ETrade analysis coy

7/28/2019 ETrade analysis coy

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E*Trade: Case Analysis


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Executive Summary

E*Trade was a first-mover in the online brokerage market. Because of

this, they achieved early brand name recognition and an adequatecustomer base. However, by the late 90s, competition was heating upand the offline brokerages were waking up. E*Trade needed to changeits strategy to face these challenges. They needed to expand theircustomer base to other investors beyond the online world. But to do so,they faced barriers to entry with their lack of complementary assets inthe offline world. E*Trade overcame the traditional barriers to entry by

spending significant amounts of money on their technologicalinfrastructure and aggressive advertising. E*Trade Group wantsconsumers to use its financial services for E*verything and marketingthe E*Trade name has been a key component of their success.E*Trades strategy focused primarily on customer acquisition andbuilding a strong brand. Over the last two years, E*Trade spent $640million on brand recognition and marketing. Schwab, which is eleven

times the size of E*Trade, spent only $520 million in the same timeframe.[1]The E*Trade Monkey riding through a deserted dot.comghost town advertisement, which aired during Super Bowl XXXIV in2000 and reached an audience of 130 million, was named the #4greatest Super Bowl advertisement of all time by consumers.

[1] Chen, Huang, Wong, and Wong, ibid.


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Executive Summary

The company continues to expand itsservices to make up for shortfalls in tradingincome resulting from Internet fallout. The

Internet fallout caused their stock to fall andalso online traders to decrease their use ofE*Trade service. This continued slump couldmake E*Trade a takeover target for a larger

financial services firm looking to broaden itsonline services. (Hoover)


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SWOT Analysis and Sustainability

Strength Weakness

Strong reputation as the first online broker

Quick access

Wide variety of products and services

Introduction of clicks-and-mortar strategy

Not the lowest price

Weak in research and advisory services

Opportunity Threat

High growth of online trading marketExpand business to International market

Easy entryRapidly changing environment


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E*Trade has focused on customer acquisition andbuilding a strong brand since the beginning. This iscritical because in the financial industry, especiallyon the Internet, trust and brand-awareness arecrucial for success due to the perception of lowsecurity. It has established a firm position as the firstonline broker in the online trading market. Whilemany brokers have entered and exited this market,

E*Trade has experienced phenomenal growth andis among the top players in the industry.


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Recently, the online brokerage industry has undergone changes andcompanies have changed their strategies as a result. During the firststage, online brokerages could attract customers simply by havinglower commission fees than traditional full-service brokers.However, by the late 1990's, all kinds of brokers have begun onlinetrading services, and following the pure-play online brokers, haveprovided lower and lower prices. So, the discount strategy is no

longer sustainable. Large, traditional brokers like Merrill Lynch, anddiscount brokers like Charles Schwab, can provide new services bycombining their old off-line services with new technology. They havestrong capabilities, huge assets, strong analysis and research skills,and large staffs. Moreover, new customers to the online market arenot as active as early Internet traders. They trade less often and areless price sensitive. In addition, in e-business, including onlinetrading, switching costs are very small so customers can havemultiple accounts with multiple brokers, quit transactions midstream,or shift to other brokers easily. In these difficult circumstances, pure-play online brokers have pursued other strategies to keep attractingnew customers.


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E*Trade began preparing early for a shift in strategy. Ithas tried to diversify its business and sources of revenuebeyond transaction fees. They not only offer a variety ofproducts - including mutual funds, proprietary mutual

funds, bond trading, and access to initial public offerings- but have also begun to offer services other thantrading. E*Trade started Internet banking services in1999, and it is the third largest operator of ATMs in theU.S. The company has also become interested in thebricks-and-mortar model. E*Trade decided to establish a

branded bricks-and-mortar presence with its E*TradeZones, which will serve as a branch office to competedirectly with both discount and full-service brokers. Italso decided to partner with Target to put both E*TradeZones and ATM machines in over 20 Target locations.


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These new strategies have brought changes inE*Trades revenue structure. While the most importantsource of revenue is interest on customers' assets andinvestments, mortgages, and fees from banking and

ATM services are increasing. Every e-business companyfaces cutthroat competition. Most of the entrants arekicked out of the market and very few companies cansurvive. Moreover, it is more difficult to make a profit.Even seemingly very successful dot com companies,

such as Amazon.com, face difficulties getting out of thered. In such an environment, E*Trades lack ofdependence on transaction fees gives it financialstrength, and greater ability to expand its business.


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Now E*Trade seeks to enlarge its marketshare both in the U.S. and globally. It alsocontinues to expand its services, loans, andpersonal banking. Sustained revenue growthand good cost management will position thecompany for sustained growth.


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VIDE Analysis

E*Trade began life as a deep-discount online broker. Asone of the first online brokerages, E*Trade catered toactive, independent, knowledgeable investors whowanted to execute trades as cheaply as possible and

who did not need expensive advice. For these investors,even discount brokers were too expensive. They wereearly-adopters of new technologies, including those whowere online in the late 1980s and early 1990s, and werecomfortable with the new online environment. E*Trades

value proposition was meaningful to a specific marketsegment and, as an early mover, allowed E*Trade togrow.


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Since its earliest days, E*Trade faced competition fromother deep-discount online brokerages. Though itsmarket was growing, no-frills trading was a limitedmarket, so the company sought to broaden its services

to reach other segments rather than compete strictly onprice. This was a significant strategic decision. Since thattime, E*Trade has expanded its services into many otherarea. The company offers mortgages, mutual funds, andreferrals. It has built the 3rd largest ATM network in the

U.S. and expanded internationally. It sells ads for all ofits websites.


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E*Trade offers banking services, such as deposits,CDs, and loans along with all of the bundling andcross selling opportunities that come with variedbanking and brokerage services. It is nowexpanding into the bricks-and-mortar world with itsE*Trade Zones, which are essentially branch officeswhich offer research and investment advice throughmore personalized service. E*Trade has entered

into an agreement with Target to open E*TradeZones and ATMs in Targets stores.


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Many of these moves were executed by E*Trade throughacquisitions. E*Trade has made over 15 acquisitions since theearly 1990s. This method is consistent with the companys desireto move quickly to attack larger competitors, and pre-empt othersimilar competitors.

These moves to diversify by E*Trade have allowed it to attractmore customers and offer more services to its growing customerbase. The wide range of services adds value to E*Tradescustomers because it allows them to consolidate their bankingand brokerage needs in one place. E*Trade becomes anintermediary between a customer and their money. By

consolidating their financial services with E*Trade, a customerbuilds loyalty because a switch will mean incurring switchingcosts.


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E*Trade has spent a considerable amount of money building itsportfolio of services, particularly its bricks-and-mortar operations.The effect of this has been to build somewhat of a defense, and ithas worked. Some other pure-play online brokerages have indicatedthat they will not actively pursue the building of similar capabilities.In the long run, of course, E*Trades moves are imitable bycompetitors. But in the short-run, it would be very difficult for anotheronline broker to copy E*Trades success as a late mover. E*Tradesexpanded array of services set it apart from its competitors.

One of the significant benefits of the wider range of products andservices offered by E*Trade is its ability to cross-sell. Many mergersfail because anticipated synergies fail to materialize. However, the

banking industry has consistently proved to be an excellent exampleof synergy in its ability to effectively cross-sell products andservices.


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E*Trade can continue to add value by offering additionalproducts and services and it can cross-sell across theseofferings. By doing so, it differentiates itself by allowing a morecomplete financial solution for customers. However, the greatestthreat E*Trade faces is its inability to build effective long-term

barriers, allowing it to exploit the short-term competitiveadvantages gained by its innovations. In the long-term, it is easyfor other firms to build branches and ATM networks. Many otherfirms already offer research and investment advice. E*Trade isparticularly vulnerable against the larger players. They witnessedthe dramatic growth of Internet usage and online brokerage firmsduring the late 1990s. By the late 1990s, they began entering theonline market.


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Some predicted the demise of pure-play online brokerages whenthe large, established players began to enter the market.E*Trade, however, has continued to grow. This is despite the factthat the environment has only deteriorated since the late 1990sboom in valuations and day-trading activity. In the current

market, customers are more conservative, executing fewertransactions. E*Trades real competitive advantage, its corecompetence, is its ability to read the market and innovate, addingvalue to customers before its competition. It would seem unlikelythat an upstart pure play deep-discount broker would be able totake on giants such as Merrill Lynch and Charles Schwab.E*Trade has not so much as taken them on as it has outranthem. And it continues to do so.


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Models of Innovation

Innovation models can be applied to E*Tradeto give us insight into the companys success

in the face of competition from traditional full-

service and discount brokerage houses.


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Teece Model

Teece argued that two factors were instrumental in reaping profits froman innovation. The appropriability regime, which is the extent to whichthe technology can be protected from imitation, and complementaryassets, other non-technological capabilities the firm needs to exploit thetechnology.[1]

E*Trades technology was easy to imitate as evidenced by the largenumber of competitors who have entered the online brokerage market.Initially, they were able to use their run strategy to stay ahead of thecompetition, but this did not prevent imitation by others. Complementaryassets became one of E*Trades distinguishing features, but this wasnot the case at the outset. It took heavy marketing, advertisingcampaigns, acquisitions, and alliances to develop a now enviable set oftightly held complementary assets.

[1]Afuah, Allan. Innovation Management, Oxford University Press,1998.


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Utterback-Abernathy Dynamic Model

The Utterback and Abernathy model details the dynamic changesfrom a fluid phase to a transitional phase to a specific pattern.Technological and market uncertainties comprise the fluid phaseand is a key time for entry by entrepreneurial firms. E*Trade enteredthe market during this fluid phase when the changing technologyand acceptance of the world wide web provided them with anopportunity to build a pure-play Internet trading platform.

Companies enter the transitional phase when they begin introducingmore and varied products. The market uncertainty is reduced andresearch and development investment increases are justified. Thisphase also requires major process changes due to rising volumes.By this time, E*Trade had entrenched itself in the online trading

market and established a strong brand name. E*Trade changed itsfocus to expanding services and technologically accommodating alarge, changing customer base. The addition of E*Trades widerange of services including online banking, financial advice,mortgages, insurance, college savings plans, etc. signified theirentrance into this phase.


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The transitional phase eventually leads to a specificpattern whereby cost reduction becomes the focus.This phase is also characterized by a more formalcorporate culture with a greater number of levels ofauthority. E*Trade has not moved fully into thisphase as it continues to diversify and reinventitself.[1]

[1]Abernathy and Utterback, Patterns of IndustrialInnovation, Technology Review, June/July 1978.

Utterback-Abernathy Dynamic

Model


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Exhibit 1: Stock Price History

Source: Yahoo!, www.yahoo.com


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Exhibit 2: Value Chain

Investor/

Decision

Maker

Broker/

IntermediaryExchange/ Trade Executer

Retai l Securi t ies Indu stry Value Chain (Simpli f ied)

Full Service:Branch infrastructureFinancial Consultants

Discount:Low Transaction FeesFast trades

Internet:Lower Transaction FeesFaster trades24/7 availability

Access anywhere

Retai l B rokerage Evolut ion

Stage I Stage II Stage III


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Exhibit 3: Balance Sheet for E*Trade

($ in thousands) 9/2000 9/1999 9/1998 9/1997 9/1996 9/1995 9/1994

ASSETS

Cash 175,443 157,705 52,776 38,235 50,141 9,624 692Marketable Securities 4,314,415 1,548,465 502,534 191,958 35,003 0 0Receivables 10,715,262 5,136,585 1,365,247 724,365 193,228 1,936 535Other Current Assets 0 0 24,287 6,970 2,203 470 623

TOTAL CURRENT ASSETS 15,205,120 6,842,755 1,944,844 961,528 280,575 12,030 1,850

Prop. Plant & Equip. 334,262 181,675 50,555 19,995 9,228 1,458 313Net Prop & Equip 334,262 181,675 50,555 19,995 9,228 1,458 313Invest & Adv to Subs 985,218 828,829 59,276 5,519 2,860 676 0

Other Non-cur Assets 0 0 3,719 3,259 0 0 0Intangibles 484,166 18,554 0 0 0 0 0Deposits & Oth Asset 308,671 160,361 7,892 5,121 2,218 0 0

TOTAL ASSETS 17,317,437 8,032,174 2,066,286 995,422 294,881 14,164 2,163

LIABILITIES AND EQUITY

Notes Payable 3,531,000 1,267,474 0 9,400 0 0 0Accounts Payable 10,777,331 5,074,360 1,244,513 681,106 225,555 2,369 430

Cur Long Term Debt 0 0 0 0 0 0 1,314Cur Port Cap Leases 0 0 0 0 0 0 23Accrued Expenses 470,742 207,961 83,659 21,542 0 0 0Income Taxes 0 0 0 0 0 602 9

Other Current Liab 0 0 0 0 0 0 415TOTAL CURRENT LIAB 14,779,073 6,549,795 1,328,172 712,048 225,555 2,971 2,191

Mortgages 0 0 0 0 0 0 0Deferred Charges/Inc 0 0 704 0 0 0 0

Convertible Debt 650,000 0 0 0 0 0 0Long Term Debt 0 0 0 0 0 45 64Non-cur Cap Leases 0 0 0 0 22 0 0Other Long Term Liab 0 0 0 0 0 0 0

TOTAL LIABILITIES 15,429,073 6,549,795 1,328,876 712,048 225,577 3,016 2,255

Minority Int (Liab) 0 0 0 0 0 0 0Preferred Stock 31,531 30,584 3,000 0 0 1 0Common Stock Net 3,101 2,838 2,313 399 295 149 150

Capital Surplus 1,814,581 1,320,338 685,553 266,953 68,738 9,899 1,241Retained Earnings -6,908 -26,060 33,786 16,022 271 1,099 -1,482Treasury Stock 0 0 0 0 0 0 0Other Equities 46,059 154,679 12,758 0 0 0 0

SHAREHOLDER EQUITY 1,888,364 1,482,379 737,410 283,374 69,304 11,148 -91

TOTAL LIAB & NET WORTH 17,317,437 8,032,174 2,066,286 995,422 294,881 14,164 2,163

Source: Disclosure, Inc., www.disclosure.com

Balanc e Sheet for Fiscal Years 1994-2000


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Exhibit 5: E*Trade Market Share

Online Brokerage Market Share by Total Assets*

Charles Schwab 38%

Fidelity 30%

TD Waterhouse 10%

E*Trade 5%

Ameritrade 4%

CSFB Direct 2%

Datek 1%

NDB 1%

Scottrade 1%

Dreyfuss 1%

Quick & Reilly 1%

Other 6%

*Data as of 6/30/2000

Source: Brokerages Need Banking to Keep Customers, Web Finances, 5 (7): April 5, 2001, Securities Data Publishing.


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Inc ome Statemen t for Fiscal Years 1994-2000

($ in thousands) 9/2000 9/1999 9/1998 9/1997 9/1996 9/1995 9/1994

Net Sales 2,157,958 955,470 335,756 234,128 48,991 23,340 10,905

126% 185% 43% 378% 110% 114% 267%

Cost of Goods 1,116,433 517,794 138,942 95,933 38,027 12,819 6,796

Gross Profit 1,041,525 437,676 196,814 138,195 10,964 10,521 4,109

R&D Expenditu res 142,914 79,935 33,699 13,547 4,699 943 335

Sell Gen & Admin Exp 734,971 431,058 159,035 94,379 19,182 5,269 3,530

Inc Bef Dep & Amort 163,640 -73,317 4,080 30,269 -12,917 4,309 244

Depreciation & Amort 22,764 2,915 NA NA NA NA NA

Non-operating Inc -36,427 -7,174 -1,929 -946 13,529 NA NA

Interest Expense NA NA NA NA NA NA NA

Income Before Tax 104,449 -83,406 2,151 29,323 612 4,309 244

Prov for Inc Tax 85,478 -31,288 224 10,130 -555 1,728 -541

Minority Int (Inc) -181 2,197 NA NA NA NA NA

Ex Items & Disc Ops NA -2,454 NA NA NA NA NA

Net Income 19,152 -56,769 1,927 19,193 1,167 2,581 785

Source: Disclosure, Inc., www.disclosure.com

Exhibit 4: Income Statement for E*Trade


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Exhibit 6: Broker Comparison Table

Online Broker Comparison 2000

CompanyNumber of

Online AccountsYOY Account

Growth

Average OnlineTransactions per

Day

AverageTransactions per

Account perQuarter

Fidelity 4,757,000 55% 100,771 1.4

Schwab 4,200,000 40% 203,500 3.1E*Trade 3,027,362 95% 150,000 3.3

TD Waterhouse 2,272,000 96% 151,900 2.7

Ameritrade 1,233,000 120% 105,540 5.6

DLJ Direct 476,571 58% 24,949 3.5

Datek 623,624 115% 97,638 10.6

NDB 268,900 69% 10,600 2.6Source: Investext by The Investext Group: Putnam, Lovell, & Thornton, December 1, 2000.


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Exhibit 7: Online Brokerage TradingCosts

Comm iss ion Fee Changes over TimeFeb. 1996 E*Trade $14.95/trade

May Ebroker $12

July Datek $9.99

Sep. Scot deal $9

Oct. 1997 Ameritrade $8

Nov. Suretrade $7.95

March 1998 Brown and Company $5

Source: Piper Jaffrey, February 2, 2000.

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