The following is a guest article from Leigh Drogen, founder of Estimize.
You know, of all the people who should be wise enough to firmly grasp what’s happening to the value of the content they produce in the digital age, it’s sell side analysts and research departments at the big banks.
Major transformations…but not research?
While some banks like SunTrust and Needham are at the forefront of generating value in new ways for their buy side clients, others continue to emulate the vastly transformed industries they research themselves. Cable package unbundling, the disembowelment of the music industry, dismantling of privately held taxi monopolies, the destruction of content models at the hands of ad blocker apps and social media platforms. All of these are being covered by sell side analysts in one form or another, yet somehow this effect on their own industry is lost on them.
The fact that the buy side ranks analyst research and estimates dead-last and second-to-last in the list of things they want from their sell side analysts isn’t surprising, it’s the worst kept secret on Wall Street. So why is there such a temptation for certain Equity Research departments to adopt a business model of “pray for a time machine to return to the 90’s”? Or perhaps a more constructive question to ask: why haven’t they embraced the fact standalone financial estimates and research just aren’t as valuable as they once were? Do they really believe a strategy of getting their clients to pay for research directly is going to work? With the massive changes taking place to almost every content industry in the other direction…now?
I certainly have a biased view as the founder of Estimize, a platform that allows buy side analysts to contribute their EPS and revenue estimates alongside their buy side and semi-professional peers. Why do they contribute? The resulting data set is more accurate and representative as proven by academics and even the Deutsche Bank quant group, and they get to use it. We had over 600 estimates on AAPL last quarter, and we were off by a penny. We’re more accurate than First Call / IBES in 70% of occasions.
It’s tempting to paint sell side equity research departments as proverbial emus with their heads in the sand. But in my experience, that is simply not accurate. The banks are fully aware of the bifurcation that has occurred in research-land. At the top end, there is a small market for extremely detailed, bespoke research. The bottom end, however, seems to be made up of entirely commoditized research, and is getting bigger by the year.
The first lesson the web taught us was that attempts to gate off information will be resisted at every turn. Instead, we have seen that if your core product is to remain viable, its method of distribution must change. Music, software, weather reports, stock quotes illustrate that information asymmetry is a dying business model. It’s the new ways in which the information is used that creates the value.
New approaches
So what is the way forward? I certainly don’t have the answer, but we can look to one defensive measure that has been consistently utilized since the Industrial Revolution: capturing more of the value chain.
I was at a fintech conference focused on Swiss startups held by UBS, and it struck me how valuable it was for all three parties. UBS aligns itself with an industry it knows nothing about (Swiss fintech arguably only started in 2013), the startups met eager UBS clients, and the clients walked away with faith that UBS has still got its finger on the pulse.
Perhaps the future equity analyst looks like Bob Peck, the senior internet analyst at SunTrust. He has done the best job I’ve seen at providing great insight to his clients, and guess what, Bob basically publishes his research notes to everyone for free! He wants you to read them, because he knows that’s not how he makes money, and he has fully embraced that fact. Bob works his tail off to provide more to his clients than a generic research note and sandbagged estimates.
There will always be a future for hardworking innovative analysts like Bob, despite what has been made of Big Data. I see the cutting edge of fintech startups from where I sit: services that track the number of Amazon servers Netflix spooled as a proxy for Netflix subscriber additions, services that track the number of Android phones in a retail area as a proxy for average spend per customer, even using the blockchain to transform the hundreds of years old bill of lading contract the shippers use, the list goes on. But there will never be a substitute for the analyst who has hard-won experience with the company, fully in tune with its culture, industry, and the type of people they hire.
Will controls succeed?
Quite frankly, Estimize and its community are already benefiting from this industry wide transformation. One defensive measure some banks have started taking is pulling their research and data back from all the aggregators (Thomson Reuters, Bloomberg, Capital IQ, FactSet). This is the scorched earth approach, as it implicitly says the user data is more important than a good client experience.
This would be fine, as long as the client does not have simple access to dozens of similar data points, given freely from analysts who recognize they can generate value in other ways. Is the buy side really going to log in and access research through a litany of individual bank portals?
This reticence effectively makes Estimize even more useful as our data set grows, all in one place. The data doesn’t lie: we now have over 10,000 contributors, and 100,000 viewers of data per quarter.
Since middle of last year, we have been approached by some hedge funds who are infamous for having the most proactive reputations. They are increasingly starting the switch to Estimize as their default, go-to estimates data set. The smart banks and brokerages (of which there are more than a dozen on Estimize who contribute all their estimates), understand that their data is only valuable in context of their peers and their buy side clients. Firms like Canaccord and Telsey contribute to give their sales people better information when serving their clients. They’re moving forward, adopting tools to help them compete in the future.