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The Bloor Perspective: Microsoft McCarthyism, e-banking and investment reforms
This week Robin Bloor and his colleagues consider the ongoing cases against Microsoft, the success of e-banking and investment banking, post-Enron and all that...

By Bloor Research

Published: Monday 24 February 2003

The European Union already has underway a four-year old probe into allegations of breaches of anti-trust laws by Microsoft. Yet we now have a request for another, similar investigation, by a group rejoicing under the acronym CCIA (The Computer & Communications Industry Association.) That group is urging the European anti-trust regulators to stop what they see as anti-competitive practices and break up the Microsoft monopoly.

There is an obsessive quality about anti-competitive lobbies: all monopolies or perceived monopolies are against the public interest and anti-consumer. The search for them is almost McCarthyist it its zeal and pursuit. The 'modern witch-hunter general' is an appropriate epithet.

In this specific instance there is certainly a gamble by the CCIA to stop Microsoft not only exploiting existing technologies but apply these technologies to future applications. The basis for the new anti-competitive assertions appear to be that by 'bundling' other programs with XP, the contemporary version of Windows, Microsoft is intent on monopolising the markets deriving from handheld computers and mobile telephones.

The point is that these are not existing monopolies, where there is an existing dominance of markets. Leaving aside the fact that such complaints seek to extend the powers of the already powerful competition authorities to areas which should be outside their domain, they could be perceived as 'vexatious'.

Perhaps the plaintiffs would be more fruitfully engaged in R&D in imaginative applications in future products and services which would be increasingly competitive, without reaching for their legal advisers.

Aside from this, the process of expensive investigation is not only a distraction from conducting business but is subsidised by the tax-payer, whom these plaintiff organisations, one must assume, are allegedly seeking to protect?

It is time to question the time, cost and effort, exerted in these expensive anti-trust investigations. The key beneficiaries are the professional services organisations engaged by the plaintiffs and defendants. Unfortunately, it is another form of creeping Americanisation, which we have to tolerate in Europe, at least for the time being.

*E-banking - just another channel?*

Despite predictions that the on internet would spell the end of branch banking, channel integration and branch renewal are set to dominate European retail banks' investment until 2005, according to research by market analyst Datamonitor. It reckons total spend on branch renewal will grow from $790m in 2002 to $1bn in 2005, a compound annual growth rate of 9.6 per cent between 2002 and 2005.

The web continues to be a great marketing and lead-generating channel, as the number of homes with internet access has grown over the last few years. However, it has failed to be the sales distribution channel that was envisioned by the major retail banks. Further, other channels such as interactive TV and mobiles have failed to catch on too.

This is supported by the evidence that spend by European retail banks on m-banking products has dropped from an estimated $73m in 2001 to $49m in 2002 and Datamonitor expects it will be slow to regain its pre-2001 levels in the foreseeable future.

Banks are realising the relationship aspect of their business is still essential. Most customers still prefer some level of face-to-face interaction. There are always certain things you cannot do over the web - such as scream at a bank manager! They are making it a priority to equip branches to perform high-value sales and services while increasing the level of self-service within them.

A key IT implication of this involves developing a next-generation, customer relationship management (CRM)-enabled branch desktop, providing staff with sales and service tools and access to customer data and product information.

Although Datamonitor predicts the number of branches in Europe will fall from 184,442 in 2002 to an estimated 168,762 in 2005, this will be because banks are still seeking to rationalise networks and migrate simple transactions to automated channels to cut costs. Datamonitor predicts that channel integration continues to be a priority as banks seek to improve service levels as well as customer retention and cross-sell rates.

The e-tail banking business grew on the back of the dot-com boom of the late 1990s and the increased uptake of ecommerce, where every punter wanted to be a trader. The retail banks thought that once a customer was plugged into this, there would be no escape. We do not doubt the internet will eventually be an essential part of retail banking but if the dot-com boom had not been there, would the investment on e-banking have perhaps taken a different line of attack? Perhaps more along the lines of what is being considered now - an intelligent combination of branch networks, better CRM technology and web channels.

*Being whiter than white*

So the UK falls into line with the US on guidelines for conduct of investment analyst activities, ostensibly to restore a level of confidence among small shareholders in investment research. Surely it is more important to restore confidence in the fundamentals of equity markets first - and these are beyond the abilities of the investment analysts.

The UK Financial Services Authority (FSA) indicates that although they have found bad management of conflict of interest and selective bias, there has not been the scale of poor practices as there has been in the US. The FSA has chosen to issue guidelines rather than introducing rules over investment research practices.

In this way it is the responsibility of the financial institutions to implement the guidelines as they deem appropriate. There are some key points to the code. Investment analysts will not be allowed to seek investment banking business. In other words, they cannot be part of the team pitching for capital raising mandates.

There will be severe restrictions on the scope and timing of their dealings in securities, which they cover for investment research purposes. Finally, investment analysts will no longer be permitted to have their overall remuneration linked to the profitability of investment banking business.

Some of the regulations introduced into the US financial markets have been avoided. The analysts do not have to certify that the research truly represents their own personal view. It is anticipated, however, that institutions underwriting an initial public offering will be banned from issuing research on the subject of the underwriting 'around the time of the underwriting'.

While it was anticipated US financial institutions will apply the US regulations to their overseas operations, many now seem to have decided that they will exempt their overseas operations from these regulations.

They believe they will lose business in local markets, where non-US rivals are not and will not apply such strict rules. Nevertheless, there is a trend in all financial markets to increase the separation of research and investment banking, accompanied by safeguards to reassure investors.