the Bloomberg snooping scandal

About a week ago the New York Post, of all places, broke a story that reporters for Bloomberg News could (and did) access information about customers’ use of their Bloomberg data terminals–and were using the insights they gleaned to try to generate stories.   In the instance the NYP cited, a Bloomberg reporter was asking Goldman about whether a certain executive was still on the payroll.  It sounds to me that in the course of an unproductive conversation the reporter said he knew something was amiss because the person in question hadn’t been using his Bloomberg terminal for an unusually long time.

Once the story broke, J P Morgan revealed that it had been pressured for information on the fate of the disgraced “London whale” trader by Bloomberg reporters who said the same thing–that they could see changes in his usage of Bloomberg data.

Bloomberg says reporters’ access to customer data has since been turned off.

good news/bad news

The good news, for Bloomberg users, is that the reporters in question made no effort to disguise the fact that they had been analyzing their target’s Bloomberg usage.  This has brought to light fine print in Bloomberg contracts that apparently allow such behavior.  The contracts will doubtless be changed.

Also, the ineptitude of the Bloomberg reporters suggests to me that the practice of mining customer information was not kept quiet for long.  They went directly to the companies; their main tactic seems to have been to beat them over the head with the privileged information they had–ensuring instant publicity.   So the problem has likely been nipped in the bud.

relevance?

Whether and when the London whale lost his job isn’t really a market-moving story.  It would be inconceivable that a trader could rack up monumental losses, hide them while trying to recoup through further trades, and still keep his position once discovered.  And the workout of the mess he made would follow easily predictable steps.  So this was not investment news.

No, this was a general news story.

That’s the interesting part of the tale.  If we figure there are 300,000 Bloomberg terminals in use, at, say, an annual fee of $25,000 each, that would mean they generate $7.5 billion in yearly revenue for Bloomberg LP.

Why in the world would you put that revenue stream at risk by undermining customer confidence in your discretion?   …especially by going after stories that have no direct relevance in helping investment industry customers do their jobs?

My guess is that someone high up in Bloomberg LP has decided that it’s a good idea to try to develop a new source of profits by building a general news capability using the investment researchers already in the company as a base.   I’d also guess that this is a relatively recent development, one that coincides with the fading of Bloomberg Radio as a source of investment information.

Peter Lynch of Fidelity called it “diworsification” (a term I hate), when a company strayed from what it was successful at to enter an allied field.  Often, the diversification make the company worse, not better.  We may be seeing an instance of it here, particularly if worries about being spied on cause customers to start looking for alternatives to important Bloomberg services.

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