My friend and former colleague Seth Goldstein got front page billing last friday in the Wall Street Journal. Seth's company, Majestic Research, offers a new form of stock research that is totally independent and proprietary. It makes money for its customers by giving them data they can't and won't get elsewhere. The term for companies like Seth's is "third party research providers", meaning that the trading ideas don't come from the "sell side" or the "buy side", they come from a third party to the transaction. In reality, many of the new emerging research providers are really sell side players of a new and different flavor.
Who else is in this business? Interestingly, Jack Hidary and Stanton Green's Vista Research and Andy Klein's Soleil Group are two important new players. Then there are two of the veterans of this business Gerson Lehrman Group and CFRA.
Seth Goldstein, Jack Hidary, and Andy Klein are veteran entrepreneurs who formed and built Site Specific, Earthweb, and Wit Capital, respectively. What do they see in the independent research market that takes them here instead of some other attractive emerging market? And what about Gerson Lehrman and CFRA? Well Bessemer Ventures just led a very large investment in Gerson Lehrman and last fall TA Associates invested $60 million into CFRA. Something big must be going on here for all of this venture/entrepreneurial activity to be happening in this sector.
As Jim Cramer (who has his own third party research group called IRG at TheStreet.com) points out in this week's New York Magazine, traditional equity research from the large brokers just stinks. It's awful and getting worse.
It's pretty clear to me that just like the computer industry in the late 80s and 90s, and the telecommunications industry today, the brokerage business is beginning to undergo a transition from a vertically integrated model dominated by large monolithic companies to a horizontally layered model with leading providers dominating each layer, but nobody dominating more than one layer at a time.
Who is going to be the Microsoft/Intel/Cisco of equity research? Who knows? It could be one of the companies I just mentioned or it could be a large broker who decides to jetison all the other layers and focus on research (but i doubt it). But one thing is clear. It's a great time to invest in companies that will accelerate this process of decomposition and recomposition and a lot of value will be transferred in the process.
I want to invest in this trend and plan to post a lot more about this emerging category in the coming weeks and months.