IT Matters

CoMa Index

May 11th, 2006

Convention
The annual AIIM Content Management convention is arguably THE event in this space. Every year the who’s who of Content Management Community congregate in Philly for the convention. A look at this year’s conference agenda reveals that the venerable veterans are all set to take stock, analyze, dissect, and discuss the state and the fate of the industry. Here is my two cents contribution – The CoMa Index

Context
The prospects of an industry are reflected in how well the stocks of that industry are doing on the bourses. The financial markets are merciless, pronouncing verdict on various companies: if the future holds promise, they reward the company’s stock; else they hammer down the prices.

Since the universe of stocks is very large, the performance of the stock markets is usually tracked through an index – which is composed of representative companies drawn from various industries. While a broad index covers the overall state of the economy, sector level indices track the performance of a particular industry in the economy. For example, a telecom index would track the fortunes of telecom companies while a semiconductor index keeps track of the how the semiconductor industry is faring.

Similarly, can we attempt to track the CM space through such a sector index?
I propose the Content Management (CoMa) Index: an index built from companies in the content management space, to help us figure out how happening or sleepy (no pun) the sector is.

CoMa Construction
A detailed discussion of the index construction methodology would be out of place here but here is the crux –
When constructing an index, you mainly need to figure out three things:
1.Which companies will be included in the index?
2.How much weightage should be given to each of these companies?
3.What should be the base year ? (i.e. the year to compare the performance going forward)

From the list of CM vendors mentioned on CMSWatch website, I picked the publicly traded Content Management companies in the US – these include Filenet, OpenText, Vignette, Hummingbird, Stellent, and Interwoven and took their adjusted (for stock splits etc) historical stock prices and built an index composed of equal percentage of these stocks. Played around a bit with the base year: we need to track data over a sufficiently large period of time (3 years, 5 years?) but at the same time I want to cut out the effects of the “irrational exuberance” of the dot com years.

The base year is very important in the index calculation. If January 2000 is chosen as the base year, (CoMa2000 = 100) then the current value of CoMa is 69. Loosely speaking, if you invested $100 in CM companies in 2000, your investment would be worth $69 now. However, it’s not a good idea to use 2000 as the base year, as it was not a sober period for the markets.

CoMa
A table listing the base year, the CoMa Index value and the adjusted NASDAQ value (reset to 100 at the base year) is below:

Sl. No.	Base Year (CoMa = 100)	CoMa (End of Q1’06)	NASDAQ (End of Q1’06)
1	2000	69	57
2	2001	61	95
3	2001 End of Q1	90	127
4	2002	78	120
5	2003	161	175

You can interpret this table as: If you’d invested $100 at the period mentioned how much you’d be left with as of Apr’06. The graphs of the index performance over time are here: 2000, 2001, 2001 April, 2002, and 2003

I am inclined to go with #3 as the base year but will have to revisit this assumption in the next version of this model. (If for nothing, because it gives me some good 5 years’ worth of data.)

Conclusions
So what gives from all this analysis?

1.If we start the base year anytime after 2001, then the CoMa has lagged the NASDAQ! It’d be interesting to see how other software sectors have fared (ERP, CRM et al) and then compare the relative “happening-ness” of these sectors.

2.Both the indices move in the same general direction, exhibiting the same trend – showing that the same factors affecting the overall technology sector are affecting the CM companies as well.
(Purists would object to my comparing an equal-% weighted CoMa with market cap weighted NASDAQ, and that too these CM companies themselves are part of the NASDAQ index – well they may be a part of the NASDAQ but they represent only a very tiny percent of it. )

3.If you are a CM old hand (before 2003) and put your money where your mouth is, you’d not be a happy camper. But if are a late comer to the party (after 2003), you’d have seen positive returns. (The CM sector is waking up from stupor?)

4.We have our own index now (however basic it may be currently) and sector performance can be tracked easily going forward.

Caveats
In its current avatar, the limitations of the CoMa index are:

1.It considers only publicly traded US pure-play content management companies. This means that:
a.The state of private companies (including open source companies) operating in the space is not reflected
b.Non-US companies are not represented
c.The CM business units of big companies like Oracle, IBM, Microsoft, EMC etc are not included
d.The number of companies considered is small – needs to include coverage to be representative of the industry.

2.Index calculation methodology – I’d have liked to use a market cap weighted index but historical market caps were not available (without a subscription)

3.The definition of what companies to include is a not a trivial exercise and has to be revisited

4.Ultimately, a financial index based on stock performance cannot truly and fully reflect the state of an industry.

Closing
This is CoMa Index version 0.1 – and there is ample scope for refinement but I’d like to think it’s a good starting point. An index that fixes the above and includes non-financial dimensions as well would be the finished product – CoMa Index 1.0. I intend to work towards that (when time permits)

Entry Filed under: Content Management