| BUSINESSWEEK ONLINE : JUNE 28, 1999 ISSUE | ||||||||
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| INFORMATION TECHNOLOGY
Where No-Frills Net Trades Are Sacred More services--with higher commissions? Not at Ameritrade It was one of the best investments J. Joe Ricketts ever made. In 1994, the founder of Ameritrade Holding Co. (AMTD) decided to take his Corn Belt brokerage business into cyberspace by acquiring New York's K. Aufhauser & Co., the first firm to offer stock trading over the Internet. Ricketts realized that the Net could make trading stocks cheap and easy. Good call. By offering bargain-basement commissions of $8 per Net trade, Ameritrade's revenues rocketed to $165 million in the fiscal year ended on Sept. 30, 1998, from $65 million in 1996. Now, the little Omaha discount broker is the sixth-largest stockbroker on the Net and No. 30 on BUSINESS WEEK's Information Technology list of best-performing companies. ''This is better than mining for gold or drilling for oil,'' says Ricketts, who with his family owns a 63% stake that's worth nearly $2.7 billion. The only problem is that Ricketts' well may be running dry. Competition is growing increasingly fierce as the number of companies offering Net trading has mushroomed--to 140 from 24 just two years ago, according to online researcher Gomez Advisors Inc. The latest contender is industry heavyweight Merrill Lynch & Co. (MER), Wall Street's largest retail brokerage with deep pockets, a sterling brand name, and 5 million customers. That has sent investors packing: While Ameritrade's stock outpaced its peers during the first 3 1/2 months of this year by leaping a staggering tenfold, it has plummeted from its high of $173.25 a share on Apr. 13 to about $72. Even more troubling may be the long-term direction of online trading--which appears to be headed away from no-frills operations like Ameritrade's. For the past three years, the company has offered commissions of $8, less than one-third the $29.95 charged by Charles Schwab Corp., the largest Net broker. How? By not dishing up extra services like specialized research or financial planning. That has worked because 70% of online investors are active traders--people who don't need handholding, so they'd rather not pay for it, according to Forrester Research Inc. But as online trading increases from 16% to an estimated 30% of all stock trading in five years, new traders will probably want the kind of extras that full-service brokers like Merrill Lynch and Schwab can offer. ''The next wave of online investors is mainstream America,'' says Forrester analyst James Punishill. AMBITIOUS. Other Net brokers are overhauling their Web sites to appeal to newcomers. Schwab is adding equity research, corporate news, money management--even retirement and estate planning. E*Trade Group Inc. (EGP), the second-largest online broker, with 909,000 customers, is following Schwab's lead even though it charges only $14.95 per trade. E*Trade offers free E-mail, access to home mortgages, stock research, and innovative goodies such as links to E-commerce sites that hawk everything from compact disks to cars. In its most ambitious move yet, E*Trade spent $1.8 billion in May to acquire Internet bank Telebanc Financial Corp. (TBFC) so it can be a one-stop financial-services shop for its customers. ''People are going to bookmark [E*Trade's site] as their financial-services site,'' says Kathy Levinson, E*Trade's president and chief operating officer. Nonsense, argues Ricketts. He thinks the leading Web brokers are blowing their money on extras that customers won't use. ''They don't want everything under one roof,'' he says. ''Customers tell us they want to pick their own bank and broker and insurance company.'' What's most critical for a brokerage, he says, is to offer high-quality, low-cost trading. Indeed, with its low overhead, Ameritrade was able to post a profit of $8.1 million in the first quarter, while E*Trade and others piled up operating losses. That's because Ameritrade pinches its pennies: It spent on average $157 to attract a new customer in the first quarter, vs. $257 for E*Trade, according to CS First Boston. ''If I add all sorts of stuff to the site, I increase costs and have to charge more,'' says Ricketts. His customers don't want that to happen. Frederick Campbell, a 66-year-old retiree living outside Savannah, Ga., used to go to Merrill Lynch and Fidelity Investments. But for the past year and a half, he has been using Ameritrade to buy the technology and pharmaceutical stocks he favors. ''You can't beat $8 a trade,'' he says. Even though other sites are offering research and other services, he doesn't plan on leaving Ameritrade. ''I just don't feel I need what they're offering,'' he says. ''I've been investing for 50 years and can come to my own conclusions.'' Of course, not all investors are like Campbell. To cater to traders who want more services, Ricketts plans to offer some customized financial information and corporate news starting this fall--for an extra fee. That way, the traders who want Ameritrade's $8-a-trade commissions won't bear the costs of delivering those services. The extras, like stock quotes and research, will be zapped out to investors any way they choose--via E-mail, pagers, or even cell phones. The effort will be led by Thomas K. Lewis Sr., a technology whiz from USF&G Corp. whom Ricketts hired in early March as co-CEO. Even though Ricketts is bucking conventional wisdom, Ameritrade has a good shot at remaining a leading Net broker. For starters, the cost-conscious segment of the market may be losing share, but it's expected to grow in absolute numbers. For example, if the discount market dropped from 25% to 12.5% of the total, the number of accounts would still increase from 1 million to 2.5 million. And the Western frontier, those who staked the earliest claims in the Internet brokerage business are reaping the biggest rewards. With rising technology and marketing costs, the pioneers hold a key advantage over the upstarts: The more volume a broker has, the more it can spend on network upgrades and the expensive advertising campaigns needed to attract new business. Ameritrade, for example, will spend $200 million on marketing in the next 18 months--up from $65 million in the past 18 months. ''It's going to be hard to unseat the top players,'' says Steve Appledorn, manager of Munder NetNet Fund, which has about 5% of its $2 billion portfolio invested in Ameritrade, E*Trade, and Schwab. CLASS ACTION. Ameritrade will have to be careful that its marketing doesn't overshoot its technology. After tripling its advertising budget last year, to $44 million, the surge in new accounts and trading volume wreaked havoc on Ameritrade's network, preventing some investors from executing trades when they wanted. That prompted a class action in September alleging that the company ''oversold [the service] far in excess of its available system capability.'' Ricketts says Ameritrade won't have the same kind of problems in the future. Under Lewis' guidance, the company is investing $150 million over the next 18 months, largely to boost its network capacity. Lewis says the company will be able to handle three times the volume it hit at peak trading volumes in the past. With plenty of capacity and a tight rein on costs, Ricketts should be able to keep his position in the industry's top tier. Just don't expect him to follow the other leaders. By Andrew Osterland in Chicago _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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RELATED ITEMS Where No-Frills Net Trades Are Sacred TABLE: How the Web Brokers Stack Up CHART: Ameritrade's Share INTERACT E-Mail to Business Week Online | |||
