The chatter across the world of financial journalism over the last few days has been the story of Bloomberg reporters accessing information about subscribers of the firm's financial data service that those customers thought should remain secret. The episode contains some important lessons for how the media business is evolving.
The controversy came to light after a Bloomberg reporter in Hong Kong asked Goldman Sachs if a certain employee had left the company, noting that the Goldmanite hadn’t logged into his Bloomberg account in some time. The same had reportedly happened with J.P. Morgan as Bloomberg reporters were investigating the departure of Bruno Iksil, the London-based trader whose strategies lost the firm billions. The Treasury and Federal Reserve are now looking into whether Bloomberg reporters had inappropriate information into their officials' use of the terminals. The firm has acknowledged that journalists have long had access to information about when subscribers have logged in and what broad categories of information they accessed--and has now reversed that policy.
It is a window into the workings of what is surely the most financially successful media venture of this century. Bloomberg LP, the parent company of Bloomberg News, has achieved the thing that every company desperately seeks: An economic moat, a way to achieve persistently high profit margins that competitors cannot easily encroach. It is a textbook case of a company doing everything it can to seize and maintain competitive advantage.
In short, if you are a high-grade financial professional, Bloomberg does everything it can to make it hard for you not to be a subscriber to its roughly $20,000 a year data terminal. The 315,000 subscribers to that high-priced service account for the bulk of the firm’s revenue and its astounding profitability.
The company invests untold millions in dreaming up any piece of information that a hedge fund maven or trader at a big bank might wish to have, and getting it. One example I only recently learned of: Zachary M. Seward at Quartz reports that Bloomberg commissions a satellite to photograph America’s largest oil reserve in Cushing, Oklahoma twice a week, so that oil inventories can be estimated based on the shadows thrown by the roofs of the tanks.
Competitors might offer many aspects of what Bloomberg offers, but would be hard pressed to come up with the resources to match all of it.
But that’s just one piece of the competitive advantage. It does a lot of seemingly little things to ensure that there are “network effects,” things that make it hard, once one becomes a Bloomberg terminal user, to switch to a competitor.
The interface, while not particularly hard to learn, is not intuitive, so people who are used to it tend to want to stick with it. It is not uncommon for hedge fund types switching jobs to have in their contracts that they will have a Bloomberg terminal at their new job. And the terminals have e-mail and chat services that only subscribers can use, and which many Wall Street types use to trade gossip and tips with each other.
You can’t think about Bloomberg News without understanding that this is the ecosystem in which it exists. The journalists there create some excellent work on topics that have nothing to do with financial markets—but their bread and butter, their raison d’etre is to be one more thing that makes the Bloomberg terminal something that financial professionals can’t afford not to have.
For Bloomberg, in other words, the terminal business is so lucrative and so important, that it can spare no expense to make sure that if a plane crashes in Mozambique or Hungary appoints a new central banker or, say, a senior executive of a major investment bank has been forced out of his job, the news will pop up on a Bloomberg terminal first.
Which brings us back to the events of the last few days. The practice of letting journalists access information about when subscribers had logged in and what broad categories of data they accessed pits the two imperatives of Bloomberg’s strategy against each other. On the one hand, it wants to do everything it can to ensure that its reporters are drumming up information that the competition isn’t. On the other, anything that discomfits the subscribers who are paying the bills could endanger the whole enterprise.
Few companies can maintain the kind of enormous profitability that Bloomberg achieves forever. The newspaper business is a prime example. For a few decades, we also had some of the same great interlocking network effects that make Bloomberg a cash cow: If you were a company looking to hire a new employee, or a department store looking to bring in customers, you had little choice but to place an expensive ad in your town’s biggest newspaper.
That created a gusher of money that allowed local papers to spend vast amounts on a well-staffed newsroom that in turn helped widen the economic moat around the newspaper, making it harder for an upstart to compete—while still having enough money left over for huge profit margins.
Eventually, of course, classified ads migrated to much cheaper competitors and reader preferences shifted toward online, where anyone with a computer can offer competing content—no massive printing plants and distribution networks required. Now we in the newspaper business have to fight tooth-and-nail for every reader and advertiser, and profits are low to nonexistent. Lavish funding for news gathering can only exist when there is the kind of gusher of money created by the kind of competitive advantage that print newspapers once had and Bloomberg now has. (It should be unsurprising that when boarding a flight from Washington to the location of some remote international financial summit, you might see a Bloomberg reporter take a seat in business class while the New York Times and Washington Post reporters trudge back to coach).
In the heydey of print newspapers, reporters were part of a complex ecosystem that allowed publishers to maintain competitive advantage and near-monopoly status in order to make vast sums from selling advertising. In the current heydey of Bloomberg, reporters are part of a complex ecosystem to guard the data terminal business against competitors.
The latest controversy shows the basic challenge for Bloomberg in the years ahead: Can it manage the tensions between the different arms of its empire and widen its economic moat in the process? Can it keep its competitors at bay forever? The events of the last few days show why that won't get any easier.