Strategy: The uncanny parallels between Facebook and sell-side research - Kotak

The uncanny parallels between Facebook and sell-side research. We see many parallels between business models of Facebook and sell-side research-(1) 'free' services provided by FB and 'free' sell-side research hitherto, (2) tenuous links between services provided by service providers and received by users, (3) regulatory-enforced direct link between sell-side research services and payments, and (4) potential similar regulatory-led disruption to the business models of the 'platform' companies.

'Free' sell-side research model

The sell-side research model until recently (pre-MiFID) comprised (1) providing free services to buy-side research and (2) limited direct linkage between the quality and usefulness of sell-side research and payments by buy-side customers. In fact, the only direct 'payment' for sell-side research was the votes of buy-side firms in internal and external polls (likes?). In a humorous vein, the 'rankings' of analysts in external polls is akin to somebody's popularity on social media platforms (number of followers, likes etc.) with analysts adopting various tactics for more 'likes'.

Regulations have changed the business model of sell-side research

MiFID regulations have established a more direct linkage between the services provided by sell-side research and research service payments made by buy-side customers for sell-side research. This will hopefully create a more integrated relationship between sell-side and buy-side with greater focus on generating alpha for final investors to ward off the threat of passive funds rather than previous model of the sell-side generating copious amounts of fantastic post facto analysis and the buy-side dutifully ignoring the same.

'Free' services of social media platforms

Search and social media platforms provide free services to users-(1) news, (2) views (give and receive views) and (3) search services, among many others. The users wittingly and unwittingly provide free personal data to the platforms, which the platforms convert into revenues through selling 'targeted' advertisements to the same users. There is no direct linkage between the services provided by social media platforms to the users of such platforms and the revenues (largely advertisement) of the platforms.

Regulations may change the business model of 'data' companies; FANGS+ my become 'ANGST'

It would be interesting to see if regulations force changes to the business models of the platform companies too, as it has done for sell-side research. There is plentiful discussion about data privacy and the extent of use (and abuse) of personal data provided free by users to various platforms. We wonder if (1) users may be paid for providing their personal data to social media platforms with explicit agreements about the use of their personal data or (2) users may have to pay social media platforms to use the services provided by the platforms (subscription model) with explicit agreements and possibly more severe restrictions on the use of personal data, enforced by regulations. In either case, the business models of search and social media companies could be impacted. We wonder how many users will pay for services hitherto available for free. The sell-side research industry has already been through that!

Source : Equity Bulls

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