E L E C T R O S P H E R E    Issue 1.08 - December 1995

The Medium Is the Market

By Simon Caulkin

Reuters used to report on financial news; now it makes news. Its networks are the shape of finance to come - global, electronic, multimedia, and moving at the speed of light.

Reuters was the information highway of the British empire. Its correspondents flashed the news of Mafeking's relief, of Singapore's fall, of Gandhi's assassination and of victory in the Falklands. Reuters reported the history of all the pink parts of the map, and, in the process, made itself the most famous news-gathering organisation in the world. (Edward G. Robinson starred in the Hollywood version of the story, This Man Reuter, made in 1941.) Today, when Britain's empire is history, Reuters has built a new empire in cyberspace, an empire of information.

When financial markets rock governments - such as the day the pound crashed out of the European Exchange Rate Mechanism - Reuters does not just report the news. It makes news happen. A large part of the trillions of pounds, dollars, francs, marks, guilders, pesetas, rubles, and yen traded each day in the world's foreign-exchange markets are bought or sold across Reuters's network. So are stocks and bonds. Reuters's database of financial information gathers 1,000 new facts a second. Reuters has proceeded smoothly from covering financial markets to creating them. In a very real sense, it has made the medium the message.

Reuters's transformation is, at one level, a business success story. In the 1960s, Reuters was a tiny company made up mostly of old hacks. Today, Reuters has sales of more than £2 billion a year, and the stock market values the firm at more than £9 billion - which is a good £3 billion more than it values Rupert Murdoch's News Corporation.

Reuters's story is also one of technological transformation. About 90 per cent of the company's burgeoning revenues, and all of the £347 million in 1994 profits, come from electronic information systems for financial markets. Its fastest growing product line is transaction systems - systems which not only tell dealers the prices of financial products, but also enable them to trade direct from the screen.

But most of all, the Reuters's story demonstrates the economics of information itself, a tale of how ideas are shaping a new economy. Reuters was not the biggest company to see the opportunities in financial information, nor was it the most technologically adept. Ultimately, the reason it beat out the likes of IBM and AT&T was that it understood what information traders need, and how to deliver it. In other words, it got the story.

Today, Reuters is in the middle of a virtuous circle of information. The supply of data by companies such as Reuters helped create today's mushrooming global financial marketplace, whose combined transactions far outstrip the value of the world's physical trade. The market, in turn, generates more demand for the information Reuters supplies - raw, real-time data on prices, deals, and the other facts needed to make global markets work. Supply induces demand, and at each stage Reuters's till rings.

The house that hacks built

Reuters was born of technological opportunities - albeit the opportunities of a different era. In 1850, Julius Reuter had the bright idea of using carrier pigeons to fly stock- and commodity-market prices from Brussels to the German border at Aachen, bridging a gap in the telegraph line from Paris to Berlin. The birds delivered the news to his customers several hours before the mail train. By the time the gap in the railway line closed, submarine cable had been laid between Paris and London. So Reuter simply hopped the channel, and began serving up financial news straight from the financial centre of the Victorian world.

In London, Reuter's fortunes took a new direction. The relaxation of stamp duty on the press in 1855 had inspired a proliferation of newspapers. Meanwhile, the gradual spread of the telegraph cable across the world created a globe's worth of new stories to report. Reuter's organisation followed the cables and brought the news home. Both the man and his company became part of the fabric of empire.

Although born in Germany, Julius Reuter eventually became a British citizen and baron of the realm. His employees invented the myth and mystique of the foreign correspondent. Reuters's men were the sort who could rush back from the front, file the story, and then charm the next scoop out of the deputy governor at that evening's diplomatic reception. (A few of them, it has long been suspected, indulged in a bit of spying on the side.) They built what is still the world's finest news-gathering organisation. Reuters today has 1,800 print and television journalists who provide what Jonathan Fenby, editor of the South China Morning Post and himself a Reuters veteran, praises as "the best news service there is."

The best foreign correspondents, however, have not always made the best business executives. It was Reuters's good fortune to have both at a time when it needed them. In the 1960s, the company was searching for new markets in a world which had grown smaller after the end of the empire. Gerald Long, then managing director, had determined that the UK market was too small to support Reuters as a general news agency. The status quo led inevitably towards either government subsidy or slow decline into a domestic bit player. Neither was acceptable, so Long began hiring entrepreneurial young graduates to build up Reuters's economic services, then still new territory for journalists. One new face was Andr/ Villeneuve, now Reuters's executive director. Another was Michael Nelson, who eventually retired as joint managing director.

The combination of Long's determination to diversify and his young reporters' knowledge of the markets proved a powerful one. When the opportunities opened up, "the only organisation in the world which had people who understood the potential was Reuters," says Nelson. "We knew what made the financial markets tick, we knew about communications, we knew about journalism and we knew how to sell. It was an unusual combination."

They knew enough to sense in the early 1960s that computer data handling was going to have a huge effect on the financial markets. Not only did computers speed the dissemination of the news, they also enabled it to be cheaply filed and stored for later retrieval. Instead of an ephemeral product, valuable for little longer than the time it took to read, computers transformed Reuters's stream of news into an asset of ever-increasing value. But that was not all. Computers opened the door to two-way communication. Printed tapes only carry the news one way, while computers let people talk back. That realisation was to become the basis of Reuters's fortune. It took some time to evolve.

In 1964, Reuters bought the rights to sell outside of the United States the Stockmaster, an electronic stock-price quoting machine developed by a US firm, Ultronic. Stockmaster was followed by the screen-based Videomaster and, in 1973, by Monitor, a machine which provided foreign exchange price quoting.

Monitor was the breakthrough. Encouraged by their initial success with Stockmaster, Reuters wanted to do more with computers in financial markets than simply create an electronic ticker tape. Young Villeneuve was given three months to research and develop a product for foreign exchange. Because foreign currency is not traded in a central market like stocks and shares, it was hard to gather and to report prices. Villeneuve's brainwave would create an electronic forum by putting screens in front of individual dealers and getting them to enter prices into the system - paying for the privilege in the bargain.

Villeneuve's baby nearly perished in its first year. Ironically, the markets were too turbulent. Currencies went wild in the fallout after the Arab-Israeli war, and dealers were too busy to input prices. It was, Villeneuve admits, "skin-of-the-teeth stuff." However, once Monitor began to roll, it was Reuters's equivalent to a winning lottery ticket. In 1972, the year before the Monitor launch, the company had total revenues of £13.8 million which yielded a net profit of £375,000. A decade later the figures were £179.9 million and £33.4 million. Monitor was the key.

The age of smart machines

Several factors fed the growth of Monitor and Reuters's other electronic trading systems. One was the enthusiastic em-brace of new technology. Chief Executive Peter Job points out, "Good technology is our lifeblood. We've never had print assets or books or publications - we've always essentially been about electronic impulses, from cables to computers. When technology progresses fast, we progress fast, too."

Pragmatism has long ruled Reuters technology policy - in large part because technology at Reuters has always been managed by journalists, interested in what computers could do with information, instead of techies enchanted by how they did it. That said, Reuters has never been daunted by technical challenge, either. For a while, it manufactured stripped-down terminals in the US, because it could build them cheaper than it could buy them - a skill which Nelson observes cheerfully is "unusual for a news organisation." But it was a no-brainer to give that up when computers became commodities, and to move to cheaper, more flexible and more open systems.

A gutsier move was to adopt Windows 1.0 as a common user interface for Reuters information services and to move from dumb terminals to PCs so users would not need separate computers to access and manipulate data from different sources. David Ure, executive direc-tor of marketing and technical policy, remembers that the move "looked bold at the time" - both because of lingering worries about the security and reliability of PCs and because it loosened Reuters's grip on what customers could do with its data. But then again, Ure adds, "it would be very eccentric not to do so now."

The right technological stuff was important in helping Reuters to see off the competitive challenges of the 1980s. But luck and global reach also helped. Information providers such as Dow Jones, Telerate (which have since combined), and Knight-Ridder focused on US equities to the exclusion of other markets. None predicted the boom in foreign-exchange trading or global-equity markets - and Reuters has cleaned up in both. Volumes through Reuters's existing data networks are growing at 50 per cent a year. "No one just wants American, Japanese, and European quotes any more. They're asking for prices from the Medellin stock exchange," says Villeneuve.

Today, Monitor's descendant, Dealing 2001, is installed at 21,230 different banks, stockbrokers, and other financial institutions around the world. Not only does it report fast-moving currency exchange rates, but it also provides a communications medium for brokers to cut deals. Brokers use Reuters to advertise the prices at which they want to trade. If dealers like what they see, they can use the Reuters network to contact the buyer or seller and strike a deal.

Unlike stock markets, which vouch for the trustworthiness of their members and provide established procedures for settling transactions, Dealing 2001 is a communications medium only. It is up to the customers themselves to decide who they will deal with, and to set up lines of credit and terms for settlement. But the next generation of Reuters's dealing-room services, unimaginatively called Dealing 2002, provides a complete, ready-made market. Already installed at 3,550 sites, Dealing 2002 automatically matches buyers to sellers. So instead of phoning around for a trade, a dealer can simply place an order with Reuters, which is more convenient for the dealer, and, presumably, more profitable for Reuters.

"Transactions," says Ure, "are part of our thinking about everything." Stockmaster's descendant, the Instinet family of brokerage services, enables share dealers from 30 countries to buy or sell electronically on any of 15 exchanges. It also provides online research on specific companies and markets, monitors market indicators, and enables dealers to analyse the pattern of their own trading to en-sure that they are making the most of their money. All of the capabilities of computers - disseminating information, retrieving it, analysing it and providing two-way communication - are embodied in Instinet. Reuters profits from them all.

Tomorrow's news yesterday

Success breeds competition and a variety of high-powered firms are now trying to wean away Reuters's customers. The company Reuters's executives fear most is the quick-footed, aggressive Bloomberg Financial Systems, set up by an entrepreneurial ex-Salomon Brothers bond trader. "Bloomberg is very dynamic and customer-focused," concedes Villeneuve. It is strong in bond markets and is beginning to offer the sorts of interactivity that enabled Reuters to evolve from report-ing the news to making it. But with only a tenth as many screens as Reuters's 309,000, Bloomberg is not going to eclipse Reuters any time soon.

Probably the greatest challenge is simply keeping up with the sheer pace of growth and change in global markets. Foreign exchange trade is booming, and new countries and currencies are popping up all over the world. Russia and China are huge potential markets for Reuters. Villeneuve was recently asked when Reuters was going to improve its coverage of markets for the tenge (Kazakhstan's currency).

Not surprisingly, given the opportunities, Reuters's executives are quietly optimistic about growth prospects to the end of the century. The question is not, as for so many companies, one of searching for new opportunities so much as deliver-ing on what it has already decided to do. Reuters won't commit to growth of 50 or 60 per cent a year, says Job. "But the underlying pattern is something we're confident with."

For the long-term, Reuters looks to its NewMedia subsidiary in New York to make the sort of creative leaps from which the next century's new markets will spring. Here, NewMedia President Buford Smith looks after a slew of small companies offering online services in consumer finance, medical information, advertising, and cable television.

The most advanced, AdValue Media Technologies, is a transaction-cum-information system, sold to the advertising industry, which is striving to automate the purchasing of TV airtime - a $16 billion a year market in the US. This could be the model for other new, market-creating ventures. Smith is already speculating about potential markets in entertainment. Today, Reuters is a partner with Variety in an online news service; tomorrow, it could also be distributing products and clinching the sorts of deals it now reports. "In all industries you can peel back to a core transaction," says Smith. "There's hardly any intellectual property which can't be stored digitally. So if you need distribution rights for a clip of Terminator 3 for a new multimedia product, for example, you could get the clip and do the deal through the system."

Reuters won't release financial details for NewMedia; it will only say that NewMedia companies' revenues are as yet "not significant" for the financial results of the company as a whole. But Smith has high hopes for the future: "Stay tuned!" he enthuses. "I enjoy being in left field. I believe this is where Reuters's future lies." And the Net? "We've exploited every distribution technology from telegraph to radio to satellites and PCs. The Internet is absolutely a continuation of that line."

That said, Reuters has not been at the forefront of the commercialisation of the Internet. It has a site on the Web, chiefly for PR purposes. It supplies news to most of the big online services, like CompuServe and, more recently, to Web-based services like Pathfinder. For the moment, though, Reuters is cautious about using the Net to deliver its core services direct. Reuters's executives reckon that the Internet is not (yet?) secure or reliable enough to handle real-time financial services at the level required by City investment banks. Nor does Reuters itself have the experience to use the Internet's existing capabilities to create services for the mass market. "Do we want to compete with CompuServe and America Online, taking $9 a month on credit cards?" ponders Editor-in-Chief Mark Wood. "I doubt it."

So Reuters's executives view today's Net mostly as a vibrant laboratory for innovation and change. "The technology has so much steam behind it that it would be folly to ignore it - either as an opportunity or a threat," warns Ure. Adds Job: "I don't see it being more than John the Baptist - not the light itself, but the precursor of the light." Nevertheless, he believes it carries a powerful message for a world where national communications monopolies still rule and politicians find it hard to let go - you can't hold back the tide. "When you see the Internet expanding in this unfettered fashion in front of your eyes, you can't deny the growth and uninhibited enterprise that freedom produces," Job says. So far, none of that uninhibited enterprise has decided to compete with Reuters.

While it is standing back from the Internet, Reuters may be nearer than any other major company to making business sense of that ultimate vapourware, multimedia. At heart, Reuters has always been multimedia, first combining text and financial data, then adding photos, sound, and television. Reuters has no desire to set up a global TV news channel (although it has the capacity), any more than it yearns to own cable or telephone networks. Instead it is looking for ways to bring together digital text, sound, pictures, data, and other elements from its databases in high-added-value, high-intellectual-content combinations that business customers will pay to use. For example, VAMP is a network linking some British GPs with hospitals and labs, which could transmit X-rays instantly for diagnosis to the other side of the world, and could grow into a sort of supermarket of medical information.

A multimedia service that already exists is Reuters Financial TV (RF-TV). RF-TV pipes live digital TV coverage of important financial news - central bank press conferences or the announcement of trade figures - direct to a window on a trader's PC screen. Unlike Bloomberg's rival system - which broadcasts all the time like any other cable channel - the RF-TV window is only activated when there's market-moving news to report. Wood admits that "we are finding our way here; further developments will depend on how information usage goes." But he is encouraged by the initial take-up. Experienced traders, he says, are finding that direct screen coverage of major events can gain priceless seconds over the reported news, and RF-TV has done well enough in London to be rolled out in New York and Tokyo.

RF-TV is, of course, high-tech journalism. Ironically, even as Reuters's share of the total business shrinks, the importance of its newsmen is as great as ever. In the last couple years, it has been rapidly expanding its news side, particularly in television and financial coverage. Television is seen as the basis of new revenue streams, while financial news É well, financial news has become the very core of the business. According to Wood, "When I joined, news journalists outnumbered financial. Now we have more people reporting wars in absolute terms, but they are surrounded by still greater numbers on the economic side." News - a name which implies the insights which separate information from mere data - is proprietary, whereas even real-time prices can be piped in like gas or water. The Reuters name counts for a lot. Says Job, "News about prices obtained from a commodity source, such as the New York Stock Exchange, adds value."

A corollary is that as the volumes of data being pumped out balloon, the integrity of the news service becomes more fundamental. Each feeds on the other. News that Reuters reports moves the prices that Reuters in turn reports. A scoop on the Vietnam peace talks won it hundreds of contracts for economic services in Japan and the US; a missing zero in the French unemployment figures caused havoc before it was corrected.

So it is that the more Reuters reports the financial markets, the more it must report the events that interact with them. And if Reuters needs the news, the news had better be right. In a world of gigantic databases, massive parallel processing, and instant retrieval, Julius Reuter's insistence on accurate, honest, and impartially distributed information is as essential to Reuters's existence as it was in the days of the telegraph. Its highest value is also its strictest discipline. General news may not be profitable, but it has made its point. "In a sea of information," says Wood, "you need to know whom you can trust. Journalists are still vital. They filter out the crap."

Simon Caulkin (management@observer.co.uk) edits a management column for The Observer.