Has ION cornered the market in CTRM?
In the last couple of weeks, we’ve had numerous people ask us what we thought ION’s strategy might be? Are they out to corner the market for trading solutions servicing energy and commodity companies? And now, with the acquisition of Allegro, had they accomplished their goal?
Let’s break this down…
Yes, we do believe that ION wants to control enough of the market for ETRM/CTRM solutions that they can effectively exert upward pressure on prices for new and/or expansion software licenses in the space by limiting buyer choices to ION owned products. Have they achieved this goal? Probably not in total as this a broad, and in many ways, rapidly changing market. With more than 100 vendors servicing some part or parts of the value chain in wholesale commodities, there are a number of options to ION controlled software for any buyer shopping for a new system. Additionally, with new cloud systems and constantly improving integration tools, customers are better positioned than ever to combine “best of breed” point solutions into an enterprise-scale CTRM architecture that allows them to move away from one of the 2 or 3 monolithic solutions offered by ION.
Looking at the question in terms of market share, ION is now clearly the dominant player with what we estimate to be about 45% or more of the market on a revenue basis. However, as we have previously noted, it’s not the only “mega” vendor out there – SAP has a fairly sizable, and growing, portion of the market. FIS, after years of investment and a new, comprehensive corporate strategy, is also becoming a more significant player in the space. Still, after having acquired the three largest independent CTRM vendors (Triple Point, OpenLink and Allegro), one might expect ION to ‘own’ the CTRM software category – but, it doesn’t, and as the remaining acquirable targets get considerably smaller and smaller as you go down the list, even if it gobbles up a few more, their market position isn’t going to change substantially. This is a highly diverse market that continually shifts, morphs and changes direction rapidly and often, sometimes leaving vendors and their customers with functionally mismatched and expensive to upgrade solutions – which, in turn, affords new vendors an opportunity to enter the market, and the younger & more agile vendors the opportunity to find new customers and grow.
Of course, one also needs to give thought to ION’s product strategy…do they try to build out a new platform as a replacement for most or all of the competing solutions they’ve acquired like SunGard tried to do? Or do they simply offer customers the status quo – “take your pick from the menu of our solutions”? Either approach is not without risk for the company – big investment in product development with uncertain returns vs. selling from a menu of increasingly expensive and mostly mature products against younger, agile competitors pushing “new tech” solutions.
As has been reported in the press over the last year, ION is accruing significant new debt with each acquisition and their ability to manage that debt going forward is apparently being questioned by some in the financial community. Given the recent difficulties they’ve had restructuring their existing debt, they may be limited in how much they can invest in their existing products and/or additional acquisitions. That could create a bit of a squeeze for the company – without demonstrating continued revenue growth (via new sales, driving additional revenue from existing customers and/or additional acquisitions) and improved profitability, their existing lenders (primarily UBS) may be reluctant to step-up and provide additional, or restructured, financing. It’s going to be interesting to see how that plays out…
Unfortunately, for existing customers, none of this changes their current circumstances in that they may not have much choice when it comes time to buy expansion licenses or additional functional modules for a product now owned by ION. If an ION customer has added employees and they need to buy licenses for those new users, or if they need to add additional capabilities like credit risk, for example, ION will probably charge that customer a premium fee…it’s a rational business behavior and should be expected from any vendor with a superior market position. The same can be assumed for support and maintenance agreements – as existing agreements near renewal, ION customers shouldn’t be surprised if the company pushes for significant price increases and lengthened terms. As noted, ION needs to grow revenue and, of particular importance to lenders, they also need to demonstrate they have a predictable and reliable stream of revenue with which to service existing and future debt.
The big question for ION will be how much can they can get away with – how much they can increase the revenue stream from their existing customers, and with which customers? Would ION be particularly bothered if they angered a customer or two over the cost of a few new seats? Can they afford to have a few angry customers or even lose a few here and there? The likely answer is yes, they would be willing to surrender a customer or two if their pricing strategy results in higher revenues across the board. This is particularly true for those that are not “flagship” customers like the global energy companies. If they do pursue a “revenue maximization” strategy, then we feel it’s likely the customers in the mid-market are going to be the ones that will feel the most immediate pain…those with 25 to 75 users that are growing their business and are seeking new capabilities and new user licenses, but don’t want to spend a couple of million dollars or more buying and implementing a new system. If the only alternative to that is to pay-up – say a half a million as opposed to two or three hundred thousand they might have paid otherwise – they will likely hold their collective noses and write the check to ION. Smaller customers, those with 10 – 20 users and trading in a single commodity or market, may be better positioned to jump ship to an alternative vendor if they feel ION is being overly aggressive with their pricing. This is of course the scenario the younger and more agile competitors have been waiting for. Hungry to grow their businesses, they will see this as an opportunity to displace some of the entrenched ION solutions and will likely be willing to heavily discount their listed fees to do just that. As a result, we do feel the smaller vendors are going to take market share in the coming years.
Still, CTRM products, much like any ERP-scale solution, are often crazily expensive to procure, implement and support. It can take 9 months to 3 years for most buyers to fully utilize their new systems to manage their businesses, and implementing these products is not like childbirth…customers do remember the pain of the process and nobody has insurance to help cover the costs. If not all that long ago you spent more than a year or two (or three) and several million dollars selecting, contracting, and implementing a new system, you’ve been through a bit of hell and you’re very unlikely to want to have to endure that again…even if your chosen software provider (who may now be owned by ION) decides to push up prices. If that happens, you may protest, but you’ll also likely write the check. However, when the day comes when you’ve fully amortized the initial cost of the system and you’re facing a difficult and expense upgrade, chances are you’ll be more likely to look around and give serious consideration to a competing solution…and there are, and will likely always be, plenty of choices when doing so.
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