Archives For Exceptional Business

Mark Spencer 1

Mark Spencer
Photo Credit: Digium, Inc.

Update: I originally published this essay in late-2012. My attention recently drifted back to the topic of disruption in the telecom industry, prompting me to revisit what Mark Spencer achieved with Digium and the Asterisk product. I’m no less impressed today than I was four years ago, and so I put this at the top of the blog list again. What Mark accomplished is impressive and a worthy model for other disruptors to consider.

Mark Spencer presents me with a philosophical conundrum. Before an interview earlier this month I text him to say I’m so excited about our conversation that I hardly slept the night before. (He is understandably cautious of my enthusiasm.) After we spoke, I’m so confounded by the way he chose to tell his tale that I don’t sleep well for several more nights as my mind grapples with what it’s heard.

Mark is chief technology officer and founder of a company called Digium in Huntsville, Alabama. It supports and develops for an open source telecom platform called Asterisk which Mark (for lack of a better term) invented. Digium is to Asterisk what Red Hat is to Linux. And much as Linux evolved into the open source alternative to proprietary operating systems offered by companies such as Microsoft, so has Asterisk become an alternative to closed technology from the likes of telecom giants Cisco and Avaya.

Not everyone likes the open source model, but enough do that Red Hat has made a thriving business out of providing software, support and consulting services to those that do choose Linux. Likewise with Digium. It has found a loyal and growing base of followers who align with Asterisk’s open source philosophy, its price and its flexibility. Some subset of those Asterisk users, mostly small- and medium-sized companies, find value in paying Mark’s company to help them use the platform.

I have little doubt that Mark bristles at my word selection in the paragraphs above.  That I call it “his” company and that he “invented” Asterisk. But those are accurate descriptions. Though he turned over day-to-day operations of the business to professional managers after raising a round of venture capital in 2007, he remains majority shareholder and has de facto voting control over board decisions. But Mark prefers inclusive language. Digium’s success is the result of the efforts of many, not just Mark, he points out several times in our interview. Asterisk’s adoption did not happen because of the code he originated, he adds, but because countless independent developers have committed their considerable energy and intellect to enhancing it and making it a better product for users.

Though its story is still being written, it’s not a stretch to call Digium a success at this point in its existence (which Mark characterizes as being in its late-adolescent or early-teenage years). The same applies to Mark. He has done more in his 35 years than most people could muster the ambition to even imagine accomplishing in their lifetimes. But he lets out a deep sigh when I ask him to tell the story in the context of this success.

Mark rejects my basic premise. “What is success?” he asks with implied disdain but unflinching politeness.

Call it success or call it something else, when he talks about where he is today and where Digium is, Mark has no interest in talking about the things he did. He takes me in a different direction altogether.

Let’s not tell a story about talent or skill leading to success, he intimates. Let’s talk about the importance of luck.

So it is this matter of luck, and its effects on outcomes – success or failure – that has kept me up more nights than I should admit since my last conversation with Mark.

Continue Reading…

Last February I got to hear John Mackey give a speech about a better way of doing business. He’s a founder and co-CEO of Whole Foods, and he stopped in at a Raleigh Chamber of Commerce event to promote his book, Conscious Capitalism: Liberating the Heroic Spirit of Business.

John Mackey, Whole Foods CEO Photo Source: Joe M500, Flickr (Creative Commons License)

John Mackey, Whole Foods CEO
Photo Source: Joe M500, Flickr (Creative Commons License)

The book’s premise flies in the face of Milton Friedman’s argument that the business of business is business. While Friedman makes the case that the only purpose of a business is to increase value for shareholders (i.e., maximize profits), John Mackey says its obligations are better understood as a balance among five groups of stakeholders:  stockholders, employees, customers, suppliers and the environment.

Mackey actually takes it one step further. He says companies that serve the interests of all the stakeholders have a competitive advantage. They create more value and are rewarded by the stock market.

After his speech I had the opportunity to ask Mackey a question. “If conscious capitalism is such a good thing,” I asked, “why aren’t more companies doing it?”

He responded by saying, in essence, that it just needed a vocabulary, someone to give it a voice, a demonstration to the world that it is a better way of doing business. “I’m giving all of you a secret formula for building a successful business,” he continued. “It will be copied as others see you succeed with it.”

Whole Foods is meant to be the living example of this better model.

Fast forward to this morning. I’m enjoying coffee with a friend at my local Whole Foods. It seems a good time to reflect on Mackey’s secret formula. Since last year the Whole Foods Market stock price has been cut almost in half, dropping from $65 per share to around $37. It’s been a rough ride. Continue Reading…

Last night Larry Page, Google’s CEO, posted this entry on his Google+ account, “Google Self-Driving Car Project,” with the video below.

“Just imagine,” begins the company’s description a future with self-driving cars,

You can take a trip downtown at lunchtime without a 20-minute buffer to find parking. Seniors can keep their freedom even if they can’t keep their car keys. And drunk and distracted driving? History.

This is bold. It’s exciting. And it’s just one of several projects Google is juggling that could actually change the world. The company calls these “moonshots” and runs them out of its Google X division, an R&D skunkworks charged with making such bold – though calculated – bets on the future.

But the story here is one part fanboy awe over Google’s investments in ground-breaking innovation and one part befuddlement over how  little other corporations are putting into long-term R&D bets. Continue Reading…

Apparently my fascination with all things Zingerman’s knows no bounds as I explore this Enough Project. I’ve trolled a brilliant little video (by Daniel Seguin) featuring Zingerman’s co-founder, Paul Saginaw, that promotes a concept called “Localism.”

“There’s this idea of having enough” Paul narrates over beautiful pictures of the Zingerman’s businesses. “So when you believe that, when you’re not wanting more and more all the time, what’s driving you is wanting to create something of excellence. It’s liberating.

“What is this? Is it capitalism? Is it socialism? What do we have here? I don’t know if it’s capitalism. I know it’s not socialism. I don’t know what it is and it isn’t. But anybody can do it. It’s just a lot of work. But I would say try it. It’s also fun.”

(The video is here.)

(h/t to Ron Maurer for this link via Twitter)


My brief trip to Ann Arbor last April introduced me to a real-life application of conscious capitalism. Zingerman’s Community of Businesses is a thriving enterprise that does good business while doing a lot of business good. Rather than extracting all the profits from their companies, the owners put back much more than they take out. It’s a model that deserves some deep contemplation, and it’s the example I turn to as I seek a new investing construct for myself. Allow me to introduce what I’m calling the Enough Project, a gonzo investing and writing experiment to see what kind of impact I can have by investing small amounts in good businesses committed to doing good.   

Eating in Ann Arbor

It’s raining hard this April morning as our rental car speeds west down the short stretch of interstate 94 connecting the Detroit airport to Ann Arbor. The windshield wipers set quick cadence, a rhythmic background for the good-humored argument entangling my two colleagues and me. My boss, Josh, sits in the back scrolling through his iPhone, barking out various Yelp recommendations for good eating options in Ann Arbor. Daniel is in the front seat, and I’m behind the wheel. We’ve already shrugged off Josh’s first suggestion – that we let some group of restaurants called Zingerman’s monopolize all of our meals – and now he’s tossing out alternatives.

Josh is our company’s resident foodie, and so we usually defer to his better judgement when it comes to dining on the road. Plus his wife earned a masters at the University of Michigan, so he can call on first hand experience when it comes to the local restaurant scene.

Yet we challenge his every recommendation – we’re feeling argumentative – and so we’re now resorting to the advice of anonymous Yelpers.

As Josh relays their suggestions, we sense his heart isn’t into any of the substitutes.

Okay, we finally relent. Your original idea sounds fine.

“Great!” Josh responds, his demeanor changing instantly.He dials a number and within seconds we have a dinner reservation that evening for some place called Zingerman’s Roadhouse.

Second Thoughts on Investing

I’ve been mulling over a change to my investment approach for nearly a year now, seeking to reconcile my desire for high returns with a growing sensibility to do something constructive and socially beneficial with my money. Continue Reading…

Business Gone Good

July 10, 2013 — 2 Comments

A musing on my recent mental captivity to conscious capitalism.

The Conscious Capitalism Pebble

Somehow, someway I was introduced to John Mackey’s 2007 manifesto, “Conscious Capitalism: Creating a New Paradigm for Business.” (1) That essay led to a book promoting the the notion that business can be done better and an organization to convene the like-minded around those ideals. (2)

And I can’t get enough of it.

I read Mackey’s essay nearly a year ago. It’s been like a pebble in my shoe since. Its slight, nagging presence won’t let me forget it; won’t let me ignore it. Its themes have dominated my recent essays, hijacked my reading stack, and overwhelmed my thinking.

So, why? Why this fixation on doing business in a better, more conscious way? Continue Reading…

An essay in which I consider Whole Foods CEO John Mackey’s response to my question, “if Conscious Capitalism is such a good thing, why aren’t more companies doing it?”

John Mackey, Whole Foods CEO Photo Source: Joe M500, Flickr (Creative Commons License)

John Mackey, Whole Foods CEO
Photo Source: Joe M500, Flickr (Creative Commons License)

John Mackey Speech in Raleigh // Conscious Capitalism // Asking Why?

John Mackey stares at the running faucets in the men’s room just moments before his talk. He shakes his head incredulously, muttering to no one in particular, “That’s an awful lot of wasted water.”

The co-CEO of Whole Foods is a man of medium height and possesses a slight build. A tight haircut has tamed the unruly locks of curled hair I’ve seen in so many of his media headshots.  He’s in Raleigh this chilly February morning for a breakfast talk sponsored by our chamber of commerce. Mackey is promoting his new book Conscious Capitalism: Liberating the Heroic Spirit of Business.(1)

He looks around for an air dryer for his wet hands and finding none seems to ponder briefly whether to just slide them across his tan slacks. He opts for a single paper towel instead. Those who want to greet him this morning with a handshake will just have to endure his damp fingers.

Moments later Mackey is giving his spiel before an attentive crowd, a set of remarks unburdened by notes, spilling freely from a mind that has spent much time mulling over the subject. Then he opens the floor for questions. I sneak one in just at the end. It went something like this:

If Conscious Capitalism is such a good thing, why aren’t more companies doing it? Continue Reading…

Bill SpruillPhoto Credit: Bill Spruill

Bill Spruill
Photo Credit: Bill Spruill

When an investor believes he has an edge, he’s supposed to stay quiet. He’s supposed to focus his energy on exploiting his advantage, not on trying to teach others the methods behind his approach. That’s conventional wisdom anyway.

And yet here I find Bill Spruill, an angel investor who backs software startups (and a stranger to me just a few months ago) explaining his investing strategy in painstaking detail. It’s the day before Thanksgiving, and we’re sipping warm beverages at the Whole Foods café near my home in Raleigh. We’ve rendezvoused at local coffee houses since September, and at each meeting – despite knowing I’m both an investor looking for ideas and a writer likely to tell my readers all that I learn – he reveals a little more about what we’ve come to call the Spruill Theorem for Reasonable Angel Returns.

In a calm and thoughtful manner befitting a college professor, Bill presents case after case for me to consider. This morning he pushes a folded copy of the day’s Wall Street Journal across the table and points to an article about a high-flying social media venture attempting to raise a fresh round of funding. Its prospects are a bit dimmer than the last time it went looking for cash. “What’s going to happen to the early investors,” Bill asks me in his Socratic style of teaching-by-interrogation, “if this effort fails? What’s going to happen to other promising startups looking to get off the launch pad?”

Those two questions signal the reasons Bill wants to tell me and other prospective angel investors about his insights. What we think we know about the risks of these investments may be misguided. And sticking to conventional wisdom carries with it consequences not only for individuals but for the larger dynamic between investors with cash and entrepreneurs with their creative visions.

It’s bigger than Bill’s portfolio.  It’s bigger than any one startup. It’s an ecosystem issue. And Bill believes that debating the ideas of the Spruill Theorem will make for better informed angel investors and ultimately a healthier ecosystem of software startups in our Triangle community.

“Angel investors are heeding the wrong models,” he tells me. “We’re trying to copy the huge successes, thinking we’ll get the same outcomes. But these stories can be dangerous. These models rarely work for angels.”

He pauses for a moment before adding, “We need new models to follow.”

Continue Reading…

Demetri Martin SUCCESSWhat Standup Comedians Understand About Success That You and I Don’t

Demetri Martin, the 39-year old standup comedian and alumnus of The Daily Show, published the sketch above in his book, This Is a Book. It’s been making the meme rounds on Twitter for a few months now, finding a welcoming audience among the business illuminati. They are glad to have a champion who can convey the wisdom (with such brevity and clarity) that the path to success is a tangled and circuitous mess, not the simple story that we so often hear of ascension in a straight line.

With these few scribbles, Martin betrays an insight into the nature of success that seems to be best understood – strangely enough – by standup comedians. As we’ll explore below, they must all hone their craft through constant tinkering in the control setting of comedy clubs. The best of them never quit this testing mindset. They allow themselves plenty of little failures. They don’t wrap themselves in the success label, considering it something to strive for continuously rather than a status to defend.

In other words, they don’t get caught up in “being a success.” We’ll call that the success mindset. They keep experimenting, keep pressing the envelope, and keep finding new ways to make their customers laugh.

There is something here to be learned by entrepreneurs and business leaders.

Continue Reading…

lucyThe Case for Conscious Capitalism

Next week Austin will play host to a group of executives that label themselves “conscious capitalists.” [See] John Mackey, founder and CEO of Whole Foods, will provide the keynote address and suitably so. In 2007 he loaned his influential voice to this movement by penning the missive “Conscious Capitalism: Creating a New Paradigm for Business.”

It’s worth the read, and you can download it here. [pdf] The gist is this:

There is a longstanding prejudice that businesses exist for the enrichment of shareholders. While this is technically true, the notion has been interpreted to mean that corporate managers have the fiduciary responsibility to grab profits whenever they are available for the taking, all other constituencies be damned. It is the investor dominated viewpoint, often ignores the other stakeholders in a business, and it can be obscenely myopic. (See my related article, Whom Does Management Serve?)

It also creates, Mackey argues, a zero-sum game that pits investors against managers, employees, customers, vendors and all other stakeholders. By spending more on employee pay and benefits than absolutely necessary, for example, you’re taking earnings off the table that are the rightful property of investors. If employees win, investors lose.

The Conscious Capitalist movement argues for a different framework for understanding the game of business. Rather than a zero-sum dynamic, it suggests viewing it as a system of interconnected parts. By investing more in employee benefits, Mackey says, you get happier employees who better serve the customer…who then buys more products…which leads to higher profits…which can be shared with investors. Treat all stakeholders in a fair manner and the whole system is hoisted ever higher in a virtuous cycle. The sum of the parts, working in unison, become much more valuable than the individual components.

Continue Reading…

Tom Pirelli ESI Baby

I caught Tom Pirelli on his mobile phone one morning last week. He was near his house in Jupiter, Florida preparing his thoughts for an afternoon meeting about his latest venture, (something to do with using therapeutic lasers to manage chronic pain). He immediately strikes me as a man overflowing with energy, though he is not so young anymore.

I learn that he made a noble attempt at a leisurely retirement after selling his software company, Enterprise Systems, 15 years ago. But it would seem retirement did not fit his constitution. He has since started an ambitious foundation to provide better affordable housing options to impoverished communities in Mexico and Haiti. He has worked with USA Rugby, and took great pride in seeing his favorite sport included on the roster for the 2016 Olympics in Rio. And, of course, he has involved himself deeply in this new laser therapy business.

Tom is a success through and through with the sort of bona fides that might just turn a less humble man into a braggart. Yet despite his litany of accomplishments, this is the picture for which Tom is best remembered:

We’ll return to that later…

Continue Reading…

Exceptional Business Pic

I’m testing a theory here, the driving question of which is What are the cardinal traits of exceptional software and technology businesses?

The term “exceptional” is as qualitative as it gets. Perhaps we’ll give it more definition as we proceed, but for the time let’s be comfortable with former U.S. Supreme Court Justice Potter Stewart’s threshold test for obscenity: I know it when I see it.

I’m suggesting four criteria and using them as a framework for evaluating various businesses in different stages of development, as early as start-ups and as late as technology that has been retired from companies that have long since moved on. The application for what we learn will resonate most, I think, with young businesses either in their fledgling stages or otherwise still able to mold their cultures and their values.

My early thesis is that the exceptional software and technology companies share some combination of the following traits summarized below in very rough form:

Continue Reading…

A Thought Challenge For Value Investors

Dear Fellow Value Investors:

I’m offering you a rare opportunity to indulge yourself in fantasy. So suspend your disbelief for a moment and imagine that you get to own the five companies whose characteristics fan the flames of your capitalist desires. You will own each for ten years.

This will all take place in a mythical market where there are no prices. Instead, investor returns are magically connected to a company’s earnings growth over a long time horizon. If the business compounds earnings at five percent over those ten years, you’ll get five percent; 15 percent gets you 15 percent; 30 percent…whoah, simmer down! Show some self-control here!

Oh yeah, and there are no shenanigans played with accruals that affect reported earnings. It’s all legit in this little magical mystery market of mine.

So, let your mind wander. If you’re freed from the constraints of price…if you get to pick any company you want that trades in the public markets…let your brain get excited and greedy over the exercise, and decide…what five companies would you pick?

The trick in eliminating price as the main consideration is to focus the mind on those variables that drive earnings growth. Namely…

1. Market Size. The business is participating in a large and/or growing market for its offerings, giving it plenty of runway for growth;

2. Competitive Advantage. The business possesses advantages that create barriers to entry and prevent encroachment by competitors, thereby protecting market share (it’s not losing business to the competition) and/or margins (competitors aren’t finding a toe-hold by under-pricing or otherwise doing battle via price);

While putting the following control in place:

3. Economic Profitability. The business has a model that is profitable both from the perspective of gross profits exceeding expenses and earnings exceeding the costs of reinvesting capital. (In other words, no cheating! You can’t buy companies that grow in unprofitable ways…though I doubt many of these could last ten years.)

What are your five companies and why do you think they can compound their earnings at such a high rate?

Let me know your thoughts, and I’ll keep a running update on the blog.



You can email me at pauldryden (at) gmail.


Over the long term, it’s hard for a stock to earn much better than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for 40 years, you’re not going to make much different than a 6% return – even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with a fine result.

– Charlie Munger

(as quoted on p.233 of Seeking Wisdom: From Darwin to Munger by Peter Bevelin)


This week I’ve been a bit obsessed with the idea that the manager’s job is to represent the interests of shareholders. It brings to mind the Yogi Berra epithet:

In theory there is no difference between theory and practice. In practice there is.

In theory it makes sense. Companies are vehicles for invested capital to find returns. We entomb that concept in law and in corporate structure where the board of directors is explicitly charged with representing shareholders. Managers run the day-to-day and should have investors’ interests on their minds, remaining on constant look out for ways to increase shareholder value.

But we put the idea in play, how does a manager best represent investor interest? Indeed, which investor?

Investors are far from a like-minded group bound together by common interests in the business’ success and united in their opinions on how that success is best achieved. Oh no. To highlight just a few investor archetypes:

There are the hedge fund traders, moving in and out with positions measured in millions of shares and closed out within minutes or hours when the stock moves up or down by a penny or two.

There are the pension funds for (as an example) retired nuns. They hold shares for years but issue measure after measure for shareholder consideration on such social issues as whether you should offer health benefits to your lowest paid employees.

There are the corporate raiders that accumulate massive positions, gain board representation, and then force management to monetize assets and distribute the cash. This pushes the share price up for a time, during which the raiders sell out and move on to their next target.

All are investors in your public company. Each has very specific objectives. And those objectives are divergent and irreconcilable.

So, how does management effectively represent investors when their interests don’t align?

As a frequent visitor of Charleston, South Carolina, I’ve been required to read the works of native son Pat Conroy. My favorite book is his memoir My Losing Season in which he details his time playing basketball for the Citadel.

The Citadel, a military prep college in Charleston, is hard on its first year students (called “Knobs”), believing it must break each of them down and build them back up again in its own disciplined model. Conroy was not spared the hazing rituals. In a particularly poignant scene from the book he recalls being surrounded by several upperclassmen who begin demanding he do a variety of conflicting activities. As I recall, one would get in his face and scream that he do push-ups. Another would degrade him for doing push-ups, telling him he’s supposed to jump up and down. And yet another would scream at him for jumping; he should be reciting the school’s creed.

The demands came rapid fire. After several minutes of this Conroy was a wreck. He instinctively fell into fetal position on the floor, his mind unable to process another command. The older cadets walked away, satisfied that they had broken this cocky Knob.

The human mind cannot process conflicting orders without freezing up. It’s simply not how our wiring works. And so, while the idea that management works for investors sounds good in theory, in practice it’s unworkable. Many an executive has driven himself to exhaustion trying to appease these feckless masters.

What’s a manager to do?

Focus on the business itself.  Use the overall health of the business as a proxy for the long-term investor…that investor whose interests are aligned with the company investing in its advantages, foregoing immediate gratification en lieu of higher earnings further down the line.

These are the businesses I want to invest in. The opposite are those that pledge allegiance to blind total shareholder return, returning cash to investors that could be reinvested in the business to fortify its barriers to entry, improve its offerings, or make itself invaluable to its customers.

Part of my screening process is seeking out companies whose investors have become captive to the Shleifer Effect, overreacting to ostensibly bad news to drive the stock price down. I use “ostensibly” because I’m looking for instances in which:

A.) Interpretation Arbitrage

(Forgive my feeble attempts at coining a new phrase. I won’t promise it will stick. I’ll probably forget about it myself.)

Investors have interpreted declining earnings – and the resulting earnings misses – as bad news and reacted accordingly by changing their opinions on the firm’s future and selling off shares. They’ve misinterpreted the financial information or news, creating an “interpretation arbitrage” opportunity.

Sometimes the EPS miss does not represent a change in the company’s prospects. It can be random. It can be part of the grittiness of operating a business where you’re just going to have down periods from time to time. Or (my favorite) it can be the result of management investing heavily in their advantages or best growth opportunities, driving up expenses faster than revenue can follow.


B.) Time Arbitrage

Investors have witnessed declining earnings, correctly interpreted the results as temporary, but determined other investors will likely sell-off as a result, decided their own investing timeline is not long enough to wait it out, and so sell their holdings.

The business will be fine, and these owners have probably reached that same conclusion. But they must please their own investors this week, month, quarter, or year. The bad news might lead to several quarters or even a few years of depressed prices. The time arbitrage opportunity exists for anyone with the stomach and holding horizon to stick it out for the long-term gains.


Enter Thomson Reuters (TRI), the information and business news giant. By way of background, Thomson acquired Reuters in 2007 for a whopping $16 billion. This for $600 million in operating income, indicating this wasn’t a merger made primarily for earnings considerations. This was a strategic move to combine content offerings in an attempt to create a more perfect set of products. It was designed for synergy, and it was intended to create a viable competitor for Bloomberg, L.P. in the lucrative markets for trading desk data and information.

Investors greeted the strategy warmly despite the price tag. Thomson traded in a $40 to $50 range for some time. It collapsed to $20 per share in late-2008, and understandably so given the uncertainty surrounding financial institutions, a group that represented the lion’s share of its customer base. It recovered back to the low-40s by early-2011, but has since been on a long slide to mid-20s.

At this writing TRI trades at 28.50, creating a market cap of $23.6 billion on trailing earnings (excluding a huge non-cash write-off of $3 billion) of about $2.3 billion. That’s 10x semi-normalized net earnings, which looks pretty cheap. Of course the company has been reinvesting upwards of $1 billion each year in capex, suggesting (in the roughest of calculations) that owner earnings are probably more like $1.3 billion.

Despite plenty of ups and downs, the stock price has not generated wealth for its investors since the acquisition. Indeed, long-term owners (in particular, the Thomson family which owns about 55 percent of the business) are suffering.

The stagnant price, in and of itself, could be enough to indicate an investment opportunity. The Thomson Reuter combination story is clearly out of favor with Wall Street. But more interesting to me is the heavy investment the company has been plowing into a product it calls Eikon.



Eikon is meant to be the culmination of the synergies between Thomson and Reuters…the ultimate justification for the expensive merger. (Take a look at the terminal/service here.)

Joanna Pachner of Canadian Business put together an excellent overview of TRI’s great hopes for Eikon in a February 2012 piece here. She writes:


The Eikon platform, which cost a billion dollars and took more than two years to build, gave users access to the two companies’ combined intelligence on one desktop—hundreds of news sources, research reports and analytical and trading tools that brokers, bankers and analysts rely on to weigh investments, assess risk and conduct transactions.

There’s no question that TRI has leaned heavily into this investment. Both sales and earnings have suffered as a result. This has all the hallmarks of a Shleifer Effect opportunity. While revenue has grown year over year, reported earnings have declined each year since 2008. This creates a narrative for Wall Street of a business in a holding pattern (at best) or whose offerings are in decline (at worst).  As the Shleifer Effect describes, investors tend to see patterns in the earnings. Unless they have strong reason to believe otherwise, they interpret a down-sloped trend line to keep the same trajectory in the future. Owners sell. New buyers are loathe to come in. The long-suffering of shareholders tends to chase away all but the most entrenched interests.

The great hopes for Eikon and the stability of the Thomson family 55 percent stake in the business have probably mitigated the effect somewhat.

Eikon holds out a double-sided promise to expand operating margins from 18 percent to mid-20s. On the revenue side, it is meant to drive TRI into new markets with new clients. It’s supposed to be so cutting edge and so easy to use, it will cast a halo on the company and the rest of its products, easing the growth path into new geographic markets and adjacent line expansions.

On the expense side, it allows TRI to cut 200 expensive legacy systems with their equipment costs, maintenance, and separate silos for sales, customer service, etc. In its 2011 investor day presentation, TRI anticipates Eikon allowing it to consolidate from 172 data centers to six, from 19 delivery infrastructures to one, and from 1,600 developers to only 1,000.


The ambitions are large. Each percentage improvement in operating margin is $130 million-plus increase in earnings. If TRI can accomplish its goals – successfully launch Eikon, realize the strategy behind the Reuters acquisition five years ago – the business should be much more valuable than Mr. Market gives it credit today.

Eikon creates a binary decision-making process on TRI as an investment. If Eikon succeeds, TRI will look cheap a few years out. But if Eikon fails, the Mr. Market has probably been too generous with his 18x market cap to owner earnings multiple.


Strategies that look so good in investor presentations, and whose numbers hold such great promise for enriching shareholders, are not implemented in a vacuum. No, companies must execute them in the live-fire world of resource constraints, operational hurdles, and constant competitive challenges.

In a previous life I was part of a software company that sat on a cash-cow of legacy products used by a couple hundred hospitals nationwide. The products were solid, but the limitations of the old technology meant there was little we could do to expand their functionality. And (even worse) the legacy platform was becoming passe. No one was buying the operating system anymore. We had a decision to make…milk the cow until it ran dry, or try to reinvent the business.

Given the ambitious management team, we chose the latter path. (The ambitious are prone to action even in the face of difficulty and often despite odds stacked wildly against them.) We transitioned to a new platform. First we called it ASP, then SaaS, now cloud-computing. Using the legacy features as our blueprint, we built several new products from scratch. They were a thing to behold! The latest. The greatest. We expected the market to beat a path to our door, demanding the products immediately and waving crisp dollar bills under our noses.

That didn’t happen.

Well, at least we had our fallback. We would offer our existing legacy customers the opportunity to transition to the new products, revel in their benefits, and spout the benefits to the rest of the world. Well, they didn’t want to change.

We were stuck. We went through a couple rounds of lay-offs. And then the president went for the hail-mary. He sunset the legacy products, announcing to the customers that they had 18 months to transition to the new platform before we stopped supporting the old. The gamble paid-off. Mostly. With much grumbling and gnashing of teeth (we heard the term “extortion” over and over again), we managed to swap over a little better than half of existing customers. We survived the loss of clients because we forced them to pay a premium for the new products.

What happened to the others? This is the most informative part of the story when thinking about introducing new technology products…while they would have continued paying us for years on the legacy products (inertia is a powerful force when dealing with IT buyers), when we forced them to make a decision they decided to open up their process to our competitors. And our competitors got fat and happy off the defections.

Lesson for all…heavy investments in technology upgrades are painful for everyone involved. Even if you think you’re loved by your customers, pushing an upgrade (that requires new equipment, new training…just change in general, even if there is no additional cost) creates opportunity for your competition. In the enterprise software business, the long knives come out when a foe is pushing an upgrade or transitioning to new platforms. From a sales and marketing perspective, you know you can ramp up your prospecting when there is an opportunity to drive a wedge between a previously unbreakable bond between client and vendor.

Such is the reality that Thomson Reuters has faced with attempting to funnel hundreds of legacy applications into a single platform. One, there is the normal intransigence from existing clients around IT changes. And two, change gives those clients an opportunity to get cozy with the competition.


As measured by nearly all significant metrics, the Eikon launch has been a dud. This despite a two-year development effort, involving the work of some 2,000 programmers, a reported 1,000 client beta test, and a heavy marketing push through major financial media.

The results? According to the Canadian Business article, nine months into the launch only 25,000 of TRI’s 400,000 financial product users have transitioned to the new platform. Worst yet, only 3,500 new users have signed up. The CEO of the Eikon division left the company with several of his lieutenants. The company CEO, Tom Glocer, took over. Soon enough, he was shown the door.

According to this article from July 2011…


…deployment of the platform has been marred by poor product integration, cumbersome technology, and a fragmented sales effort. One industry executive familiar with the company said that where co-operation over the implementation of Eikon had been required, there had instead been “territoriality”.

 The Economist supplies this graph, comparing the market share of Thomson Reuters financial offerings versus those of Bloomberg. At the merger, TRI had a distinct advantage. But Bloomberg has closed that share at an astonishing rate. Indeed, Bloomberg defines the competitive environment into which Eikon is attempting its launch.



What has Bloomberg done during the Eikon launch? A lot. This is, I think, the most damning evidence against the long-term potential of Eikon competing against Bloomberg.

Computer World UK reported in February 2012 that Bloomberg dived into its own platform redesign…Bloomberg NEXT. The results versus TRI’s attempt could hardly diverge more. Bloomberg spent a reported $100 million versus TRI’s $1 billion. It programmers worked extensively with end-users, making sure to track their acceptance of changes and new features. It was an Apple-like design approach. Bloomberg moved some 100,000 of its 300,000 customers in the first few month and said it expected to move the rest by end of 2012.

And Bloomberg isn’t stopping there. Sensing a weakened opponent, it’s pushing its advantage by going even deeper into markets that TRI has traditionally dominated. From the Canadian Business article:


This month, Bloomberg launched another salvo across TR’s bow by unveiling a new tool that will let clients freely access information for which TR charges fees. The private company has said it expects its fiscal 2011 revenue to rise 11%, to $7.6 billion—a much steeper growth curve than the 2% Burton-Taylor projects for the industry. The two companies’ market-share trajectories sum up the momentum: both now have around 31%, but for Bloomberg, that’s up from 25% in 2005; TR is down from 37%.

I’ll use two more quotes and then end this comparison between rivals. First, Bloomberg executives are displaying thinly veiled schadenfreude at TRI’s troubles. Regarding NEXT, Tom Secunda (Bloomberg co-founder) states:


Simplicity has tremendous value. A function that’s brilliant and never used is worth zero…Our business model is that we keep our price fixed but we dramatically increase the value of our product. 

Second, the Candadian Business article winds up using this conclusion (apt, I think):


TR executives may be confronting a disheartening realization: that even a huge investment in state-of-the-art technology, which is in many ways superior to its main competition, may not be enough to reverse its slide and Bloomberg’s gains—“which goes to the core of how entrenched Bloomberg is,” says Aspesi. TR admitted last year, he says, that it doesn’t expect to regain the market share it’s lost any time soon. In what promises to be a very tough year in the financial markets, amid economic weakness and European instability, Thomson Reuters may have to significantly change its game plan. “The merger could not have made more sense,” sums up Taylor. “The strategy is still sound. But the tactical implementation just hasn’t worked.”


Using screens to identify investment candidates, Thomson Reuters showed some early promise. While somewhat cheap on a reported earnings basis, the company was clearly investing heavily in what it saw as a future franchise…Eikon. It just might be a Shleifer Effect interpretation arbitrage opportunity. For purpose of our assessment, the success or failure of Eikon really is the driver, creating a decision based on a very simplified question…

Do we have good reason to believe that Eikon will succeed, creating stronger earnings in the future, and protecting the business with a competitive advantage against the likes of Bloomberg?

From the evidence we collected, it seems the answer is “no.” Reality might very well play out differently. Perhaps there’s something going on behind the scenes that we just don’t understand. Perhaps TRI is worth considerably more after another year or two of getting Eikon (and its other businesses) right. I’ll accept that possibility while understanding that I don’t see a clear, conservative path to it. The shallow competence I possess calls TRI a pass.