Winner takes all

After three working visits to the US in
the last few months, it’s both interesting and worrying to compare the development of e-business in America and New Zealand. In cities like New York and Chicago, the talk is of tidal wave. Switch on the TV, check out the freeway billboards, turn the pages of any daily newspaper, and e-business is there, in your face. It’s strange, then, to get back to New Zealand and see that, here, the tsunami looks more like trickle.
It’s understandable when you look at the statistics: 70 percent of e-commerce is generated in the United States. Europe accounts for about 15 percent. The whole of Asia-Pacific generates only seven percent!
In New Zealand, some companies are taking e-business seriously but many regard the talk of an ‘e-revolution’ as more hype than happening. They still see it as just business as usual, through another medium, and expect they’ll still be doing in the future what they always did in the past.
They’re staking billions of dollars to capture market share and stake in this future in the States. Here in New Zealand, few are starting to realise that they’re falling well behind.

You’ll only do well if you’re making loss
A common criticism of e-business is that nobody’s making any money, that all the big players have share prices that are sky high and that all they’ve ever done is lose millions of dollars.
(This isn’t quite true, of course. friend of mine has business in San Francisco, selling cappella CDs. The bad news with cappella CDs is that only tiny percentage of music buyers are interested. The good news is that if you ‘go internet’, as he has done, you get tiny percentage of multi-million customer market. My friend’s business is doing very nicely, thanks.)
Small niche players are one thing, though. The e-business giants are often still hitting headlines with large-scale losses. So why is the Nasdaq rewarding so many of them with astronomical stock prices? Wall Street analysts will tell you — and they’re only half-joking — that’s share price will only do well if it’s losing money. If company’s making money, they argue, it’s not investing enough in the real battle of the emerging e-world: the battle for market-share.
This battle can, perhaps, be best seen in the electronic trading industry.

Big bucks for market share
E-business approaches to trading (of shares and other financial instruments) are attracting lot of attention in the US and, increasingly, in other countries. couple of news releases demonstrate the current state of play. Ameritrade, one of the leading online brokers, recently announced TV advertising campaign that will cost the company around US$200 million. Barely week after this announcement, the company also disclosed that it had lost over US$9 million, equivalent to five cents per share, in single quarter.
Although Ameritrade has since bounced back with better earnings reports in March 2000, this trend of heavy marketing expenditure pushing companies into loss situations is far from ended. The e-trading industry is expected to spend around US$1 billion in advertising this year, as the main players jockey to attract investors to their sites. And the number of investors has been increasing: leading brokers are already reporting trading volumes double those of last year’s and the expectation is that the total number of online traders will more than treble during 2000.

Client trust gave e-Schwab poll position amongst traders
So, why are companies like Ameritrade ready to spend up big on advertising at such cost to their bottom lines?
To answer this question, we might look at the doyen of online brokers. The Charles Schwab Corporation built its business through discount brokering, particularly after ‘May Day’ in 1975, when the US government deregulated the brokerage industry. Deregulation opened the market to discount brokers offering lower fees in return for lower levels of advice and service.
Schwab developed series of innovative discount-priced services directed at experienced investors, who wanted low charges and had little need of advice from their broker. The company was also an early adopter of technology to improve efficiency and to allow it to handle large — and fluctuating — volumes of trade. As far back as 1985, the company was offering retail investors software allowing online trading over modems.
It was only natural, then, that when Internet e-commerce became reality, Charles Schwab should see it as both threat and an opportunity.
The threat was most obvious. By 1994, an upstart competitor, E*TRADE, was already trading via the Internet and its business was growing rapidly. Moreover, web-based trading was changing the discount industry: online traders could cheaply provide advice to investors, bypassing traditional full-service brokers.
Schwab responded with an Internet-based service, e-Schwab, in 1995. Schwab was, in many ways, ideally placed. It had an existing, physical presence and trusted reputation. It had, above all, an existing customer base. These advantages quickly allowed it to take poll position in the industry, position it has held against the constant threat of new players and traditional brokers entering the online world.

The big 10 shake down
Currently the industry has many specialist e-broking players, centred on ‘big 10’. E-Schwab and E*TRADE lead the pack, with 29 percent and 11 percent of the market, respectively. The bunch behind is made up of companies like Ameritrade, Waterhouse and Fidelity, generally with three percent to 10 percent of the market each. These companies won’t, however, have it easy over the next few years. Established firms like Merrill Lynch are entering the e-broking business and the word from the US is that the Nasdaq and NYSE exchanges will follow suit. Problems with customer service and order fulfilment, moreover, have recently impacted the reputation of the “pure play” e-brokers (and caused several to move towards alliances with “physical presence” firms in so-called “clicks and mortar” ventures).
And, even in mid-1999, the experts were predicting that the “big 10” was too big and that the smaller players wouldn’t be able to keep pace with the big firms. The latest thinking is that the e-trading industry will see series of fall-outs over the next several years and that we’ll probably see the “big 10” reduced to “massive four or five”.
The question is: who will be there in the winners’ enclosure when the dust clears?

Winner takes all
This is the key to the “lose now, gain later” strategies of the e-business firms. In the e-broking world, the players can foresee situation where, if they’re in the “final bunch”, they can win big chunk of an increasingly online global financial services sector. But they also know that they’ve only got limited period of time to position themselves as winners; and those who don’t make it won’t even be remembered as the e-world moves on. The stakes are enormous and the big bet, according to the players — and many of the Wall Street analysts — is justified.
It’s race being run in all prominent electronic markets, from the book-traders to the new online beauty shops. The usual measures of success, based on financial performance, haven’t gone away. They are, however, on hold. The measure of success that means more than any other, right now, is less to do with immediate profitability and more to do with market share and customer relationships.

Meanwhile, back in
New Zealand
And where does this leave New Zealand? The banks have been eyeing moves into online trading: ASB has its solution up-and-running and claims to have exceeded expectations, with thousands of clients signing up. Local players will be helped when the NZSE introduces “straight-through” trading — that is, the full “electronic-ising” of trades — probably by mid 2000. This, however, will also be the signal for companies like E*TRADE to enter the New Zealand market.
As online trading catche

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