Waiter, There’s a Fly in my Distribution Platfom

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New York – Recently it has come to our attention that small cap research provider, Sidoti & Company has decided to terminate distributing their research over the Bloomberg system.  Sidoti’s problem isn’t actually with Bloomberg, but rather with another service on the Bloomberg platform, Theflyonthewall.com.  This is not the first time that theflyonthewall.com (the Fly) has provoked feelings of anger in a research provider; Merrill Lynch executive Candace Browning wrote a note on their service in March of last year, and Merrill, Morgan Stanley and Lehman Brothers filed a joint lawsuit against the firm in June of 2007.

The main complaint against the Fly seems to be that they take the intellectual property (i.e. recommendations and ratings) of the research providers and sell them to their clients at a fraction of the cost.  Sidoti is also amazed (and perhaps appalled?) at the speed with which the Fly is able to disseminate Sidoti’s ideas, claiming that the Fly releases Sidoti’s rating changes to their clients before 9:30 in the morning, which is often before Sidoti can contact their own clients with this information.

Of course, Sidoti’s fear is that buy-side clients will value Sidoti’s research less, or they will be willing to pay less for it, because their recommendations are available quite inexpensively over a service like the Fly.  Fly on the other hand feels that all of the information it disseminates is already in the public domain.  They do not get their information from research firms directly but rather from a variety of sources in the industry.  In their view, this method of collection ensures that they are justified in putting out the information that they do.  In the internet age, information is available more quickly than ever before and Fly even has to worry about some of the information they put out being picked up and reproduced in other places.  Candace Browning refers to this trend as well when she discusses the ‘Napsterization’ of the industry in her note.

Sidoti has addressed the issue with both the Fly directly and to Bloomberg and has gotten nowhere in terms of resolving the issue so they decided to pull their research off of the Bloomberg platform.  The reasoning behind this move seems to stem from the fact that Sidoti simply cannot stomach the idea of sharing the same distribution system as a firm that they believe is stealing their research, and in the meantime Sidoti is directing their clients to other platforms such as First Call, Reuters, or TheMarkets.com.  Sidoti does not have the resources to be able to file suit against the Fly as some of the larger sell-side firms did, so instead they feel that an action such as this may inspire others to follow suit.

Sidoti & Company, LLC is a boutique small cap trading and equity research provider with over 50 analysts covering nearly 500 equities across 30 industries.  Companies covered generally have market caps below $3 billion, lack research coverage by the larger brokerage houses on Wall Street, and are profitable. Analysts conduct their own due diligence, visiting companies and talking with the key operating and financial management; the firm will not cover a company unless its analysts have access to the Chief Executive Officer and the Chief Financial Officer. The analysts also check with customers, suppliers and competitors. Overall, Sidoti’s research focuses on fundamentals, particularly on analyzing cash flow from operations.

Sidoti currently has around 500 institutional clients, consisting of asset managers and hedge funds. All of the firm’s clients are from the buy-side. Coverage is initiated with an eight-page report that includes projections of cash flows, balance sheet ratios and quarterly earnings, as well as recommendations. The firm publishes notes and reports when material events occur. All reports include price targets that balance the analysts’ growth expectations for the equities covered against variables such as peer group valuation and historical indicators. Sidoti also hosts annual Investor Forums.

TheFlyonthewall.com describes themselves as a “single source provider of relevant, market -moving financial news, syndicate and event information to equity professionals.”  They deliver an average of over 600 stories a day and claim to use relationships they have with “people ‘in the know'” in order to come up with their information.  They charge $25 for their Fly News service, $25 for their Fly syndicate service, and $15 for their Fly Events service.  One can purchase all services for $50 a month, or for a yearly price of $480.

On March 22nd 2007, Integrity put out a blog titled Merrill’s New Distribution Policies.  The topic of that blog was a letter that Candace Browning, head of Merrill’s global research, had written in reference to theflyonthewall.com and its policy of redistributing sell-side research almost immediately after its release.  Titled ‘Obituaries for Sell-Side research are premature‘, the note talked of Merrill’s intent to enact stricter distribution policies to thwart a certain website provider who compared its research to “having a seat at Wall Street’s best houses and learning what they know when they know it.”  The note went on to declare that, as the title implies, sell-side research is far from dead and the fact that it is being ‘napsterized’ proves that it still has value.

What the note does not mention is a lawsuit that was filed in June of 2007 by Merrill Lynch, Morgan Stanley and Lehman Brothers against theflyonthewall.com which sought $150,000 in damages for each report infringed.

Sidoti’s recent actions, Merrill’s note and the previous lawsuit all raise the issue of intellectual property.  As of now, Theflyonthewall.com and similar companies such as Briefing.com and streetaccount extract the recommendations that sell-side firms pour billions of dollars into to create in the first place.  The fact that they charge clients a fee for the research that others put out undermines the value of the companies that they take from. Companies such as Sidoti have a harder time finding new clients if their research is available for $25 dollars a month from a different service, and existing clients have a hard time justifying the high cost of the research and insist on paying less.  Sidoti has a cost associated with creating the research it puts out and without income from clients, it will be an impossible task to keep up the research it provides.

These recent developments all point to the rising importance of research providers gaining more concrete control over the distribution of their research.  Without this control it is much easier for them to lose custody over their intellectual property and thus to lose the value that they add to their clients.  As stated above, the way in which the internet effects the dissemination of information cannot be underemphasized.  The big question in exploring this topic now seems to be whether other firms are going to follow the example set by Sidoti and leave the Bloomberg platform.  Whatever the case, the aftermath to this story will no doubt be interesting to follow.

In nature, flies often interact in symbiotic relationships to survive, however if Flyonthewall keeps feeding off of the intellectual property of others, it may come to find that soon there will be nothing left to eat.

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