CAPÍTULO 4: METODOLOGÍA 1. Alcance de la investigación
3. Técnicas e instrumentos de Recolección de datos 1 Focus Group
Charles Schwab was incorporated in 1971 and entered the discount brokerage busi-ness in 1974 prior to the US Securities and Exchange Commission’s abolition of fixed commissions in 1975. Always a leader rather than a follower, Schwab began online trading in 1984, although it didn’t go live with Internet trading until 1996. At the end of September 2002, Schwab had more than 8.0 million active customer accounts with total assets worth $727 billion. Of these accounts, 4.1 million were online with 84 percent of all trades conducted online. (See table 9.3.)
Schwab pursues a multichannel strategy, aimed at providing a wide selection of choices for its clients’ investment needs and offering online and telephone broking through to advisory services provided via its network of offices. Telephone access is provided in two forms: through automated telephone channels or through a service that allows customers to talk to a firm representative. The latter is organized primarily through regional client telephone service centres and online client support centres that operate both during and after market hours. Online broking services for retail clients
Table 9.3 The Charles Schwab Corporation: consolidated statement of income (in millions, except per share amounts)
Year ended December 31
2002 2001 2000 1999
Revenues:
Commissions 1,206 1,355 2,294 1,875
Asset management fees and 1,761 1,675 1,583 1,220
admin.
Interest revenue, net of 841 929 1,237 820
interest expense
Principal transactions 184 255 570 500
Other 143 139 104 71
Total 4,135 4,353 5,788 4,486
Compensation and benefits 1,854 1,875 2,414 1,888
Other compensation 22 56 39
Occupancy and equipment 471 490 415 307
Communications 262 339 353 279
Advertising and market 211 246 332 248
development
Depreciation and amortization 321 338 255 169
Professional services 177 193 255 184
Commissions, clearance and 71 92 138 100
floor brokerage
Merger-related 61 – 69 –
goodwill and other impairment charges
Goodwill amortization – 66 53 12
Restructuring and other 373 419
charges
Other 144 104 234 200
Total 3,967 4,218 4,557 3,387
Income before income taxes 168 135 1,231 1,099
Income taxes 71 57 513 433
Net income 109 199 718 666
Weighted average common 1,375 1,399 1,404 1,373
shares outstanding – diluted
Diluted earnings per share $0.07 $0.06 $0.51 $0.49
Dividends declared per $0.0440 $0.0440 $0.0407 $0.0373
common share
No. of employees 16,700 19,600 26,300 20,100
primarily centre on www.schwab.com, although there is also CyberTrader, an integrated software-based trading platform for highly active investors, which the firm is continuing to develop, and its wireless service PocketBroker, which has not taken off as expected.
period one: market growth
The launch of Internet technology provided Schwab with an opportunity to tap into new customer markets, where it pursued a “bricks-and-clicks” strategy, with more than 70 percent of new accounts being opened at its branches. Customer education was a key component of Schwab’s online offering. WebShops, which were introduced in 1999, were the first in a series of educational workshops designed to help investors increase their skills in using Schwab’s online services. However, Schwab began to reori-ent its customer focus to include the growing mass afflureori-ent customer market both in the US and overseas. Surveys showed that up to a quarter of mass affluent investors are prepared to make their own financial decisions with little or no advice, with almost half of these wired to the Internet.5Since the launch of its Signature Services program in 1999, Schwab has designed new products targeted at mass affluent investors.
SchwabAdvisorSource was also launched, which refers customers with more investable assets who seek a higher level of investment advice. In this case, clients must have a minimum of $100,000 to use the service, which offers referral to over 400 advisors.
Schwab does, however, face a number of hurdles with regard to its market reposition-ing: its acquisition of US Trust in mid-2000 could be viewed as direct competition to Schwab’s substantial investment advisor client base. Schwab provides custodial, trading and support services to nearly 6,000 independent investment managers, who had guided the investments of around 1 million Schwab accounts containing $224.2 billion in assets at the end of March 2001.
Technology has been core to Schwab’s online strategy, ensuring that the company is able to expand and improve upon existing services, such as Mutual Fund One Source.
This makes nearly 1,300 funds available from around 250 fund families with no-load, no-transaction fees. During 2001, StockExplorer was developed as an online screening tool which enables clients to identify equities that meet certain screening criteria according to the investment strategy selected. Essentially, it is a tool that mimics the advisory function of a personal broker. At the same time, systems have to respond to the challenge of varying capacity demands. 1999 was a major growth year for Schwab, with total customer assets up 48 percent on the previous year to $725 billion, and with the number of new accounts opened up by 1.5 million to a total of 6.6 million accounts at the year end. This growth was reflected in a $126 million investment in systems capacity, which doubled trade processing capabilities as well as enabling the web site to handle single-day records of 78 million hits in December of that year.
It is not surprising that, given Schwab’s focus on multichannel delivery, the company has tended to focus on internal development of its technology to ensure a greater level of control. Its move to work more with outside providers was justified by the company’s need to enhance existing services; its MyAccounts service utilized technology provided by Yodlee Inc. to aggregate online financial information for clients and enable them to
analyze and manage that information in one password-protected site. And most notably, in 2000 Schwab entered into a technology alliance with Ericsson to develop wireless trading applications.
period two: market decline
Weakness in equity markets tends to have a negative impact on retail brokers. Clients of retail brokerages, unlike wealthier private clients, are likely to have share portfolios that are a much smaller percentage of their total investments and, hence, are more likely to withdraw from equity markets in a downturn. Schwab is a successful company with net income of over $718 million in 2000 (table 9.3). However, Schwab’s trading revenues in the first quarter of 2001 were down 51 percent year-on-year, with total revenues down 30 percent. In addition, the total number of daily average trades was down substantially during the same period.
For Schwab, the impact of market weakness was first felt in early 2001, when Schwab began encouraging its employees to take time off in an attempt to avoid layoffs.
By March, however, the trading situation had worsened, and Schwab announced that it was going to fire 13 percent of its employees. By the end of 2001, the firm had reduced its workforce by nearly a quarter, the first layoffs since the market crash of 1987. The one exception to all this was the marketing budget; it was reported that Schwab was still going to spend the same amount on marketing in 2001 – around
$330 m – as it did the previous year.6Trading volumes did not, however, recover in 2002, with Schwab announcing that the number of trades in August was down 25 percent on July. The company continued to lay off staff throughout 2002. With the total number of employees at 16,700 at the end of 2002, Schwab had laid off approxi-mately 35 percent of its workforce since the end of 2000. While the reduction in staff in 2001 was aimed at reducing capacity in its retail business and technology units, along with the sale of substantial amounts of computer hardware, the firm said that the recent staff cuts were focused on streamlining the company’s structure and elimi-nating middle management.7
Despite continued market weakness and ongoing conflicts of interest with its advisor client base, the firm continues to confirm its commitment to target the mass affluent customer segment. In May 2002, Charles Schwab himself announced moves aimed at capturing the most profitable customers of the likes of Merrill, Morgan Stanley Dean Witter, Salomon Smith Barney, and UBS Paine Webber – affluent clients with $500,000 to $5 million to invest. As a result of this, the company has launched its own private client service, where, for a flat fee, customers can talk with a personal advisor on a wide range of issues from asset allocation to stock selection as well as receive equity research from investment bank Goldman Sachs. Clients pay an annual fee of 0.6 percent of assets subject to a minimum fee of $1,500, although the advice offered does not cover legal, tax, or estate-planning advice. These clients constitute an estimated $11 trillion investment market, or about half of all the investments made by Americans.8
Other new services include a stock-rating system to aid investment decisions. More than 3,000 stocks are graded on an A to F scale based on 24 measures, such as a
company’s cash flow and sales growth. The company claims that the potential of the system to outperform the S&P500 stock index is proven in recent trials. At the same time, since the beginning of 2002, Schwab’s marketing campaign has emphasized that its brokers are not paid on a commission basis and has focused on the impartiality of the firm’s investment advice given that the firm is not part of an investment banking group. The company further plans to launch insured banking products, aimed at encouraging nervous investors back into the equity markets. However, cost pressures have caused the company to reappraise its fee structure, with an extra $3 transaction fee being added to online trades.
To date, Schwab has pursued a successful multichannel strategy, where the use of technology has been central to its strategy of enhancing its offering. Given continued market weakness, the firm’s positioning towards the mass affluent investor does, however, carry risks. Will it maintain its leading position as a retail broker or will investors view it as a diluted version of a private client broker, unable to compete with rivals like Merrill Lynch?
E*Trade
E*Trade is both the pioneer of Internet trading and a “pure-play” entrant. Its success has been rapid; transaction revenues were over $739 million in 2000 (see table 9.4) and the company was listed on the New York Stock Exchange (from NASDAQ) in early 2001, less than five years since its IPO on August 16, 1996. From a reported 91,000 customer accounts at the time of listing, E*Trade reported 3.725 million active cus-tomer accounts with total cuscus-tomer assets of $47.9 billion and 3,800 employees by March 2001, when the level of customer accounts had approximately doubled over the previous year. Despite the market downturn, the firm has continued to expand and diversify. By early 2003, the company described its principal activities as offering “. . . personalised and fully integrated financial services solutions that includes investing, banking, lending, planning and advice.”
period one: market growth
The company launched its new financial portal site, Destination E*Trade, in late 1998 along with a “state-of-the-art” new customer support centre. This was followed by the opening of a Knowledge Centre in 1999 for the benefit of customers, many of whom were young and new to investing. Clients were offered two types of accounts: an E*Trade account or a PowerE*Trade account. The latter is for more active investors in which the more you trade, the lower your commissions, with these as low as $4.95 per trade for 75 trades or more per calendar quarter. However, the company has continued to expand the services it offers. It acquired Private Accounts to provide low cost, direct access to nation-ally recognized money managers and timely access to portfolio information. It also launched E*Trade Personal Money Management, an online investment resource that allows investors to search for, compare, and hire professional money managers via the Internet – a service that is available to customers with a minimum of $100,000 to invest.
Table 9.4 E*Trade: consolidated statement of operations (in thousands, except per share amounts)
Year ended December 31 Year ended September 30
2002 2001 2000 1999
Provision for loan losses (4,003) (2,783)
(Post-2000)
Gain on sales of orig. loans 128,506 95,478
Gain on loans held 83,953 75,836
Other banking related 46,184 38,587
Banking interest income 763,890 854,290
Banking interest expense (548,659) (692,786) Provision for loan losses (14,664) (7,476)
Net Banking Revenue 459,210 363,929
Net Revenues 1,325,864 1,275,364 1,368,318 671,448
Cost of Services 567,224 595,590 515,571 302,342
Operating Expenses:
Sales and marketing 203,613 253,422 521,532 325,449
Technology developments 55,712 88,717 142,914 79,935
General and administrative 210,646 236,353 209,436 102,826
Amortization of intangibles 28,528 43,091 22,764 2,915
Merger-related expenses 11,473 11,174 36,427 7,174
Facility re-structuring/non- 16,519 202,765 recurring
Executive loan settlement (23,485) 30,210
Total operating expenses 502,736 865,732 933,073 518,299
Total cost 1,069,960 1,461,322 1,448,644 820,641
Operating Income (Loss) 255,904 (185,958) (80,326) (149,193)
Income taxes 85,121 (19,885) 85,478 (31,288)
Extraordinary items 1,555 480 (181) 4,651
Net income (Loss) (186,405) (241,532) 19,152 (56,769)
Weighted average common 361,051 339,315 301,926 272,832
shares outstanding – diluted
Diluted earnings per share $0.52 $0.73 $0.06 $(0.21)
No. of Employees 3,500 3,500 3,800 2,000
E*Trade’s origins stem from its development of proprietary transaction processing technology, and the company’s technological infrastructure is based on a modular architecture which is scaleable to handle increasing transaction volumes. Enhance-ments to its broking service included the development of E*Trade AccountExpress (the first real-time account opening and funding service that allowed customers to open and fund an account electronically) by increasing the cash amount that new customers could initially invest as well as enabling faster and easier transfer of additional funds to E*Trade. MarketCaster, a new applet product which provides brokerage customers with free, streaming, real-time stock quotes, was also introduced. With this product cus-tomers are able to set up one or more customized watch lists and monitor the perfor-mance of stocks without having to refresh their computer screen. MarketTrader is a tool providing all PowerE*Trade customers with streaming NASDAQ Level II quotes, integrated trading, and personal account information on a single screen. It is offered to the most active traders, namely those who trade more than 30 (PowerE*Trade) and 75 times (Platinum Level) per quarter respectively. Convenience of access has been central to E*Trade’s strategy. Customer access has been enabled via the Internet, CompuServe, Prodigy Internet, Microsoft Investor, WebTV, direct modem connection, and TELE*MASTER, their touchtone and speech recognition telephone investing system. An integrated wireless banking and brokerage service was launched in October 2000.
Expansion of services has been afforded by the company’s emphasis on developing content, technology and distribution alliances including Bond Exchange (bond trading), Instinet (after-hours trading), Briefing.com (research), InsWeb (insurance), Critical Path (e-mail services), and EveryPath (wireless application provider). At the same time, E*Trade acquired a number of companies including Private Accounts (which provides low-cost, direct access to nationally recognized money managers), VERSUS Technologies (software supplier for global cross-border trading), Card Capture Services (to expand the array of financial transactions and, ultimately, online broker-age via ATMs), Telebanc (the nation’s largest pure-play Internet bank), and Clear-Station (a financial media site that integrates technical and fundamental analysis with community discussion to offer investors ideas, analysis and opinion). Also, E*Trade together with Ernst and Young announced a joint venture in 2000 to provide a per-sonal electronic advisory service to help prepare clients for major financial events such as buying a home, tax/estate planning, funding a child’s education and preparing for retirement.
period two: market decline
At the beginning of 2001, E*Trade’s average customer balance was $17,500 vs.
$106,000 for Schwab and $180,000 for Merrill.9The firm is vulnerable to a reliance on brokerage commission, especially given that its low trading prices imply a higher
“critical mass” (i.e. the point at which the firm is profitable while charging no com-missions at all). The company increased its physical broking presence in the US, includ-ing the development of E*Trade Zones, in conjunction with retailer Target. The firm is
further attempting to diversify its sources of revenues. The company has expanded geo-graphically, predominantly via joint ventures and acquisitions, with operations across the globe serving customers in many countries including Australia, Canada, Denmark, Hong Kong, Israel, Japan, Korea, Norway, South Africa, Sweden, the UK, and the US through branded web sites. Telebanc, acquired in 2000, was relaunched as E*Trade Bank, the largest pure-play Internet bank in the USA. Integrated banking and broking services were provided with access to the third largest ATM network in the USA (with around 9,600 ATMs). The success of the bank is owed, in part, to gains from cross-selling efforts to the broking customer base. Mitchell Caplan, Head of Banking Division, said in April 2002:
Last quarter, half our new bank accounts came from existing brokerage customers and 29 percent of the mortgage business came from existing banking and brokerage customers.
Since the beginning of 2001, E*Trade has nevertheless suffered a significant decrease in broking volumes and revenues. It has sought to expand its broking services. Follow-ing the public condemnation of research analysts at investment banks like Merrill, E*Trade has taken the opportunity to provide its own research to clients, given that it is not compromised by the potential conflicts of interest facing investment banks. In May 2002, the firm hired a group of analysts from investment bank Credit Lyonnais to provide clients with unbiased advice. However, its core broking business remained under pressure and, by October 2002, the firm began to extend an offer of $9.99 per trade to those customers averaging 27 trades per quarter. It is not surprising that Christos Cotsakos, CEO, came under criticism from shareholders for the very large com-pensation package awarded to him for 2001, an unprofitable year for the company.
Despite relinquishing part of his compensation package, his final pay still stood at
$64m, the highest in the US broking industry.
E*Trade has come a long way since its pure-play origins. The company has sought to extend and adapt its broking service in line with changes in customer tastes and in response to the market environment. At the same time, the firm has sought to grow and protect its revenues by diversifying its online financial services offerings. The firm has successfully managed to survive the market downturn so far. The question remains:
how long will it take for the company to translate this once again into profits?
SUMMARY
The application of Internet technologies to traditional markets has led to the emergence of new, online markets, where new customer segments have been created by the trans-formation of existing business models. What is interesting about the broking industry is how all segments of the retail broking industry appear to have embraced the new technology and added new online services to their existing service offering. However, private client brokers, such as Merrill, may prove to be the exception in terms of the direction of their online strategy, given the greater resilience exhibited by the very rich than the mass affluent in the current market downturn.
QUESTIONS
1. What has been the impact of the Internet on the broking industry?
2. During the period of market growth, how did each of the three brokers compete?
3. E*trade can be considered to be an Internet-based e-commerce business.
Identify the type of e-business model that it has developed over the growth period. Is this a viable model?
4. How well has each company performed during the downturn?
5. How have each of the three brokers responded to the market downturn? Do you think they will be successful in surviving the downturn and why?