Reuters in crisis

Ravi Madapati 
Faculty Member
Icfai Knowledge Center

Reuters, the financial information firm seems to be in serious trouble, with a loss of $740 mn in 2002. Three thousand two hundred jobs have been cut during the period 2001 and 2002 and another 3000 have been planned in 2003. The company’s fall has been sudden. Competition has snatched market share. Reuters’ core business, the terminals it serves, has fallen by 18%. Reuters’ average revenue from each terminal is down to a quarter of Bloomberg’s. Technology spending has decreased and this has hit Reuters hard. Reuters has not faced such a bleak situation in its 150-year-old history.  

“We are pleased with the progress we made this quarter in what continues to be a tough market. Revenues were in line with our expectations and we saw some good sales wins. Fast Forward is gaining momentum, and I personally am focused on creating a fast, accountable, service-oriented team at Reuters.”

—Tom Glocer, Chief Executive, Reuter Group^[1]

Reasons behind the fall

For a long time, Reuters’ grip on news and financial information had been ironclad. But by the end of 2002, its market capitalization plunged by almost 90% from its peak of € 34.4 bn. In July 2002, Reuters posted its first loss since becoming a public company about 18 years back. Reuters not only made a loss but it almost lost its place in the FTSE-100 index. It lost a billion-dollar contract with Merrill Lynch to Thomson Financial. The precipitous fall of this famous information provider had no simple explanation with analysts citing many reasons. Gloomy equities markets had reduced the subscription to the firm’s brokerage services. A weak economy had reduced the demand for investment banking services. Institutional investors had reduced their exposure, which resulted in weak demand for its asset management services. Even before the post-bubble downturn hit financial firms, bank mergers had led to a consolidation of trading rooms and cancelled Reuters’ contracts. Since then, lay-offs had hastened the trend. Reuters’ news service, which earned 10% of revenues, was hurt by the slump in the media business.
But some analysts believed that Reuters’ cyclical troubles were only hiding more serious structural problems. At the higher end of the market, Bloomberg had snatched business from Reuters, offering one product, sold at one price compared to Reuters’ many offerings. Bloomberg’s service was also perceived to be superior to Reuter’s and its colorful terminals were also trendier compared to the conservative look and feel of Reuters. During boom times most banks had let their traders keep both the terminals; but when crunch time came, most stuck with Bloomberg. At the same time, the bottom end of the market had been commoditized by a combination of Internet start-ups and newer operators such as Thomson Financial (Thomson), Moneyline, Telerate and Proquote. Such companies sold cheaper, more basic packages to clients who did not need sophisticated packages. Proquote charged about $200 a month for its most basic service. Even Reuters’ news service was no longer indispensable. A trader could get the news from a much cheaper source such as Dow Jones Newswire. With 2,500 journalists in 198 bureaus, this was proving to be a costly business for Reuters.
In fall 2002, Reuters lost out after a bitter contest with Thomson to replace Merrill Lynch’s (Merrill) archaic in-house market-data services in a contract valued at $ 1 bn. The terms were not disclosed but industry experts speculated that Thomson had undercut Reuters by as much as $50 mn a year. Reuters alleged that Thomson appeared to be desperate to save its business and hence such heavy undercutting. But many industry specialists felt that the loss of the contract was symbolic of the reversal of fortunes at Reuters. With cost-cutting a priority among its customers, Reuters had been fighting to maintain market share in a highly competitive business. Reuters seemed to be increasingly squeezed between the premium data service operation of Bloomberg LP, which charged customers with multiple terminals $1,350 a month, and the lower-priced services of providers such as Thomson Financial, whose services cost about $500 a month.
Reuters had been seeking to reduce the costs of delivering information and upgrade the analytics[3] — so that it could move into less expensive products. The loss of the Merrill Lynch contract was one more setback for the company. More than 90% of Reuters’ revenue came from sales to the financial services industry, either directly or through its stake in Instinet. The rest came from sales of the company’s news services to other news organizations.
Though Reuters remained relatively strong in the news and equities businesses, Bloomberg had redefined the rules of the game. Reuters’ terminals were packed with information but left users to draw their own conclusions from the data. Bloomberg believed users wanted tools for applications such as calculating the return on securities and comparing investment options. So Bloomberg established a new business to supply terminal concept to his ex-colleagues in Wall Street and abroad. By combining real-time prices with the tools that Reuters lacked, he met an unfulfilled customer need. Like Reuters a century earlier, Bloomberg rolled his core product out to a broad base before adding text-based news whose quality rivaled what Reuters and others offered.
Reuters meanwhile, was feeling the negative impact of size and success. The company had missed market trends like instant messaging, which Bloomberg added to create another industry standard. In trying to become everything to everybody in the information-services game, Reuters had found itself caught between players like Bloomberg focused on the premium segment and Thomson, who used price as its lead weapon.

Glocer’s challenge

Future outlook

[1] Reuters First Quarter Revenue Statement, April 16, 2003.

[2] The Economist, February 28, 2003, Is Reuters Terminally ill?

[3] Analytics are the equations allowing traders to get customized portraits of a given security.

© Icfai Press. Global CEO •September 2003, All Rights Reserved.