Thomson and Reuters? I guess the rumors are true. But what does a Thomson-Reuters merger mean for the industry, aggregators and the providers themselves?
The goal of the merger appears to be to provide a Bloomberg alternative. But a consolidated Thomson-Reuters presents its own challenges. Thomson and Reuters are two of the three largest financial data providers -- they both supply real-time data; they both have distribution platforms; they both provide access to research, analytics and news; and both serve the same markets, don't they? Well, yes and no.
While both companies have competitive products across virtually every space, Thomson's and Reuters' sweet spots are actually more complementary than competitive. Reuters' most significant asset class is FX, its primary geography is Europe, its primary client base is the sell side and its most common delivery vehicle is an electronic feed to a market data distribution platform. Thomson's primary asset class, however, is equities, its largest market is the U.S., its most significant customer base is the buy-side and analyst community, and its distribution is traditionally to a platform -- Thomson ONE.
Still, consolidation won't be easy. While both organizations have thinned down over the past five years, they still have significant redundant infrastructure and operations. Cutting these redundancies are the key to their stated goal of reducing annual costs by $500 million. This means reducing technology, platforms, data centers and people.
Unless details are settled quickly, the integration could put new and renewal agreements on hold, as clients do not often transition to a platform scheduled for sunset or put their faith in a team that may not be there next month. This will push decision makers to examine other vendors, putting momentum and business into the hands of either Bloomberg or FT IDC, which will be short-term winners.
The Department of Justice also may present another challenge. Will the government allow the market to consolidate into two dominant players? While the consolidated brand may need to divest a few assets, my guess is Justice will be the least of their worries. Aligning the banks and dealers may be quite another challenge, however, as European dealers have already developed an industry utility (Project Boat) to consolidate and distribute European market data. In addition, more firms are bypassing aggregators for high-speed market data and leveraging direct feeds for their DMA and algorithmic trading engines.
Managing revenue consolidation also will be a concern. If and when Thomson and Reuters consolidate their overlapping products, how do they get customers to continue to pay for both while also increasing client wallet share? And if the firms are able to get customers to pay more, does Bloomberg become the inexpensive product, or does Bloomberg just raise its prices? Either wouldn't be too bad for Bloomberg.
While the industry will certainly cogitate and worry over the deal, it wasn't the first and it won't be the last -- market data providers consolidate. TradeWeb, Telerate, Bridge, GovPX, ADP, EJV, Market Vision, Knight-Ridder Financial -- all of these firms are part of the Thomson/Reuters lineage. The Thomson-Reuters move only consolidates these platforms further.
With bank and broker consolidation, as well as the increasing power of technology and the decreasing cost of connectivity, market data will never be controlled by a single entity -- or at least, not for long. Competition drives consolidation, which drives innovation. So as long as Moore's (processing power), Gilder's (connectivity growth) and Metcalf's (network value) laws hold true, there should be no lack of data providers to consolidate. It just may take a few years for these platforms to grow.