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BIZ-TECH |
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Prophets of Boom
IT
analysts were a vital component in the tech boom's bull run, but the market
may be rethinking their value, reports Bill Bennett.
No
other market in history has been subject to as much scrutiny as Information
Technology. Today, a $30 billion research industry watches IT trends,
forecasts growth, measures performance and records sales. If you can afford
their fees, hundreds of expert analysts are on hand to interpret every
move an IT company makes and dissect every technical nuance.
Mark Phillips, who
runs APT Strategies, a Sydney-based research company, says there is a
huge amount of information around and a ready market for that information.
He says, "In America the average user company spends some $US550,000 ($1.1m)
a year on buying research, the vendor companies each spend much more.
Australia's numbers are smaller, but things aren't so different."
Phillips divides the
hundreds of IT research companies into three generations. These dovetail
neatly with technology generations.
International Data
Corporation of Framingham, Massachusetts, is the granddaddy of all IT
research outfits. IDC started out in the 1960s, counting US mainframe
computer sales. Today it's a sprawling global empire with offices in 43
countries, including Australia, as well as extensive publishing interests.
Although the Yankee Group and the GartnerGroup are slightly younger, they,
like IDC, come from the first generation of IT research companies.
Minicomputers arrived
in the 1970s along with Forrester Research, the Giga Group and the Meta
Group. Second-generation research companies broadened the research scope
to encompass more application-related material. While the first-generation
companies tended to think in terms of unit number and focus on individual
companies such as IBM, second-generation companies started out by looking
at various sub-markets making up the computer industry. Some of these
companies, particularly Forrester Research, made a name for themselves
by publishing printed reports written in lively language and packed with
diagrams.
It would be easy to
think of the third-generation research companies, such as Jupiter Communications,
now called Jupiter Media Metrix, as children of the personal computer
years. To some extent that's true, but it is more accurate to describe
them as Internet-era research companies. Jupiter started out selling printed
reports, but quickly shifted to an online business model. The company
got big quickly by focusing on lucrative growth markets such as e-commerce
and business-to-business exchanges.
Until the 1980s, customers
wanting to buy IT industry research generally had to commission private
reports from one of these companies. Then the larger companies started
offering subscriptions. This meant clients could pay a fixed fee and receive
regular research reports on particular subject areas. These subscriptions
generally include some access to the various expert analysts, giving customers
an opportunity to ask specific questions and get clarification. In some
cases companies will sell individual reports to customers but the overall
business model is subscription-based. In addition to the basic reports
and analyst access, research companies offer their clients newsletters,
seminars and other related goodies.
These days the differences
between the three analyst generations have blurred - all the major firms
now report on e-commerce, wireless data and similar hot topics. They all
offer advice on technology strategies and trends as well. To some extent
the various companies are differentiated by cultural differences, methodologies
and subject specialties. Collectively they are exciting, even glamorous,
companies with a fascinating product and a ringside seat for one of the
hottest shows in town, but do they really deliver the goods to their customers?
Database manufacturer
Oracle clearly doesn't think that is always the case. In late August the
GartnerGroup released a profile of the company. The report was posted
on the Gartner Web site where people could download it free. Shortly after,
Oracle issued a statement on its Web site claiming the report was "provocative
and biased". It's not unusual for disgruntled IT companies to disagree
loudly with analyst reports.
Oracle's marketing
director, Paul Rushton, says there have been a few reports from the same
group of Gartner analysts that have caused concern but that on the whole
the companies enjoy a good relationship. Rushton says, "I'd much rather
they focused on us than ignored us. This isn't likely to cause much harm
because customers get input from a wide number of sources."
Another reason for
looking more closely at IT analysts is that analysts elsewhere are coming
under increased scrutiny. In July, the US investment bank Merrill Lynch
announced that it would no longer allow its market analysts to buy shares
in the companies they cover. Merrill Lynch's move followed media accusations
that much of the so-called advice investment bank analysts give their
clients is less than objective.
Shortly before the
Merrill Lynch announcement, the US Securities and Exchange Commission
(SEC) warned that investment bank analysts were often tied up in a web
of conflicting interest that frequently led them to paint a misleadingly
rosy picture of a company's prospects. Some of these conflicts are not
immediately obvious. For example, some financial analysts avoid harsh
criticism of the companies they cover because disgruntled executives might
deny them access to important information and briefings. After all, an
analyst without information has little to sell. There's also a fear that
analysts pump certain stocks to line their own pockets. A widely reported
positive report can boost a company's share price and increase an analyst's
personal wealth.
Analysts' personal
trading is only the thin end of the wedge. According to the SEC, when
a company needs to float or issue fresh stock, it works with securities
firms who in turn work with investment bankers who underwrite issues.
This can be an extremely profitable business. However, it is widely understood
in the investment community that no company is going to do business with
an investment bank if that bank's analysts are telling clients to avoid
the stock. Indeed, the more a bank's analysts promote a particular stock,
the more likely the bank is to win the business.
While most specialist
information technology analysts have fewer financial conflicts of interest,
there have been stories that some research companies took equity in the
companies they were watching during the Net boom. This might be more innocent
than it looks: At the time, cash-poor Internet companies often used equity
as a way of buying goods and services.
That issue aside,
there are still some serious worries. During the late 1990s some research
companies repeatedly made overly optimistic forecasts that did much to
expand the Internet investment bubble. As Internet shares soared, Wall
Street analysts made frequent references to the IT research companies'
optimistic reports as they recommended various stocks to their clients.
In retrospect it turns out that some analysts were only guessing.
It needs to be said
that Forrester issued a report weeks before the bubble burst warning of
an imminent shakeout and others warned of overheating. Nevertheless, many
analysts persisted with bullish forecasts in the weeks and months after
the crash.
Equally disturbing
is the practice of publishing "white papers". These reports are often
given free by research companies and widely distributed to potential customers
by technology vendors. Although they carry the research company name and
imprint, generally one or more of the companies covered in the document
underwrites the white paper. Of course, it's unlikely that a respectable
research company would jeopardise its reputation for the sake of a few
extra dollars revenue, but analysts' white papers should be taken with
a pinch of salt.
According to Mark
Phillips, Australia's analyst industry is pretty well squeaky clean. "The
Aberdeens, the Gartners, the IDCs are definitely not shonks, they employ
straight-up people." He says there are few conflicts of interest, high
levels of integrity and a good overall culture. He also says that Australian
analysts have no financial interests in their reports other than their
salary and argues that the quality of their work is, on the whole, first
class. But, he warns, the conventional IT analyst business model has some
problems for customers.
Phillips says, "There's
a leak in the boat. It comes down to poor communications. A sales person
from the analyst company will call up and sell an attractive-sounding
contract to a client. Generally, this contract includes so many written
reports and the right to access an expert - probably on the phone. The
printed reports are good, but the contact is the really important part.
It's a smorgasbord model, but when you see too many others pigging at
the table while you're paying for their feed you tend to get angry."
This squares with
what Oracle's Paul Rushton says about analysts. "We've seen a number of
customers making large purchases who have been getting advice directly
from analysts. Some get the local analysts to interpret their research
- it's much better than just getting a piece of paper that was written
a couple of months ago by an analyst somewhere in America."
Phillips argues that
people using research companies get the most value when they deal with
analysts personally. "They have a lot more information than they put in
their reports. Sometimes the reports are couched in guarded language for
legal reasons. If you want to know what's going on at a rival company,
what the latest industry buzz is, then you need to talk to the analyst
and make sure you are getting exactly the information you need." In the
past year Phillips has restructured his company so that analysts spend
more time with clients and less time working on reports.
Now that the IT industry
is in recession, analyst companies are feeling the pinch. In April, Gartner
announced plans to cut global staff numbers by 6 per cent, the Meta Group
said it would reduce its workforce by 15 per cent and the Yankee Group
by 13 per cent.
billbennett@ozemail.com.au
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