Leigh Watson Healy – June 24, 2016
The Brexit referendum results have delivered a political and economic earthquake that will rock Britain and Europe and have repercussions around the world and for all parts of the information industry.
The people of Britain woke up today to find that they are leaving the European Union. On a turnout of 72%, 51.9% voted to leave and 48.1% to remain. A slightly emotional David Cameron stated that he will resign as prime minister ahead of the Conservative Party conference in October. The pound plunged to a 30-year low. The stock markets in London, the US, Europe, and Asia plunged into turmoil in the opening minutes of trade, with shares in banks hit especially hard. The Governor of the Bank of England, Mark Carney, issued a statement saying that, “inevitably, there will be a period of uncertainty and adjustment following this result.” Addressing the markets, Mr. Carney said the Bank of England has “extensive contingency plans” and is ready to provide more than £250bn of additional funds to help stabilize the economy.
The EU referendum has divided the UK, with Scotland and Northern Ireland strongly voting to remain and England and Wales voting to leave. In Scotland, 62% of voters opted to remain in the EU, and 56% in Northern Ireland voted to remain. Unless a compromise can be agreed, this raises the very real prospect of Scotland voting to leave the UK in a new referendum on independence, and possibly a referendum on whether Northern Ireland should reunite with the Irish Republic.
Focus is now on the negotiation process to manage the UK’s exit. Article 50 of the Lisbon Treaty provides Member States with a process for exiting the EU. The negotiations will be split in two parts: First, the terms of UK’s exit; and second, the UK’s future relationship with the EU. However, the five short paragraphs of Article 50 raise as many questions as they answer, and the untested process will break new ground. The European Commission will lead negotiations within two years, and propose an agreement that will be put before the European Council of Member States. The fear of contagion will mean that some Member States will be eager to make the UK leaving the EU as difficult, and as expensive, as possible. A failure to reach an agreement will lead to the UK trading with the EU on basic WTO rules involving trade tariffs in both directions.
Why This Matters:
There was enough uncertainty in the global economy without Brexit, with an already fragile EU economy that has still not fully recovered from the Euro and banking crisis. Now businesses face a prolonged period of uncertainty that will impact investment decisions. The economic warnings from expert economists could not have been clearer ahead of the referendum, among them the International Monetary Fund forecasted that the UK economy could shrink by 1% to 9% over the long term if the UK left the EU. However, the vote was not driven by people’s views on the mechanics and economics of the EU; instead, it was a populist protest vote against the political and economic establishment that fits a pattern across much of the developed world since the 2008 crash, witness Sanders and Trump rising high on the scene.
Closer to home, ultimately global economic instability is the biggest single threat to the information industry as a whole. The Japanese yen has surged, which will be a body blow to government attempts there to get the country out of its long-term slump. China is slowing, and Russia is still suffering from oil price collapse. France and the Netherlands, two of the six founding members of the European Economic Community, will have politicians demanding an exit vote as well. As in 2008, much will depend on the degree of international cooperation to keep the European and world economy growing stable. But the political climate is febrile and that won’t make it any easier
There will be much ado about sorting out trade and regulatory arrangements on a country-by-country and company-by-company level. US and European companies will reassess their UK businesses. These uncertainties and the measure of power that is now in the hands of national trade and regulatory negotiators will make it hard for any company to act on any contingency plans they may have waiting on the shelf. UK’s leaving will create disruption in trade and commerce and tension in the economy that will last for years. In information circles, it will mean upside for law and risk and related practice areas. Some may go relatively unaffected unless R&D dollars dry up — health and STM — others may face downturn — businesses that depend on marketing dollars. Information companies face the same general uncertainty and risks as all other businesses; however, Outsell specifically expects the following impacts on the various information industry and its segments.
B2B & Media
Ahead of the referendum, a lot of advertising spend that was supposed to happen in Q1 and Q2 was front-loaded into the second half of 2016. In the short term, the Olympics, the US election, and the Americas and European football cups will still attract advertising spending. Global advertising market by all accounts is growing 3% to 5%, driven by these big events. However, the consensus before the Brexit result was that it might fall back by 1% next year. Now the drop is likely to be bigger, especially if there is another recession. If there is a big cutback in advertising, a lot of the current adtech and martech companies will not be able to last until the recovery. This is especially true of a lot of venture-backed startups, many of whom are each other’s best customers. Fear and uncertainty could lead to a reduction in advertising, travel, and event attendance, particularly in B2B, in the second half of 2016. It’s one of those moments when everyone just pauses to see what the other guy will do. It seems less likely to lower spending on the underlying industrial goods and services.
Financial, Credit & GRC
In the financial, credit, and risk and compliance arena, information providers in these spaces will be “firing on all cylinders,” due to customer need for more market visibility. Opportunities for the major financial desktop solution providers like Bloomberg, Thomson Reuters, McGraw Hill Financial (S&P), and FactSet could gain an advantage over the smaller niche data providers, as the ability to view geopolitical impacts on stock, equities, and commodities in one centralized platform could become more desirable, allowing users to decipher potential correlations and causal relationship on pricing and valuations. However, if the financial markets falter or the London financial center becomes a shadow of itself, it portends fewer terminals and another round of shakeup.
Experian, Equifax, and Callcredit, the major credit information providers, will likely see an uptick in their demand as well. The GBP has already dropped 6.8% against the USD, 12.5% against the EUR, and 11.4% against the AUD since the start of this debate at the end of 2015. This means British consumers looking to buy imported goods are looking at heftier price tags, thus potentially in need of more credit to secure these items.
In the risk and compliance area, the aspects of supply chain, forex, tax, and commodities pricing will drive up the demand for solutions that identify and mitigate these risks. Top players that stand to win include LexisNexis, Thomson Reuters, and IHS Markit. In the areas of commodities, trade deals will be disrupted, weakening an already tough commodities ecosystem. UK will not only have to renegotiate trade deals with the EU countries, but with other nations that rely on EU trade deals. This will present a near-term pain and disruption in business. People will no doubt be working overtime, from assessing forex and trade implications to changes in tax structure of its companies with distributed teams based in the EU and elsewhere in countries working with the EU.
Legal & Regulatory
There will be a great deal of legal and regulatory changes that will need to take place to facilitate the exit of the UK from the EU, which will increase demand for legal services and information solutions that cover these practice areas. However, the small short-term uptick in demand for these solutions could be dwarfed by the long-term decline of the global financial center in the City of London, which is the lifeblood of the largest law firms. While corporations will, of course, spend more on legal Brexit advice, economic uncertainty may lead to them pulling back from mergers and acquisitions, a major source of fees for large law firms. London is the world’s second-largest legal market, with 122 of the world’s 200 largest law firms having an office there, second only to New York, according to The Lawyer Global 200 2016. Seventeen of London’s top 50 law firms are US headquartered, and these firms, along with others, may now look to move their operations to Dublin and elsewhere if trade tariffs make it difficult to serve clients outside the UK, resulting in a more geographically fragmented market for information providers.
The immediate implications will be around UK Research and Development (R&D) funding. Brexit will leave a significant hole in R&D funding as the UK’s research institutions have been incredibly successful in competing for European research funds. They account for a third of the UK’s research funding (see Insights, 26 May 2016, UK R&D at Risk in the Event of a Brexit). The leading players in science publishing have been German (Springer), Anglo-Dutch (Elsevier) and Anglo-US (Wiley). Brexit is likely to lead to a reconcentration on Continental Europe.
Education & Training
It is ironic that in an era when technology is reducing access barriers to education that the UK has taken the decision to restrict movement across its borders in such a way as to limited the talent pool from which employers can draw. Businesses reliant on employing low(er)-cost workers from the EU will see the most immediate impact, but the longer-term impact will see fewer opportunities both for UK students looking to study in the EU and for EU students looking to study in the UK, as well as for UK employers looking to employ the most suitable talent, irrespective of where it comes from. Net result: Lower margins and higher prices driving higher wages in a spiral effect. In terms of edtech, London has put itself at the front and center of this activity in Europe, and this will now be under threat as edtech players experience the same talent and recruitment issue as other UK businesses.
Enterprise Information & Data
There will be increased complexity and overhead for enterprise data executives. Their global charter includes standardization of processes and structure for enterprise data, and this will be yet another layer to address in that effort. The regulatory environment for information services is already a hodgepodge patchwork that is hard for any buyer or provider to navigate. It will only become more complex.
The biggest issue for libraries (in all sectors: government, academic, public, and corporate) is that the economic uncertainty and most likely tightening of credit markets is going to continue to put a strain on already anemic budgets. Our overall prediction for 2016 was budget increases of barely 1%. Future increases are now almost assuredly gone.
While there is immediate near-term pain with the sharp economic contraction in the UK, we see volatility roiling the world stage for years, and most depressing is recognition that the new normal for years to come will be a slow drip drip drip as innovation and openness bleed out, even as the gates slowly swing closed, and a new era begins. Information industry companies who operate in the EU have long been able to move employees and officers. With the closing vote, the future for UK execs operating in other countries may dramatically change and vice versa, creating additional havoc. Talent is one of the industry’s most pressing issues and it may get worse.
So what is the way forward for Britain and our industry now? Some companies may see uplift as they are freed from the burdens of EU regulatory constraints and costs. The volatility in sterling will require companies to examine and create different pricing scenarios — some to account for the weaker pound, and others to take advantage of the opportunity to grab market share. UK goods and services are suddenly at more attractive price levels, which will attract some influx of revenues. At the same time, UK businesses and consumers will struggle from having to pay more for imported goods and services. Britain will have to find its strengths as a country and focus the world on those strengths, whether in British education or London as financial center or new focus on R&D and innovation from within.
Ultimately, no contingency plans could prepare our industry for this, and all players must find the way to maintain unvarying focus on customer needs and will no doubt deal with a very significant wave of yet more change. It is not positive news for the industry, as we no doubt are watching another economic cycle unfold. At the end of the day, the EU may go back to doing what it was meant to do — focus on economic trade. It will have to deal with a wide perception of government bloat, taxes on people who weren’t feeling the benefits, and the prospect of even more countries opting out. We could witness the unraveling of this great experiment unless governments respond to the wide discontent that continues to rumble across the globe. Not an information company leader we have spoken with in the past few weeks thought Brexit was positive, and Outsell’s response is the same. At the end of the day, though, many predicted its occurrence and the notion we’d be here today.