Bloomberg's money machine (cont.)

By Carol J. Loomis, Fortune editor-at-large

'Here was the future'

How Michael Rubens Bloomberg built this marvel was part vision and part random events. Bloomberg had thrived as a trader at Salomon Brothers during the 1970s, loving the place, then made an enemy who got him banished to run the firm's rudimentary computer systems. Soon after, Salomon took itself public by merging with Phibro - whereupon Bloomberg and a few other Salomon partners were declared surplus. The only silver linings for Mike were that he had stored up computer knowledge and was leaving with a bundle of Phibro-Salomon securities worth around $10 million.

Recruiting a few friends to join him, Bloomberg conceived a company that would supply computerized aid to Wall Street firms and other financial operations that traded fixed-income securities. There would be rivers of data (providing, say, all the specs of a corporate bond), analytic tools that would allow users to manipulate the data (calculating, say, the relative value of government bonds vs. corporate ones) and for the processing of transactions, systems that tightly linked traders with their back offices.

It was brave new stuff, and the complete package certainly didn't come into being overnight. But by 1982, Bloomberg's company - then going by the name Innovative Market Systems - had landed its first order, from Merrill Lynch, and was on its way.

Bill McElroy, a veteran bond buyer who now works for a Manhattan investment advisor and treasures his Bloomberg, remembers seeing a sales presentation of the product at a hotel in the early 1980s. He says, "They had an old IBM Selectric typewriter hooked up to a terminal, the hotel switchboard kept messing up the presentation, and everything worked abominably. It was primitive. But you could just see it: Here was the future."

He and other buy-siders went on to indeed identify Bloomberg as a great leveler, because it sharpened their knowledge of bond values to the point they could hold their own with sell-side traders (who meanwhile lamented the transparency that the new product brought to the market).

"And then," says McElroy, "Bloomberg just kept adding more stuff," which is like saying the Pilgrims were followed by many more immigrants. From its start in bonds, Bloomberg gradually poured in data and analytics on commodities, equities, foreign securities of all kinds, energy, mortgage-backed securities, derivatives, mutual funds, real estate, hedge funds, foreign exchange. Its oceans of information today include earnings estimates, SEC filings, merger and acquisition facts, legal documents and data on 1.3 million people.

Yes, you can search on Google for people. But a Bloomberg can give you a quick-and-dirty rundown that, at its best, will provide address and phone, year of birth, education, employment history, news stories about your subject, compensation when that's public, maybe some family details. If you'd next like to e-mail that person, and maybe send him a raunchy joke that would get you in trouble on your corporate system, you can send it on the Bloomberg e-mail system. "Just Bloomberg me" is a common Wall Street instruction.

And of course, you've got news. Convinced by 1990 that he needed to compete fully with the Dow Jones News Service and Reuters, Mike Bloomberg hired bond reporter Matt Winkler from The Wall Street Journal and told him to start building a news service.

Today Winkler has 2,300 people, more than half outside the U.S., reporting to him. He thinks of them all as being in the news service, but some specifically put out a magazine, Bloomberg Markets, staff a 24-hour television operation (which in the U.S. is available mainly by satellite transmission or digital cable), and run a New York City radio station. You can get the TV and radio on a Bloomberg.

'I've got to have a Bloomberg'

The mountains of information on a Bloomberg, and the functions that allow the data to be usefully analyzed, are both the service's glory and its occasional burden. One Manhattan value investor said recently he'd removed the Bloomberg from his desk because he was spending too much time on it. Some technical fumblers and old-school moguls also find the sheer size of the Bloomberg menu daunting.

Michael Steinhardt, the hedge fund pioneer, said recently that he has a Bloomberg on his desk but doesn't know how to use it. The retired chairman of Citigroup, Sandy Weill, says he uses his but wouldn't dare stray from the pages that show the price of Citi stock and changes in the major indexes, for fear he could never get back to them. (Another financial notable, Warren Buffett, does not have a Bloomberg on his desk, though a member of his staff uses one gratefully.)

To be sure, if you're willing to learn, training classes are freely given and hordes of Bloomberg customer-service people will "smother you with love" - that's how Lex Fenwick puts it. You could tax them with questions 24/7, and they would politely pass you around the world's time zones, from one help desk to another, normally talking or writing to you in your own language, even if that's Urdu.

As for Bloomberg prices, they have no direct connection to the mass of content the company has added over the years - they just go up periodically. Not by a bundle, either, since it is pretty clear that Bloomberg does not see itself as blessed with price elasticity. Late last year, the company raised rates roughly 5 percent, as it has done about every two years in the recent past.

Here are the current particulars: When a customer buys a standard Bloomberg Professional subscription he enters into a two-year contract, paying quarterly in advance. If the customer has just one Bloomberg, the rate is $1,800 per month. If he has multiple Bloombergs, which is overwhelmingly the case, the charge is $1,500 for each. Should the customer want Bloomberg to, for example, effect equity trades or supply flat-panel screens, there are additional charges; real-time stock prices are among the other items that cost extra.

An unusual element of this pricing structure - and a pillar of the business model - is that Bloomberg absolutely will not provide volume discounts. The monthly price if you have two Bloombergs is $1,500 for each; the price if you have 2,000 Bloombergs is $1,500 each. Neither can you buy only a portion of Bloomberg's data. It's the whole megillah or nothing.

In contrast, Reuters and Thomson Financial are much more flexible about both price and what they will sell. Reuters actually has more terminals installed than Bloomberg but doesn't come close to getting as much in revenues out of each one.

Talk to a large number of Bloomberg customers, and you will find some who don't know what a subscription costs and others who think the price steep, to the point that they contemplate having their Bloombergs removed. In between, there are people who know precisely what they are paying and find the product worth it. The technical expert at a respected money-management firm recently called Bloomberg "an essential component of our business process" and went on to give his view of the world: "There are really two types of market-data users out there - the ones who have a Bloomberg and the ones who wish their firm would spring for one."

There are funny echoes of that opinion in a recent experience of Paul Darrah, an architect who oversaw the construction of Bloomberg's new Manhattan headquarters, then last year took a new job as head of real estate at Lehman Brothers. Darrah recalls being introduced early on to a Lehman executive who, hearing where Darrah had come from, tore into him about Bloomberg, gathering steam as he talked.

"It's like drugs," railed the executive, "like selling heroin, and they get you hooked, and they screw around with cables under your desks, and they keep selling ... All the traders are out there saying, 'I've got to have a Bloomberg, I've got to ... ' It's like crack cocaine, because everyone has to have it, right?" He stopped and pinned Darrah with a fierce look: "I'll bet you're a spy. They put you in here, didn't they?" It took a while, says Darrah, but finally the executive cooled down and allowed, "It's a brilliant product."

The ultimate test of a Bloomberg's worth to an employee would be whether his boss could bribe him to give it up. Well, the head of a much-admired East Coast money-management firm says he tried that not long ago, with astounding results. Figuring unhappily that the cost of a Bloomberg was $18,000 annually and not believing that his value-investing analysts could be getting that much out of it, the boss told each of 12 analysts that he would raise their individual bonuses by $15,000 if they would give up their Bloombergs. Eleven out of the 12 said no. One analyst said he would actually prefer to see his current bonus cut by $15,000 rather than give up his Bloomberg.