Hard-Pushing E*Trade Trades Up to a Different League
By Caroline Humer
Staff Reporter
6/22/99 7:05 AM ET
PALO ALTO, Calif. -- About an hour from San Francisco's financial district, workers throng casually (no suits here) onto chairs and the floor of the CEO's office. Sounds of the gathering echo through hallways lined with boxes destined for the new, larger corporate campus in Menlo Park.
This could be the headquarters of any large Silicon Valley Internet company. The small E*Trade (EGRP:Nasdaq) service center on the ground floor is the only outward sign that this is the No. 2 online brokerage, ready to do battle with Wall Street's traditional firms, now heading to the Internet.
Having built its business on low-cost online executions, E*Trade is on a steady but potentially risky course to becoming an online financial superstore.
"What's different about E*Trade is that we're a technology company that leverages information for our business model," says Christos Cotsakos, chairman and chief executive. "We always used brokerage as content, but we hired some of the best people in the industry that had that expertise."
With a war chest of nearly $1 billion, a stock that has gained nearly 200% this year despite having been halved since May and $150 million set aside in a fund for strategic investments, E*Trade is charting a path to be a financial supermarket. It already owns stakes in an email company and a Web-hosting firm and says it's considering the online calendar business -- businesses more closely associated with general interest Web sites.
This strategy could differentiate E*Trade as it competes in a world in which Merrill Lynch (MER:NYSE) and other traditional brokerages are heading online, Charles Schwab (SCH:NYSE) is carving out what an online full-service brokerage is and personal finance Web sites like Quicken.com are growing. Yet at the same time, it also could cause E*Trade to stray too far from its core competency.
E*Trade's idea: "You come into us through digital financial media and from there you are going to go into different areas like online investing where you are going to have stock trading, mutual funds, bond trading, online banking with Telebanc (TBFC:Nasdaq), online insurance, mortgage loans," explains Thomas Bevilacqua, an E*Trade executive vice president who joined the firm in March to work on acquisitions.
E*Trade's Portal Puzzle
Over the past year, E*Trade has acquired or invested in a variety of sites that would make it more than just an online brokerage.
Telebanc: online bank
(100% stake, pending completion)
Archipelago: ECN
(25% stake)
ClearStation: financial media Web site
(100% stake)
Critical Path: email
(undisclosed minority stake)
Third Age Media: baby boomer community Web site
(undisclosed minority stake)
Digital Island: Web hosting firm
(undisclosed minority stake)
The goal of Destination E*Trade, as the Web site is known, is to diversify the revenue base.
Bevilacqua is likely focusing E*Trade's efforts on four areas: online investing; banking; insurance; and financial services, which could include bill presentment and payment, personal loans, home equity loans, retirement planning and tax services.
Part of his plan may also include building, buying or taking a stake in a calendar company, similar to acquisitions in the past two months by Microsoft (MSFT:Nasdaq) and AOL (AOL:NYSE). Portals use things like calendars as "sticky features" to bring people back to their Web sites to increase ad revenue, says Rob Sterling, an analyst at Jupiter Communications, which does consulting work for E*Trade.
E*Trade's pending purchase of online bank Telebanc, after having added mutual funds and bonds, will help legitimize claims that the company is more than just a cheap trade. Most of the $126.7 million in revenue it posted in its fiscal second quarter came from trade commissions, but Telebanc should bring that percentage down to 50%, company officials say.
But E*Trade doesn't stop there. Cotsakos sees a world that includes streaming video with news, live analyst reports and road shows, and real-time updates to your portfolio as you move through banking, credit cards and investments.
James Punishill, an analyst at Forrester Research, says he believes E*Trade could become a so-called vertical portal, or an aggregator of information from other sources, but that any aspirations to be like Yahoo! (YHOO:Nasdaq) are misplaced. (Forrester declines to say whether it has done consulting for E*Trade.)
"They want to be a destination site," Punishill says. "And we think they are absolutely crazy."
E*Trade's addition of new financial services makes sense, he says, but the nonfinancial expansions, such as a calendar, weaken the business model. Sterling at Jupiter also questions whether offering such a service would be central to E*Trade's goal as a financial services site of building assets beyond the near $22 billion it counted last quarter.
Bevilacqua, though, says customers would likely use the calendar for financial management.
"So ideally, you have some personal finance calendar where you'd be able to track things in your day-to-day financial life," he explains, "maybe when to pay your bills, maybe when your bills come in, maybe when your CD is coming due at Telebanc."
Some of E*Trade's other nonfinancial investments so far include stakes in Critical Path and Web-hosting company Digital Island, companies it said it took stakes in to build reliability and service.
The path to Destination E*Trade may be uncertain, but even critic Punishill at Forrester says the online broker is sticking by its vision: "These guys believe."
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