Category: Analyses

Posted on

Amazon Attempts a Monopolsts’s Squeze

Summary

Amazon is attempting to own the book business by exercising control of the small fast growing independent end of the market. Ultimately having done much good for book buyers and helped publishers, Amazon is now in danger of squeezing the small houses they have helped encourage. Book publishing is in danger of having a very significant element of control levied by Amazon which will profit Messrs Bezos and Company in the short term but not in any way assist the development or innovation in the publishing business. In the long term Amazon will see their catalogue shrink. Their market share will decline and they will stifle the growth of the book publishing business. Make no mistake, this is a very very bad day for technological innovators, small businesses and publishing as an industry. For Amazon, it is a foolish plodding play of a monopolist which plainly has lost sight of the fact that treating suppliers with disdain will create a backlash. Finally expect higher book prices too!

Analysis

For the record (and so readers can understand why an expert in financial market structures and complex products is posting on this story, my expertise here goes back a decade or more…) Amongst my various corporate interests, I own a small book publishing imprint. I set the company up to use the “new” Print on Demand (POD) technology.

POD is a great way to publish books and avoid being stuck with the stodgy, highly inefficient old fashioned legacy publishing houses which stifle competition and profit while authors get squeezed.

With my current POD model I can pay authors a higher royalty than the general publishing market and also make a healthy margin. In fact the entire finances of publishing books can be rewritten.

Now, in what strikes me as a desperate measure to improve their own margins at the onset of a recession, Amazon wish to cut my provider (for the record: Lightning Source) out. Small houses such as my own would be forced under this proposal to use a monopoly supplier owned by Amazon. Moreover, the terms I have seen are significantly worse for my business – higher fees and worse margins. Let’s not trifle with all that relationship bulding cost etc (and believe me Lightning Source do a terrific job, I do not under any circumstances want to change from using them currently).

It is a fact of life that large companies can become arrogant and develop monopolistic tendencies.

Alas, in this instance, Amazon are effectively creating a programme to help the large leviathans of publishing (with all their inefficiencies) and squeeze out of business the innovative new companies that have created the POD culture the world over.

This as a concept makes as much sense as getting pregnant and then feeding your children as infants to the elderly and infirm.

Amazon have done many great things for book retailing and that must be applauded. However, this policy develops clear evidence that they are succumbing to short term thinking to create a monopolistic profit (and subsidise a subsidiary) which will ultimately be detrimental to the entire book publishing industry, hurting consumer choice in the process.

I suppose there are free speech implications here too but I am focusing on the business issues here, although I suppose in the litigious USA there may be legal challenges?

Amazon needs to keep growing the book industry. By demanding cuts n margin and forcing higher costs and bureaucratic duplication on small publishers, they are only going to stall growth in the industry.

Or maybe, just maybe, they may start unpicking their business model and lead to alternative sales channels becoming more competitive.

Confidence in Amazon has been shaken by this announcement and even if they succeed, the trust of the publishing industry in Amazon will take a considerable time to rebuild, at best.

Barnes & Noble may not see tis as a major “gift horse” but having built their business model on the comprehensive nature of their offering, Amazon is now explicitly encouraging smaller publishers to concentrate on other channels. That is a very arrogant position to be in given the fluidity of customer loyalty that is possible in the modern internet market.

At the onset of an economic slowdown, it may even be a first sign of suicidal tendencies.

 

Posted on

How Foolish We Were …and Will be Once Again!

Summary

Ultimately all markets go in cycles. The concept that property, to name but one sector, would forever go up, was a delusion of the Florida land grab of the 1920s and umpteen other times in history, not just the very recent past… Sadly in the modern age, the analysis remains that even with new-fangled tools to lose money by, the old fashioned methods of over-leverage and foolishly bullish beliefs are working just fine too.

Analysis

Modern investment means we have new tools all the time. Just as guns kill people, it is always a surprise to the uninitiated (or the media) to find out that using tools which make money faster on the way up turn into very unpleasant money loss engines on the way down too!

Right now the US, the UK and various other nations have a big hangover in the wake of an amazing party.

At the end of the day we can blame CDOs and so forth and they are indeed a key part of the whole fiasco. However, the simple fact remains that nations have over-geared their orientation to property and are now paying a very very severe price as the property cycle turns. On a macro scale some nations have overgeared themselves and that will turn into a bloody witchhunt amongst those who are culpable in due course.

There are of course pockets of property gain – and I certainly hope my positions in various facets of Eastern Europe will ride out the storm better than many western markets but then again who knows…

On the other hand we cannot expect such emerging markets to hold up the US economy as purchasing power is so different. However, there are possibilities of markets which will grow – perhaps in fits and starts – amongst the emerging world, just as there are those with budget deficits who are going to have an ugly summer once economic reality hits.

Central banks are once again acting as lender of last resort in a big fashion and confidence is required across the board. No doubt about it, as this “Motley Fool” article suggests, here are some amazing companies out there to invest in. The problem remains, just when is going to be the right time?

Given the crisis we have seen so far, the actual major indices are not _that_ far away from their highs and that is either a wonderful sign of robustness or a very worrying harbinger that maybe, just maybe we are edging closer to a situation akin to 1929 once again.

I am not saying we are, but just as being long property has turned for many into a one way street of misery when the market turned, I am not confident enough to say that there is no chance of a recurrence of savage past equity market falls in the latter part of this year.

The concept of “A Nation of Enrons” is a major concern,. Not just because it suggests a lot of hiddne debt that is junk but also because it suggests a lot of digging must take place and a great deal of soul-searching before confidence will return. That is a big big worry in this marketplace.

 

Posted on

CME Across Asset Classes

Summary

CME has run its slide rule across cash exchanges before but never taken the plunge to acquire one. Equally, it seeks to create partnerships where it can act as a predator and buy out the partner (see my previous analysis on the subject). Sooner or later CME will likely acquire beyond its traditional futures sectors and there is a wealth of deals out there… However, the key thing CME (and other predatory exchanges) need to do in the long term is to diversify beyond US dollar denominated markets.

Analysis

Acquirng NYMEX gives CME a great expansion in various commodity markets (partiularly metals and oil products such as the benchmark WTI futures) as well as these interesting share positions.

IMAREX is pretty modest as a business but freight trading has enjoyed enormous growth in the past couple of years.

MX and with it the merged MX-TSX entity is a handy
foothold into Canada and indeed an equity marketplace too.

The BM&F stake is one example of where CME (and all exchanges with predatory ambitions) must do deals: zones beyond the realm of the hitherto almighty US dollar. In the long term the greenback is not going to be so dominant and therefore the currencies of the likes of the BRIC economies may become much more substantially traded. CME needs exposure beyond the US dollar zone…

The deterioration in relations between the CME and industry body the FIA has been growing for some time. Given that FIA serves a very narrow remit (essentially futures brokers alone – it is not nicknamed “The Futures Intermediary Association” for nothing!). The FIA’s annual conference is coming up soon n Boca Raton, Florida and CME are breaking new ground apparently by largely avoiding attending the event. That said, more exchanges may follow suit if the FIA continues with what has been some rather bellicose and narrow interest statements of views…

Meanwhile, CME has lots of opportunities but then again like all exchanges it will face mounting competition on all sides in the coming months and years…

 

Posted on

Now For the Hard Part!

Summary

The ability of the new merged management team to keep clients happy when products are merged is going to be a key issue in making this merger work. Staff are understandably nervous about their prospects and the history of Reuters in recent years has included a great deal of almost ongoing upheaval.

Analysis

Merging financial data vendors is difficult if only because one product must win out and yet the reasoning may not always be clear cut. In a period when financial markets are unstable and banks will be keen to extract cost savings, Reuters-Thomson is going to have a very difficult job keeping clients loyal to many products happy.

Difficult definitely – impossible, of course not. However a great deal of diplomacy is required and the upside to this business is enormous.

Reuters Thomson needs to demonstrate an agility rarely seen in either structure in recent times and that will prove a huge challenge.
Having said that, in a financial marketplace which while currently recessionary will ultimately grow again, the merged entity has huge opportunities. Indeed, in many respects the sum of the pair is a combination of businesses who often due to the speed of market change may have been missing as many opportunities as they could exploit.

There is a lot of hard work ahead but then again there is simply enormous upside if the execution of a clear strategic vision is carried out.

 

Posted on

Here We Go Again!

Summary

The political battle between the big banks and exchanges is becoming more explosive than ever.

Analysis

The fault lines in the battle for dominance in the financial intermediation business is getting a lot more fraught.

Exchanges see themselves as the rightful arbiters of trade execution while end user investment banks see themselves as the rightful source of the order flow.

As ever the truth is somewhere in between and the investment banks may yet be surprised by a slow growing understanding amongst end user investors that they are in fact the source of a great deal of the order flow the bulge bracket investment banks view as their own.

Meanwhile, in a world where exchanges are consistently reducing fees,  the investment banks want cuts to be faster and deeper.

At the same time, the fact that the total amounts of money being paid by entire investment banks to each exchange per annum amount to the bonus on one medium sized investment bank trading desk seems to be overlooked by those who can only see “large” numbers wth several noughts on the end.

A sense of perspective suggests this is all about political domination and indeed the right of investment banks to intermediate as part of their survival in a world of microtrades and whisper it quietly, microbanks…

Meanwhile, this latest plan will have the same hurdles as all the other such plans (market structure history buffs will recall Brokertec, nowadays all the talk is coloured by Turquoise). Meanwhile, interested parties to such organised cartel-esque structure such as banks tend only to act with solidarity for so long before they seek competitive advantage…itself a story related to the history of much product development for instance.  Moreover, management volunteers are often thin on the ground when it comes to working for a company whose revenue is only a few pence per trade compared to the much better margins to be had in investment banking proper.

More plans will emerge and more exchanges will perhaps even see the light of day (perhaps even Turquoise will yet launch) but ironically the richest pickings for all interested parties is in new products and not merely rebadging a trade in an even cheaper package than its curent tiny cost base. Of course banks dislike that assertion but given their ability to add considerable mark-up to their own value-added products using simple exchange building bricks, there is a certain interesting angle to how virulently they object to paying pennies to exchanges…

 

Posted on

NYMEX processes with gusto…

Summary

Another exchange, another strong processing result…Just imagine what would hapen if they could close the bottleneck of the floor!

Analysis

NYMEX continues to impress but then again with Clearport amongst its offerings this is hardly surprising and let’s face it if you can’t make a lot of money in commodities in a period when oil and gold were centre stage, then when can you expect to profit?

Nevertheless, NYMEX has a good business overall. The big question is hypothetical – just how fast would it grow if the exchange was purely electronic?

That answer judging by similar experiences from other exchanges when they closed their floor trading, is “considerable.”

To put it mildly…

 

Posted on

CME Uses the Predator Partnership – Again

Summary

CME deal value is related not just to exchange growth but also the state of commodity prices. Nevertheless, CME is best placed to acquire CME for approximately 40 key reasons

Analysis

CME has made a fairly aggressive move in attempting to acquire NYMEX and indeed Jeff Carter is absolutely correct: CME had a window to compete a couple of years back.

The cost given the current high oil price may be an issue. If commodity prices prove less frothy in the future, volume will likely tail off a bit too.

NYMEX has made great strides in many parts of its business but the core floor remains and it remains a liability. Sooner or later CME needs to really rationalise its existing floor businesses (let alone a new one) – at which stage it will become an even more incredible payment processor than it is today.

There are 40 simple reasons why CME is ideally poised to buy NYMEX now and that is the 40 remaining months for the current NYMEX electronic trading contract using CME GLOBEX. Buying CBOT when the clearing agreement was close to expiry allowed ICE to enter the bidding war. This time it’s tricky for a competitor to enter the market.

Moreover, acquiring NYMEX means CME owns the other main global US-based clearing network for derivatives. NYMEX Clearport added to the CME’s own clearing offerings is a great global concept for all manner of products.

However, the challenges going forward will hinge on not just the extant floor and commodity prices but also just how much ongoing leverage the US marketplace has in defining commodity prices.

The commodity marketplace is expanding in sync with growing markets world-wide and NYMEX has made many attempts to create new ventures in the rest of the world. This has interesting implications for the company if the merger can be effected. However, there is also always the possibility that maybe, just maybe, more and more er, “liquidity” in 5 or perhaps 10 years time in oil and gas for instance may be made in contracts closer to just where the oil is being produced, or used… NYMEX needs to make sure it can succeed with its strategy to create benchmark beyond light sweet crude oil for instance.

CME/NYMEX is a very interesting deal with great potential…of course that won’t preclude a lot of third party debate about the price being paid!

 

Posted on

Let The Battle Begin!

Summary

The Jury Is Out – But At Least We May Get a Verdict of Sorts Next Year. Historically Major Regulatory Changes Result in Unforeseen Consequences.

Analysis

The jaw jaw bit of the pre-MiFiD era is thankfully over and the many consultants who crawled out from under the rocks they occupied after their humiliation at predicting the Y2K bug that wasn’t will hopefully go find another “crisis issue” to deal with in another sector. Now the exciting phase of analysis begins and it will be an intriguing battle.

The plain truth is we can’t tell right now where MiFiD will take us but we can make a few educated guesses while awaiting some actual data – but don’t expect anything very meaningful until Q2 2008.

Traditionally major regulatory changes result in some unforeseen consequences arising. The smart money ought to search for “the bumps in the carpet” as that is likely to be where the biggest opportunities lie in the long term.

That said, MiFiD is an interesting law and David Wright at the EU has made a passionate pitch to engender cross-border competition and the best price for the client.

Initially, the focus is on the left field platforms making inroads against the  legacy exchange players and this seems plausible. Certainly competition will be intense and nerves will be somewhat frayed at a great many exchanges – which is frankly no bad thing.

So, for now, the key is to let battle commence but not to draw too many conclusions in the short term. Ultimately there will be big impacts from MiFiD but the current conclusions of the market players may well be a tad simplistic. This is three dimensional legislation and as such will have a greater ramification than simply concentrating more business in London. In fact, if anything MiFiD may favour fragmentation for at least a few years.

 

Posted on

No More Bidders But Watch for a Share Swap Shuffle?

Summary

Other bidders Unlikely but the deal may get more complex…

Analysis

A third bidder for OMX is unlikely, It is too much of a hybrid to really attract anybody – hence the curiosity of NASDAQ’s bid which seems to have lacked emphasis on the IT side (the bit where a lot of profit upside could potentially lie given current return on capital). Dubai ont he other hand wants OMX for its technology arm where they sense a better return being feasible and indeed a great “diplomatic arm” in IT development to help promote the Dubai Financial Centre project.

Here’s a theory: The end result of the NASDAQ deal may be a share swap between NASDAQ and Dubai. Dubai want OMX most for its IT but if they had a chance to have a run at the London Stock Exchange don’t be surprised if the men in the Emirate try to exchange their OMX share stake as part of a deal to get the NASDAQ LSE shareholding.

That said, there is yet a possibility Dubai might be able to negotiate a break-up of OMX too, taking the LSE stake and the IT side while NASDAQ gets the European trading content/platform…

True, Singapore are keen on that LSE stake as well but NASDAQ ultimately need to conclude a deal having seen LSE slip away twice and with an inability to match Dubai in terms of reserves when it comes to a straight bidding war for OMX.

See also:
http://online.wsj.com/article/SB118781693465205673.html

 

Posted on

CME analysis

Summary

CBOT future has key implications for CME
All futures exchanges have board issues

Analysis

Jeff Carter provides an excellent overview.

I would simply add that:

1) CME – like many other exchanges which have made the move from mutual status to demutualised public company, has legacy issues surrounding some of its directors – this is commonplace amongst many such exchanges.

2) The big worry for CME right now muct be the future of the CME deal. Note that the counter-bid from ICE would mean CME losing the clearing fees they currently garner from CBOT and that would create a hole in the cashflow of the “Merc.”

ICE has already made it clear that with its acquisition of NYBOT it is keen to remove its clearing business from LCH.Clearnet in Europe to its own clearing house and will do so too if it wins the CBOT.