It's a beautiful Friday evening, mid-April of the year 2003. Your spirits are buoyant with springtime. Through the window, you take in the warm setting sun. A cloudless sky promises more of the same for tomorrow. Seated at your desk, at home, you ponder weekend plans.
Meanwhile, beneath the placid surface, a nagging concern -- ignored but not squished -- pushes its way upwards. Suddenly, it breaks through. It blots out the view. It speaks:
Taxes are due on Monday.
Ugh.
But rising to save the weekend, you take control. You fire up your home computing device and head for E*Trade where you can click and drag your way through every financial service you need. Your E*Trade Savings are fully FDIC insured but they're earning brokerage money market returns! You drag $2000 to your E*Trade Traditional IRA. Ding! A message box informs you that you have exceeded the income limits this year, but E*Trade helpfully suggests a Roth IRA. Thank you, E*Trade. Drag the $2000 to create a Roth IRA. Ding! You already contributed $500 earlier in the year. Remember? Oh yeah. Thanks again. Make that $1500. And, sure, keep the money in-house. Put it into the E*Trade S&P 500 Index Fund.
And so the evening goes. Can't find your mortgage interest statement? No matter. E*Trade holds your Mortgage -- with a convenient line of home equity credit -- and the Escrow Account is just a click away. While you're thinking about it, why not click and drag the annual payment from your E*Trade Checking Account to renew your E*Trade Insurance Policy? Ploink. Yeah, baby. Done....
BUSTER! SNAP OUT OF IT! Are you nuts? You've burned a big chunk of your Duel word-count already and you haven't even mentioned record numbers for e-broker trading volume! Give us some commission revenues, quickly. Come to think of it, give us any kind of numbers. TMFMax is gonna bury you, rookie!
To which I reply: You are... BUSTED, FOOL!
Caught you looking short-term again. Wall Street wants you to focus on trading volumes, next quarter's commission revenues and punching up a sell order on top of the next price peak. But you, my friend, are a complete Fool. You know that investing for the long term is all about vision. And E*Trade has vision.
E*Trade <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EGRP)") else Response.Write("(Nasdaq: EGRP)") end if %> doesn't want to be your e-broker; it wants to be the comprehensive, one-stop, online window into your total financial estate. Let Yahoo! and America Online aggregate content and structure it to meet your every whim. E*Trade wants to aggregate your money and give you the tools to manage it all in one place, with unprecedented power and ease. Never one to speak softly, E*Trade has emphasized this bold vision in its most recent quarterly SEC filing where it extends the list of its competitors beyond the standard e-broker fare, adding no less than AOL, Citigroup, Microsoft Money, and Yahoo!
In support of the vision, E*trade has built industry-leading website traffic and brand power. According to Media Metrix, Etrade.com is not only the most visited brokerage website, but the most visited financial website period! Page views for the most recently reported quarter jumped a whopping 239%, to 891 million. Opinion Research Corporation International recently ranked E*Trade as the fourth most recognized e-commerce brand -- behind only Amazon.com, priceline.com, and eBay. And this was before the Super Bowl where, according to InsightExpress, E*Trade delivered the first and fifth highest-rated commercials among "dot-coms."
These are the twin engines -- vision and brand -- that will power E*Trade's future ascent.
Listen, Buster, you say, all this intangible stuff is great, but this company is losing money hand over fist! Didn't you hear that the Internet bubble has sprung a leak? Where are the earnings?
OK, I hear you. Before we do any more unrestrained future-gazing, we'd better ground all this with some numbers. Let's work in that direction, starting with the recent entry of brokerage big-shots like Merrill Lynch into the online business. With these old-school behemoths lacing up their dusty sneakers, the already-heated race to acquire customer assets has turned into a mad, take-no-prisoners dash. The new online model -- combined with bull market euphoria -- has unleashed a massive rebalancing of customer assets under management, and the big guys aren't about to get squeezed out of their share without a fight. Never before has so much dough been on the table for the taking.
This is the real story -- the asset race. Trading volumes are fickle and profit margins are eroding due to intense price competition for trades. Even the market makers are facing reductions in income due to SEC rule changes on bid/ask spreads and this hit is passed on to brokers via lower payments for order flow. How does an e-broker cushion themselves against these market forces?
The answer: build customer assets. The more money you hold for customers, the more interest income you will draw, trading or no trading, come bull or bear market. You control the interest spread, and this interest income is, essentially, pure profit, as the trading business provides the necessary account management overhead. Moreover, customers who have entrusted you with their nest-egg will provide a ready-made growth pool as you expand your line of financial services. Who wouldn't love to have the whole ball of wax under one roof, on a single monthly statement? Assets beget more assets. And recent changes in federal law have spread the icing on the cake by permitting greater consolidation of bank, brokerage, and insurance services.
With assets in mind, let's look at some major online brokerages and see who is winning the asset-building race. Compared below are Charles Schwab <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SCH)") else Response.Write("(NYSE: SCH)") end if %>, TD Waterhouse <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TWE)") else Response.Write("(NYSE: TWE)") end if %>, E*Trade, Ameritrade <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMTD)") else Response.Write("(Nasdaq: AMTD)") end if %>, and National Discount Brokers <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NDB)") else Response.Write("(NYSE: NDB)") end if %>.
Customer Assets (in billions)
SCH TWE EGRP AMTD NDB
End of 1998 491 96 15 15 6
End of 1999 725 150 44 32 9
Gain 48% 57% 190% 112% 59%
For 12 months ending:
11/30: NDB
12/31: SCH,EGRP,AMTD
1/31: TWE
Even with recent Ameritrade gains due to their own advertising splurge, E*Trade still easily outdistances the pack in asset growth, marking up a 190% annual gain vs. 112% for Ameritrade in the last year. E*Trade has simply built assets faster than anybody over the last few years, and given its brand recognition, popular website, and recently completed acquisition of Telebank -- the largest branchless Internet bank in the country with over $3 billion in customer deposits -- there is no reason to believe that this pattern will change any time soon.
Finally, let's talk profits. Will E*Trade ever show any? Sure it will. In fact, in this case the wiseacre answer is the best answer: As soon as they want to. Here's the data to back up this claim:
Calendar 1999 Operating Results (in millions)
SCH TWE EGRP AMTD NDB
Total revenue 3,945 1,127 751 327 253
Total Operating Expenses 2,974 881 923 349 218
Operating Profit 971 246 (172) (21) 35
Advertising Expenses 242 87 366 109 19
Advertising % of Revenues 6% 8% 49% 33% 8%
In the 12 months ending 12/31/99, E*Trade spent a whopping 49% of annual revenues on advertising. By cutting this ad budget in half, E*Trade could have easily shown a profit last year while still spending more, on a relative basis, than most of its competitors. But it wisely chose, instead, to funnel the revenue into building more assets. Now is the time! Invest now and we'll have a lifetime -- between now and the next broker revolution -- to sit back and collect the profits.
OK, Max, I'm out of steam....
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