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Slide 1: The Pipeline Report Incisive Analysis of Emerging Trends in Financial Technology May 2010 Bloomberg’s Bugaboo First some housekeeping The response to the Pipeline Report has been overwhelming to the point where logistics of email distribution are getting to be an issue. We will continue with the current email list. Longer term we may move from a ―push‖ distribution strategy (e.g email) to a pull distribution strategy. When we post a new report, we will put the tweet on Twitter. Follow us on Twitter @c_lamb. We will also be posting links on Hedgehogs.net, Linked In, and Facebook. Currently we post the Pipeline Report on Slideshare here. future, because the search engines crawl it regularly. We will continue to use Slideshare for the foreseeable In this edition of The Pipeline Report, we focus on enabling technologies that portend a radical transformation of the desktop business. The title of this report, Bloomberg’s Bugaboo, unfairly singles out Bloomberg L.P. We chose the title because it is eye-catching. The threat applies to all of the major incumbent vendors: Bloomberg, Thomson Reuters, Factset, Dow Jones, IDC etc. The transformation will be excruciating for those vendors that rely on their old ways of doing business. Survival will come not from incrementalism within existing business paradigms, but by changing the entire basis of the business. A hegemony of emerging technical standards is changing the fundamental competitive basis of the desktop business. We examine some emerging technologies. No doubt others will emerge. The specific technologies, and the degree to which each drives transformation, is still unclear. What is clear is that fundamental open access technology standards are emerging that in some combination will decimate the current barriers to entry—barriers which the incumbents have used to retain competitive advantage. A mix of the emerging standards will transform the business over the next five years. The important point is this: the entire metaphor by which companies compete will change. A common theme among the enabling technologies is that they are either open source, open access, or with broad use rights. What this means is that the rules of the game will change: Successful vendors will have to compete on innovation and continual delivery of additional value. Customer retention using proprietary lock downs will become obsolete. Once the standards take hold in an early adopter market, there is no putting the Genie back in the bottle. Watching legacy vendors trying to compete using their existing methods will be as humorous (or perhaps as painful) as watching a group of geriatric farmers trying to group-tackle a greased hog manically sprinting around the barnyard. The old timers will probably just end up with mud on their faces—but no pig. ENABLING TECHNOLOGIES HTML 5 Web Sockets One of the most exciting desktop technologies to emerge is HTML 5 Websockets. Much as been written about the public spat between Steve Jobs and Adobe Flash on why Apple is embracing HTML 5 and not supporting Flash in the iPad. Steve’s blog posting can be found here. Jobs’ jabs may carry a hidden agenda. Some have contended that he does not want Flash to disintermediate the iPad from its applications. We will leave that wrangling to others.
Slide 2: HTML 5 completely changes the dynamics of real time applications, including steaming data to the desktop. As stated by Kaazing, a start up building core HTML 5 technology: The HTML 5 specification introduces the Web Socket interface, which defines a full-duplex communications channel that operates over a single socket and is exposed via a JavaScript interface in HTML 5 compliant browsers The site goes on to say: Web Sockets account for network hazards such as proxies and firewalls, making streaming possible over any connection and with the ability to support upstream and downstream communications over a single connection. With the introduction of one succinct interface, we can now divorce ourselves from the mind-bending hacks all too often associated with Comet and focus on the task at hand, namely your application logic. Furthermore, by moving to a single, streaming channe l of communications, we can overcome the inadequacies of techniques such as long-polling and "forever frames," and as a result further reduce latency. Let’s translate that into English. As compared to existing proprietary desktop applications, HTML (and hence web browsers) has suffered from severe technological impediments—the equivalent of running a marathon in a gunny sack. For real time applications, such as video on an iPad or a feed to a trading desk, HTML 5 removes all of those restrictions, emancipating developers from technological incarceration. HTML5 supports full-duplex streaming communications. Now the web’s rich ecosystem, tools, and development paradigm are all available for real time financial applications. This changes the entire competitive ecology: the number of competitors, the amount of competition, and the rate of innovation. No longer will low latency to the desktop be the exclusive province of a few vendors. Now anyone and everyone can get into the business—at least this aspect of the business. Advanced Queuing Messaging Protocol Another enabling technology is Advanced Queuing Messaging Protocol (AQMP). As stated by the AMQP website, AMQP addresses the problem of transporting value-bearing messages across and between organisations in a timely manner. This seeming bit of minutia does tie back to the themes of this Pipeline Report. AQMP is an open standard middleware that can be used to distribute financial information in real time feeds. To date, vendors have used proprietary transport mechanisms, such as the Reuters Reliable Messaging Protocol. The past technical rationale for building proprietary protocols was to be able to control to delivery of messages, both in reliability and in real time. The byproduct was that a customer was locked into a specific vendor. The promise of AMQP is to do this in an open standard. Middleware Messaging may sound like a pedantic detail down the bowels of the organization. The reality is that messaging is the connective tissue within organizations and between counterparties. A proprietary messaging standard means that customers are dependent upon a single vendor for an end-to-end solution. An open messaging standard means they are no longer captive to a single vendor. With the (yet to be seen) broad adoption of AQMP, many vendors can enter the fray—and many will. The availability of a technically viable standard changes the entire market dynamic, opening the market to niche players and start ups. This is another example of a core technology getting commoditized and opening up the market to the unwashed masses. The jury on AMQP is still out. The standardization effort began in 2006, with the backing of major players in the capital markets: J.P. Morgan, Credit Suisse, and Goldman Sachs to name a few.
Slide 3: We are not aware of any major deployed instances of AQMP. Here’s why: any messaging system is at a core of a bank’s trading desk and at the core of the capital markets, between counterparties. Given this importance, a new standard will take years to deploy in core applications. Broker Dealers, Trading Firms, Banks will be reluctant to deploy a new technology right into the core of their operations. Instead, we can expect to see and ACMP incursion at the edges—e.g. back office applications, mobile (where there is no existing solution) and the like. That being said, AMQP has huge potential in the next generation of computing. SpringSource, a VMware division, has recently acquired a company called RabbitMQ, one of the leading implementations of AMQP. SpringSource positions itself as the leader in Java infrastructure and management. The potent combination of VMware, SpringSource and RabbitMQ unites virtualization, Enterprise Java, and an open messaging fabric. Cloud Computing This year Cloud Computing is the fair-haired boy of technology. It seems that no report is buzzword compliant without a mention of Cloud Computing. There are even start ups focused on Cloud Computing for financial services, Flexisphere. In our initial research on this report, we considered Cloud Computing to be enabling, but not transformative. We erroneously concluded that it was about lowering entry points, making costs variable, resources shared and elastic. We have since revised our analysis. To paraphrase a colleague of ours: Cloud computing is a set of techniques for enabling much greater improvements for infrastructure management, agility, and scalabilty. This approach has the potential to isolate innovators from having to concern themselves with hosting infrastructure, high availability. The most significant aspect of Cloud Computing is that it normalizes enterprise and public cloud process around a single set of technologies, allowing greater flexibility in migration of proof of concepts to product without fundamental redesign. Effectively Cloud Computing compresses development cycles and increasing the pace of change. Innovation becomes abstracted from the commercial context allowing innovations to get to market more quickly This has huge impact, because it simultaneously lowers the time to market and the barriers to entry by taking issues of production scalabilty and availability out of the equation. THE NEW DEVELOPMENT METAPHOR One potentially interesting application is a mobile application from Chaikin Stock Research. Chaikin’s business hypothesis is that self-directed investors are frustrated with their lack of tools for to control their financial destiny. This is a perfect example of a new application starting on the fringe to address non-consumption. With all disruptive technologies, early adoption begins on the fringe. HTML 5 and AQMP are barely out of the lab. We don’t expect a deluge of applications immediately. The incumbents do not need to liquidate their companies and go home tomorrow, or even the next day. Nevertheless, the trends are unambiguous, and the destiny is obvious. Many industries have relied on proprietary lock-downs for customer retention and sustained competitive advantage. We have seen the closed-to-open movie before—and it always ends badly for the then-current titans. We do believe that applications will emerge, and be built in the ―web model,‖ meaning the web is the operating system. The apps will exploit web technologies and offer data and analytics mash ups from various vendors working decoupled but in concert, through established APIs and hand-offs. Far more important than understanding the specific applications is comprehending that the development metaphor will change. The new winners will exploit the change, and the losers will be victimized by it. Gone are the massive billion dollar internal development projects with their multi-year timeframes, waterfall processes, with their
Slide 4: Kafkaesque nightmare of interlocks and internal dependencies. previous sentence. There is a lesson in that.) (Note: the word customer does not appear in the The new development paradigm is one of independently operating development cells, loosely coupled through open web standards and informal business relationships. This development approach is externally focused with tight feedback loops with customers and partners. Product evolution happens incrementally —and at warp speed. This model fosters innovation, specialization, and alacrity. The new paradigm drives an order-of-magnitude increase in speed and innovation. No old style organization, no matter how many resources, can keep pace. THE FATE OF THE INCUMBENTS Are the titans toast? Not necessarily. The message to them is crystal clear: change or die. the next GE or the next GM? Do you want to be To thrive in the transition, vendors will need to change from the inside out. No doubt, all the press releases will talk about, ―New Innovative Ways‖ or ―Agile Development Programs.‖ That’s rhetoric, not radical reform. A vendor cannot win the marathon if it sheds the gunnysack only to discover that its ankles are fused with shackles. Do What’s Best, Commoditize the Rest Organizations will need crystal clarity on where they deliver value and where they do not. After IBM got its head kicked in during the 1990s, it re-emerged with renewed clarity and vigor. Hardware was a core competency. Operating systems were not: they had lost that battle to Microsoft and Sun years before. To that end, IBM embraced Linux, an open source free operating system. They couldn’t compete in operating systems, so they gave it away. Arguably, Bloomberg’s open symbology is the same strategy. In a shot across the bow of Thomson Reuters, Bloomberg has opened up its symbology to compete with the Reuters Instrument Codes. We are skeptical of Bloomberg’s intent, and see this effort less as business strategy and more as grandstanding. Specific Challenges Bloomberg’s Frank Sinatra reputation for vertical integration, ―We do it all, our way, and better than everyone,‖ will likely hurt it over the long term. Bloomberg’s challenge will be to transform from a product into a platform and develop an ecosystem of partners with complementary skills. Their real challenge will be to transform their culture. Thomson Reuters will need to increase its metabolic rate to stay in the game. As a Reuters executive—who left prior to Thomson’s acquisition of Reuters—told us, when he joined Reuters from a Fortune 20 company, ―I thought I was joining a small (17,000 person) organization, and found myself in an English bureaucracy, where I could not get anything done.‖ This executive is now working for a Fortune 150 company, where apparently he can get things done. If this executive’s experience is indicative, the message to Thomson Reuters is to focus on execution. Loosely Coupled Cells Any incumbent wishing to survive the transformation will need to embrace a loosely coupled development strategy, where development cells operate asynchronously and co-join in a federated model. The key is to define the boundary conditions—APIs, provisioning systems, operational support systems, management systems and the like—and turn the cells loose. The essential idea is to define a governance framework, and then give the cells full autonomy.
Slide 5: All incumbents need to deliver platforms, not products, and develop an ecosystem of partners, vendors, and channels. Delivering a platform is not tantamount to abdicating competitive advantages. Of course, the incumbent can (and should) deliver its own applications on its platform. The point is that the platform needs to enable others to add value—in more than just trivial ways. Absent a platform, an incumbent is trapped on the ground wrestling its own shadow, while the market sprints away. The Apple iPhone—with is embedded applications and App Store—is a fantastic example of the platform strategy. Apple has been able to have its cake and eat it too. Alternative Development Models When embarking on next generation platforms vendors should create and empower a completely separate company—not a division—a company. TradeWeb might be an example of this. A better paradigm is the spin-in paradigm Cisco pioneered in the 1990s. On several occasions, Cisco funded venture start-ups driven by focused maniacal entrepreneurs, with very specific milestones and payouts if the venture hit its schedule and deliverables. At an agreed upon time, the start-up gets spun into Cisco, and the team receives a payout similar to what they would receive in an arms –length M&A transaction. Far more important that this spin-in model a inception is what happens after acquisition—or should we say reverse acquisition. Rather than being stuck way down in a massive bureaucracy reporting into a legacy organization, the model is flipped: the entrepreneurial team runs the show and the legacy organization reports to the new management team. SUMMARY Several foundational open source and open access standards relevant to the capital markets are now coming fruition. More important than the specific standards and which will survive is that the innovation metaphor is going to transition over the next few years. The winners will be the organizations that embrace the changes. The losers will be the ones who deny the new reality—all the way to bankruptcy court. For the incumbents, the choice is clear—and stark. Special thanks to Ken Yeadon at Hedgehogs.net for his contributions to this edition of the Pipeline Report. About the Pipeline Report The Pipeline Report is a periodic report produced by Chris Lamb, a business strategy consultant in financial technology and web services. Previously he was at Thomson Reuters, in which he stills owns some shares. The opinions expressed herein are his own. To contact Chris, please email him at clambresearch@gmail.com Twitter Feed: @c_lamb To unsubscribe, respond this email with Unsubscribe in the Subject Field. © 2010. Chris Lamb. All Rights Reserved.