One of the trends that ComTech is advising clients around is the structural change in the industry. Today’s Reuter’s story shows that this change continues unabated as commodity volatilities and prices remain lower along with many other issues and difficulties. Over the last few years, we have seen a decrease in the number of top tier players in the industry or a reduced focus on commodity trading in the top tier led by the exit or pull back of the larger banks. However, this has not been restricted to banks – in fact, we have seen large utilities losing money restructure often creating a new business for fossil fuel assets and separating out the renewables such as EON/Uniper. The big oil and petrochemical companies have also faced reduced profitability and restructuring while the big merchants have also suffered – most notably Noble. The top tier is smaller than it was and we would argue that even the middle tier – the traditional package buying tier – has also declined in numbers. What has grown and grown quickly is the bottom tier. As traders at large firms have exited disgruntled not just by smaller bonuses, but by an increasing amount of bureaucracy and ‘red tape’ in part driven by regulatory pressure, they have often emerged running their own small boutiques or joining smaller entities seeking greater expertise. Added to that the increased number of niche business opportunities in retail, aggregation, specialist shops (think Coffee, Cocoa and so on) as well as the entry of consumers and producers who now see a need to hedge, and you have a structural change in the industry.
The impact of this is quite large. Big CTRM deals are fewer and many of the top tier still instinctively prefer build not buy anyway. The middle tier is smaller but has been more focused on infrastructure and data both for regulatory reasons as well as to prepare for a technology shift. The bottom tier, though now more numerous, is cost sensitive yet, impacted also by regulations and stakeholder audits, has to move to proper systems and processes. It is finding what it wants with the smaller more focused CTRM in the cloud vendors. The top tier, is also impacted by decreased profits and needs to reduce costs and sees the cloud and services approach as a way to build and buy.
This means that cloud is King. The lower costs and ability to get in and out of new solutions quickly means that both top tier and bottom tier are moving rapidly to the cloud. as the middle tier completes its infrastructural changes, it too will go for the flexibilities of the cloud. Traditional license deals are not dead but they are fewer than ever before. Any vendor that doesn’t now have a real cloud strategy and business model is feeling the pinch. ComTech sees this as a period in which smaller, niche focused vendors will pick up market share from the larger vendors – though let us be realistic too. A 20% increase in revenues for a 1m USD business isn’t going to erode significant revenues from the larger vendors but in terms of number of deals consummated – we expect the smaller vendors will have a greater share going forwards.
Of course, there are many other trends and impacts at the moment as well but we do see this one as important. In time, things will perhaps return to what has been the norm from an industry perspective as merger & acquisition – on both sides – will eventually restore something of a status quo. The winner however, has to be CTRM in the cloud.