Reuters, Telerate Users Support MTG Inquiry Into Pricing, Distribution Issues

To increase their leverage with Reuters Holdings PLC and Telerate Systems Inc., several major customers plan to compare notes on the terms and conditions under which they acquire services from the two market data heavyweights.

The information-sharing exercise will occur in the context of a multi-client research study promoted by Market Technology Group Inc. of New York. The study proposal suggests that Reuters and Telerate users need to develop strategies to deal with the vendors' packaging and pricing practices. The MTG study will also consider the value of creating a formal users organization.

"We're not looking to throw out Reuters or Telerate," says Steven Francesco, principal of MTG. "We're trying to make them understand that we, as the largest users, have difficulty accepting the way they're approaching our problems."

Participants in the multi-client study will pay $25,000 each to see just how good a deal their competitors were able to cut with Reuters and Telerate. MTG plans to collect detailed information on Telerate and Reuters expenditures from all participants segmented by location, scope of agreement, term of agreement, product area supported, pricing structure and total annual expenditure.

According to a promotional summary of the study, participation is limited to companies with annual expenditures of $5 million or more on Telerate and/or Reuters services in at least two major financial centers.

Bankers Trust, Security Pacific, Morgan Stanley, Chemical Bank, Citibank and First Boston Corp., are said to be among the firms that have expressed an interest in the project. MTG claims it has positive commitments from eight or nine firms.

It's no coincidence that MTG will focus on the two vendors that built their businesses on contributed data from dealer markets. Telerate and Reuters have yet to feel the effects of prolonged competition within their respective core markets of U.S. Treasury securities and foreign exchange.

Large users are increasingly concerned with the cost and quality of information services, especially in light of developments in digital data feed technology that hold out the promise of more efficient distribution.

"There have been a lot of promises about products that were supposed to be delivered that never made it," says Francesco. "[Reuters] IDN, for example is still a wading stream."

The MTG study was apparently sparked by recent negotiations with Reuters. According to the MTG promotional memorandum:

"The problems, concerns, strategic implications and economic impact of Reuters on all the participants was evident -- and foreboding. What became apparent was that the leverage when dealing with Reuters is increasingly one-sided -- REUTERS. As a result, the representatives of these major firms feel strongly that there is an immediate need to collectively share information and assess the opportunities to control the expense associated with the ever- growing predominance of this organization and its major competitor, Telerate.... Recent negotiations by several major Reuters users indicate the monolithic approach taken in the course of these discussions by Reuters may not bode well for the future."

For all its heavy breathing, the MTG document takes a charmingly naive view of business ethics. It laments that "the breadth and diversity of Reuters' and Telerate's services has enabled the companies to grow impressively -- literally AT THE EXPENSE OF THEIR USERS."

Asked about its "monolithic approach," Reuters went poker-faced. "There were some minor price adjustments in January," says John Adams, Reuters vice president, marketing for North America, "but I don't know of any such negotiations."

The MTG study will address a number of key issues for large market data consumers, including pricing and redistribution policy.

Users are concerned that the practice of bilateral contract negotiation may have backfired. "There are a lot of people out there who feel that we are being singly picked off," says Brian Slater, vice president, global securities and foreign exchange group at Chemical Bank.

Major customers are no longer certain that centralized purchasing produces the best results. In some cases, negotiations for global service contracts have run into road blocks. Reuters has apparently been unable or unwilling to provide a single point of contact for some such negotiations, citing the independent nature of regional or local subsidiaries. "Some of the firms have had to go overseas to haggle with Reuters subsidiaries in order to get a global contract," says Francesco.

International redistribution has also emerged as a sticking point. Some large customers aren't comfortable with the rationale for Reuters' redistribution policy. The MTG document asks, "What are the real issues pertaining to the redistribution of Reuters data internationally? Are they legal? Marketing ploys? Why just the U.S.?" Some European firms have been granted international redistribution rights, while similar rights are denied to U.S.-based organizations, sources say.

One redistribution discussion was concluded with threats of litigation. According to Francesco, Reuters' end of the argument went something like this: "You bought a service here and you want to turn around and have distribution rights over there. Although we [Reuters] gave you the pipeline at a premium, we're going to restrict you because that's an inter-country border, and by the way, if you do that we're going to sue you."

A spokesman for Reuters declined formal comment on this or any of the issues raised by the study proposal.

Big U.S. users are concerned that inconsistencies in pricing and policy aren't always working to their advantage. "Is there a relationship between the quantity of Reuters/Telerate services and the pricing plans proposed to their clients?" asks MTG. "Is it consistent or does it capitalize on each user being treated differently?"

Major league market data customers feel that Reuters' virtual monopoly of FX data, and Telerate's similar position vis-a-vis U.S. government securities and options data limits their flexibility when negotiating for a broad range of services, according to MTG.

One of the study's objectives is to assess alternate sources of comparable products and services. Study participants admit that the search for Reuters and Telerate clones today is something of a snark hunt. But they stress the strategic importance of encouraging a more competitive supply situation.

"There are firms that are trying to compete -- such as Knight- Ridder and Cantor Fitzgerald, Bridge Data and J.J. Kenny and Bloomberg -- that haven't been recognized by the users," according to Francesco.

"If you have a consortium of enough top-level institutions that recognize their products as strategic products, that could build new business, new competitors," he says.

On the other hand, some of the new competitors may be just as intransigent as the old ones.

"You could say that Telerate and Reuters represent semi-monopolies in certain parts of the market," says Slater. "There are other vendors out there growing semi-monopolies in other parts of the market and Bloomberg is a wonderful example."