Spinning Off Network Assets

As the global market data industry wakes up to Internet delivery, it's beginning to realize that selling real-time and historical content is not the only way to make money. It's the network, stupid! While the combined revenue for the U.S. market data vendors was estimated at over $6 billion last year, the market for providing corporate Internet, intranet and extranet access, plus Web hosting, co-location services and other value-added Internet data services runs into the tens of billions.

This month's cover story explores how two major market data suppliers and one trading network-Reuters, IXnet and Bridge Information Systems are teaming up with managed network service providers-Equant, Global Crossing and Savvis Communications Corp.-respectively to tap into the demand for global telecommunications services. See, "Market Data Vendors Wash Their Hands of Network Management," p. 20.

But guess what? Networking isn't the core competency of financial information providers whose expertise is in delivering real-time quotes to major brokerage houses and to investment banks around the world. For years, market data vendors have wired desktops, installed leased lines and monitored data transmission speeds, but the cost of updating and maintaining this equipment no longer makes sense. Plus, they must do this while coping with volatile, two billion-plus share days in the stock market, and planning for an expected surge in quotation and transaction volume once the industry converts to decimal pricing, especially in the options markets.

By outsourcing their networks, the vendors can leave issues such as capacity planning, security, Web hosting, and firewalls to experts. Instead, they can focus on delivering through a single pipeline, a smorgasbord of services, such as market data, analytics, trade order routing, risk management, clearance and settlement, as well as links to ECNs and exchanges.

At the same time, spinoffs are an attempt to financially engineer the vendor's existing IP network assets and financial client base into a new economy business. IXnet, and its parent IPC Communications, were acquired by Global Crossing for $3.8 billion in a stock deal due to close in the second quarter, while Reuters and Equant formed New Co., Bridge raised over $400 million in February with an IPO of Savvis at $24 a share. But the market turmoil in early April sliced their values in half. Savvis saw its market cap of $2 billion in February fall to $1.2 billion as of April 27, while the shares slid to $12 3/4, from a high of $28. Global Crossing's shares toppled to 29 7/16, off a high of 64 1/4.

The value of the new networking business will be influenced by its partner's fortunes in the financial industry. Bridge, for instance, is Savvis' largest customer, accounting for 83% of Savvis' 1999 revenues, according to the prospectus. It cites Bridge's "net losses, negative cash flow to date and significant debt repayment by June 30." See, "ILX Tells Customers: Bridge Over Troubled Waters, p. 14. "If Bridge is unable to meet its financial commitments to us, we may be adversely affected," Savvis informs investors. Time will tell. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio