London calling – home of the free platform

Trialogue is coming to you from London this week. The UK is doing it pretty tough. The November weather is miserable. Like everywhere, the economy is being restructured by the digital revolution. To make things worse, it’s part of a deeply recessed Europe. There are more empty shops on the high street than when I was here last.

The financial services sector is a similar same story. Investment banking is probably worse than in Australia, with big job losses as banks scale back their operations.

Wealth and asset management are seeing flows, if only because interest rates are so low that investors are forced to look beyond deposits to earn a return. But it’s not a picnic by any stretch, with the Financial Services Authority (FSA) following ASIC in slamming the stable door after the horse has bolted, making life difficult with onerous audits and huge fines for relatively trivial oversights.

The hostile operating conditions have seen some interesting new business models attempted, both in finance and other industries. A common theme in new models is responding to the disintermediation and devaluation of the platforms which have traditionally provided access to content for their customers.

In wealth we have seen the impact in falling prices for investment platforms, as new technology has allowed investors and their advisors to bypass platforms and gain access to markets and services in new ways.

This theme is even more advanced in other industries such as media. An interesting example here in London is the recent decision of Time Out magazine to drop its ~$5 cover price and become a free publication, supplemented with a strong online presence.

Time Out (which launched in Sydney last year) is London’s leading weekly covering entertainment and what’s on. The magazine has been running 40 years, and while the content is still good, sales have been steadily shrinking (now down to ~50,000 per week), and with it the advertising revenue which is the lifeblood of media.

So they made the following drastic change in business model:

– Before: Cover price ~$5, selling 50,000 per week, advertising rates of $3,000 per page.

– New: Cover price nil, distributing 300,000 per week, advertising rates of $7,500 per page.

In other words, they gave up net revenue of ~$6m pa on sales (which was shrinking anyway), aiming instead for a big increase in circulation which would drive a gain in advertising (both print and website) which would more than offset the revenue lost.

It’s a bold move, and of course it’s far too early to say whether it will be successful, but better than a slow and certain death, which is what they were looking at.

There have also been some major side effects, in particular having to come up with a new distribution model – newsagents are not interested in stocking a free publication from which they make no revenue. So Time Out is now distributed at Tube stations, museums and galleries, major tourist attractions, and bookstores. I picked up my copy at a coffee shop.

What would be the corresponding business model for wealth management platforms? Well, probably something like:

– Platform price / revenue: nil

– Investment product based revenue: increased slice of external asset manager revenues plus more internalisation where possible

– Interest revenue: much more focus on revenue raising from cash and term deposit balances

– Other services: broking, insurance, and all sorts of optional extras. Made a booking for Jetstar or another discount airline lately? You’ll get the idea. It’s the endless add-ons where they really make the margins.

We have seen some significant downward moves in platform pricing already, with ANZ’s Smart Choice Super the latest instalment at 50bps plus $50 pa, and some innovative revenue models such as ING Direct’s Living Super.

But it’s hard to imagine that we have reached the logical conclusion. Ironically, although it may be a race to the bottom in terms of headline pricing, just as with discount airlines, effective revenues per customer may not fall anywhere near as far. After all, Jetstar is one of the most profitable parts of Qantas.