubble that had the intellectual heft of a “Real Housewives” television show. That malfeasance forced a stricter Chinese Wall around the research department, limiting pay and creating a diaspora of many good – and honest - analysts to the buyside. A few of the old lions remain, and a few new ones manage to come up through the ranks. But “Peak Analyst” happened about two decades ago.
In many ways, this narrative arc resembles the changes in the news business over the same period of time. The Internet cut out the newsstand and home delivery as the exclusive methods of distribution, replacing the highly profitable full-page print ad with banners for tooth whitening and cut rate mortgages. Narcissistic content like Facebook and other social media soaks up time, shifting public attention from news to keeping up with the Joneses, in every sense of those words. Craigslist took away the highly profitable classifieds business. And new competition from web-only news services fulfilled the classic “Innovator’s Dilemma” paradigm by entering the market with highly efficient Internet-optimized business models.
One prominent venture capitalist, Marc Andreessen, recently penned a piece entitled “The Future of the News Business” where he expressed tremendous optimism for the industry. By his reckoning a rising middle class in emerging markets, paired with affordable mobile Internet access and devices equals the potential for explosive growth in demand for news content. In developed markets, the Web has actually increased demand for news, just in a way that is ferociously hard to monetize. Get the right business model, and news could once again be a highly profitable growth industry.
Andreessen lists 8 specific issues as a roadmap to this sea change, and the lessons here apply as much to investment research as they do journalism and the news business. We’ve included the list here, with our thoughts about what it means for Wall Street as well as the newsroom.
1. Advertising. Andreessen calls the news industry out for all those “Crappy” dancing girl ads for mortgages on their websites. Ad sales departments need to partner with companies that reinforce their corporate brands, not erode them.
In the investment world, money management businesses understand this very well. They have begun to hire senior strategists of their own, in direct competition to the brokerage world. These professionals go direct to the customer base with educational content, investment perspectives, and macro analysis. Yes, it is ultimately advertising, but by controlling its quality and content these shops control their branding message.
2. Subscriptions. This is where the rubber hits the road in the news business: are consumers willing to pay for it? If not, then just relying on ad sales is a tough slog indeed.
This is also a perennial problem in selling brokerage research. The classic model is to employ a motivated sales force and go for “Share of wallet” with institutional investors. Tough game, that – and only more difficult now as these customers are increasingly used to finding their own differentiated sources of information. Still, some of the best independent research we see has explicit pricing. It is, therefore, possible. And increasingly essential.
3. Premium Content. Newspapers like The New York Times offer a limited number of free views before they demand payment. That segments the market nicely and entices semi-frequent users to upgrade to a paid premium service.
Some of this exists in broker research currently. Better customers get better service. The more disciplined firms are more rigorous in keeping the gates up until the client pays more. At the same time, it takes a good deal of intestinal fortitude to hold to this approach. And just like point #2, it is an increasingly important discipline.
4. Conferences and Events. There is a reason why sporting events still hold pricing power in the world of television: live must-see events draw viewer attention at a specific time. Very little news content qualifies for this category, so hosting events with opinion leaders and other must-have content is a path to pulling money and attention from customers.
Wall Street research does this quite well, but there is always room for improvement. Industry conferences are commonplace to the point of being largely interchangeable. New content – issues like market structure are hot at the moment – is essential to holding customer attention.
5. Cross Media. News flow can vector into video content, books, magazines, and other media. Bloomberg is one good example, as is Yahoo! Finance.
Investment research is proceeding down this track, albeit slowly. How many analysts have their own Twitter following? Or write books? Yes, there are some compliance restraints here, but the path forward is clear. More points of distribution build brand and awareness.
6. Crowdfunding. Andreessen cites the historically important but expensive area of investigative journalism as one ripe for independent funding. Is global warming your cause celebre? Give $5 to a news website dedicated to the cause…
This is also an intriguing direction for investment research. There are thousands of underfollowed public companies in the U.S., and multiples of that around the world. Would you pay $100 to get access to better information on a small cap name, buying that content alongside a few hundred other investors?
7. Micropayments. News organizations can tier access to their content along the Basic/Premium approach, but wouldn’t it be better to capture more of the consumer’s wallet by asking for $1 here and $0.50 there? Current payment systems aren’t particularly friendly to small amounts due to their transaction costs, but Andreessen pitches bitcoin as an answer to that.
In the world of investment research, this could be a boon for providers with a broad range of content. If I have to pay $10,000 for access to a broker’s entire suite of research, I may well pass. But if I can pay for exactly what I want, I would be willing to shell out $100 a few times a year. Yes, research providers may well balk at risking their $10,000 price point for fear of massive substitution to lower unbundled pricing. But if they don’t do it, someone else will.
8. Philanthropy. There is a growing trend in journalism to not-for-profit enterprises. Frontline on PBS is funded this way, with consistently first-rate programming.
The connection to stock research comes through socially-aware investing. Investors, especially public and sovereign wealth funds, are increasingly aware of their societal roles in allocating capital. They choose investments not just from financial analysis but also with an eye to favoring businesses that adopt and maintain progressive agendas. That may fly in the face of classical finance, but it is clearly an important trend. Bottom line: the next “Big Thing” in investment research could be a not-for-profit focused on issues like environmental, social or corporate governance.
The upshot of all this is simple: the news business isn’t dead, and neither is investment research. Yes, both have had their troubles and tribulations. But the trends that have put a foot in the grave for both businesses can also lead them back to health.