07/22/96 THIS VIRTUAL BROKER HAS REAL COMPETITION

THIS VIRTUAL BROKER HAS REAL COMPETITION
E*Trade battles Charles Schwab, eBroker--and internal bugs
To some, the exploding world of electronic commerce is an exciting frontier. But to Christos M. Cotsakos, the animated chief executive of E*Trade Group Inc., it's also a war zone. ``We're the infantry on the beach,'' says Cotsakos, whose brokerage service was first to stake a claim in online trading in 1992. It is now battling new competitors, fixing snafus, and preparing to be the first firm of its kind to go public. By being first, ``you get blood on your spear, but you know the terrain better than anybody,'' he says.
War metaphors come easily to the decorated Vietnam veteran. After all, says Cotsakos, who has been on the job since March, ``I know what it feels like to get your butt shot off.'' It may happen again, as more than 20 firms, including such stalwarts as Charles Schwab Corp. and Fidelity Investments, gun for a piece of the Internet's coveted financial marketplace. Already, rivals are eating away at the edge E*Trade has had on them--the once incomparable $14.95 commission. So far, eBroker has beat that with $12 trades, and Schwab just reduced its fee $10 to $29.95 per trade.
That's not E*Trade's only hurdle. It also must justify the giddy price-earnings multiple it seeks as an Internet stock, rather than the more mundane mutiple of a discount broker. Revenue--$23.3 million last year--has grown an average of 125% annually since 1991. Even so, the expected offering price of $11 to $13 a share would be 133 times earnings for the past 12 months. Schwab trades at a p-e of 24.
Yet Internet-crazed investors might still buy the IPO, which is scheduled for August. E*Trade has the largest volume of Internet trades--2,500 daily and does 75% of its trades online. While a mere 800,000 investors trade online now, that number is expected to grow to 1.3 million by 1998, and individuals could manage $30 billion in mutual-fund assets online by the year 2000, according to Forrester Research Inc. ``It's going to be a huge market segment,'' says Paulette Donnelly, an analyst at Simba Information Inc. in Wilton, Conn. To cater to that market, E*Trade is launching an online investment bank that will sell individual investors shares in IPOs. ``We'll work like traditional banks, except without a sales force or a road show,'' explains E*Trade's David M. Traversi.
LATE NOTICE. But E*Trade must convince investors to overlook its myriad problems. A computer hardware failure in May, for instance, left many customers unable to access their accounts for 2 1/2 hours. That led to a $1.7 million payout to clients who lost money in the market. And customers gripe nonstop about not being notified promptly when their trades are executed. ``I had a stock for a week without knowing I had it,'' grumbles Holly Cahill of Manchester, N.H. Customers even considered suing E*Trade to recoup losses.
Behind the snafus was E*Trade's too-rapid growth, which it engineered through ubiquitous ads. In 1996's first five months, active accounts swelled from 38,000 to 65,000 and monthly trading volume tripled from 50 million to 170 million shares. ``Everybody was caught by surprise,'' says Cotsakos, who endured startup problems during his 19 years at Federal Express Corp. Starting in May, the company reduced its ads for six weeks to stem the huge expansion.
E*Trade has already upgraded its technology and beefed up its staff. In early July, it set up a remote backup system to increase capacity and take over in the event of another computer breakdown. And E*Trade now clears its own trades, which lets it improve confirmation times. Telephone waits are down from more than 20 minutes to a still hefty five minutes. It's unclear whether these initiatives will keep E*Trade ahead of the advancing troops--a tall order even for a group of warriors.
By Linda Himelstein in Palo Alto